Small DB Pot...what to do?

peterpiper88

Hi all,

Just looking for some pointers for my Dad. 

He’s recently been contacted by an old employer and told he has a DB scheme in place with them, which will give £1k per year after 65. He’s currently 60 and paying off some debts before he retires from his job in a couple of years. 

He has another pension (DC), which he was planning to rely on when he retires. 

As this newly discovered pension wasn’t something he was aware of previously and the amount is very small, he’d like to be able to cash this out and pay off his debts to allow him to have some more cash now. 

The pension scheme doesn’t allow a cash transfer but he can transfer to a SIPP. The value they’ve given is £22k. 

Couple of questions: 

- can he transfer to the SIPP and then cash out? 

- I know he’d have a tax liability but are there any other drawbacks I’m missing?

As additional info - Dad is single so there’s no benefit of the 50% continuing after he passes. 

Thanks for your help! 

NedS

The bit he's missing (or perhaps not?) is that it's £1k/year guaranteed for life, and is probably index-linked meaning it will rise with inflation every year. If he takes the £22k, where would he invest it such that he could guarantee a £1k/year return rising with inflation? If he needs cash to pay off debts, wouldn't he be better taking a tax free lump sum from his DC pension and retaining this valuable DB pension?

Marcon

peterpiper88 said:

Hi all,

Just looking for some pointers for my Dad. 

He’s recently been contacted by an old employer and told he has a DB scheme in place with them, which will give £1k per year after 65. He’s currently 60 and paying off some debts before he retires from his job in a couple of years. 

He has another pension (DC), which he was planning to rely on when he retires. 

As this newly discovered pension wasn’t something he was aware of previously and the amount is very small, he’d like to be able to cash this out and pay off his debts to allow him to have some more cash now. 

The pension scheme doesn’t allow a cash transfer but he can transfer to a SIPP. The value they’ve given is £22k. 

Couple of questions: 

1. can he transfer to the SIPP and then cash out? 

2. I know he’d have a tax liability but are there any other drawbacks I’m missing?

As additional info - Dad is single so there’s no benefit of the 50% continuing after he passes. 

Thanks for your help! 

1. Yes
2. Beware the Money Purchase Annual Allowance. If your dad transfers to a SIPP and then 'flexibly' accesses the pension (i.e. takes even 1p more than the 25% tax free lump sum from the SIPP), he will trigger the MPAA and any future contributions made by him + tax relief on his personal contributions + any employer contributions) cannot exceed £4,000 a year. If he's planning to pay in more than that (sounds as if he may not, given he is currently paying off debts - but don't know what the employer contribution is?), he needs to think carefully before scooping out the SIPP pool!

peterpiper88

NedS said:

The bit he's missing (or perhaps not?) is that it's £1k/year guaranteed for life, and is probably index-linked meaning it will rise with inflation every year. If he takes the £22k, where would he invest it such that he could guarantee a £1k/year return rising with inflation? If he needs cash to pay off debts, wouldn't he be better taking a tax free lump sum from his DC pension and retaining this valuable DB pension?

Thanks - yes, that’s something he was aware of but considering the small amount it’s unlikely to have a huge benefit. It’d be £90 a month and so even when it’s linked to inflation, I’m not sure there’s a bigger benefit. 

He could take the higher lump sum from his DC like you mentioned - but he’s planning on taking his DC in 2 years and can’t access the DB for another 5 years. So he’d have 3 years with a slightly lower (although not massively) pension than he’d planned for. 

Ideally, he’d like to have some of the debts clearer now before he draws down on the DC to minimize the interest being repaid. 

But will definitely feed that option back to him! Thanks again. 

peterpiper88

Marcon said:

1. Yes
2. Beware the Money Purchase Annual Allowance. If your dad transfers to a SIPP and then 'flexibly' accesses the pension (i.e. takes even 1p more than the 25% tax free lump sum from the SIPP), he will trigger the MPAA and any future contributions made by him + tax relief on his personal contributions + any employer contributions) cannot exceed £4,000 a year. If he's planning to pay in more than that (sounds as if he may not, given he is currently paying off debts - but don't know what the employer contribution is?), he needs to think carefully before scooping out the SIPP pool!

Thanks for this - hadn’t seen this come up in my research! 

So he wouldn’t look to make any further contributions to the SIPP but he would continue to make contributions to his DC pension via his employer. Would this be impacted?

Also - he’d be willing to look at taking the full amount out of the SIPP rather than 25%. I understand this might be more beneficial from a tax perspective to do the year after he retires? But he’d be keen to do it before then to repay debts and minimize the interest. 

Thanks again! 

AlanP_2

The MPAA restricts contributions to all DC type schemes whether employer or SIPP.

p00hsticks

peterpiper88 said:

Marcon said:

1. Yes
2. Beware the Money Purchase Annual Allowance. If your dad transfers to a SIPP and then 'flexibly' accesses the pension (i.e. takes even 1p more than the 25% tax free lump sum from the SIPP), he will trigger the MPAA and any future contributions made by him + tax relief on his personal contributions + any employer contributions) cannot exceed £4,000 a year. If he's planning to pay in more than that (sounds as if he may not, given he is currently paying off debts - but don't know what the employer contribution is?), he needs to think carefully before scooping out the SIPP pool!

Also - he’d be willing to look at taking the full amount out of the SIPP rather than 25%. I understand this might be more beneficial from a tax perspective to do the year after he retires?  But he’d be keen to do it before then to repay debts and minimize the interest.

You'd need to do the maths - if he's currently a basic rate tax payer and withdraws the whole lot the provider will deduct 20% tax on 75% of the pension - so 0.2 x 0.75 x £22,000 = £3,300 in tax. Is that cost more that he will save in interest on his debts ?

you also need to look at his situation after he retires - if you mean State Pension Age, then that is taxable income, so he may not have that much ta allowance (if any) free to set against withdrawals.

The most tax efficient way to get the money is probably to wait until the tax year after he 'retires', defer his State Pension for a year if his retirement coincides with him reaching State Pension age, and accessing the SIPP then.

Albermarle

Might be worth considering that to buy an annuity in the open market for £1kpa inflation linked but no 50% spouse pension from age 65 would be more than £30K .
So in addition to the other points made the £22K is a rather poor offer.

xylophone

Has he obtained a state pension forecast?

https://www.gov.uk/check-state-pension

MallyGirl

It is not a great conversion rate to transfer value- depending on exactly what the approx £1k DB income actually is. Does that income rise with inflation etc? I am wavering on transferring mine which pays me £1600 per year and my transfer value is £108,000 - admittedly I would have to pay for advice as it is over £30k. 

xylophone

When exactly was your father a member of the scheme?