How to Balance Extra income and lifestyle tax efficiently!

blindman

Dazed_and_C0nfused said:

More confused than before I think 

If she defers her DB pension past the NPA for that scheme what happens to the pension payments not made by the scheme?  Are they simply lost as would be the case with some schemes or will she actually get them backdated?

UFPLS is associated with DC pensions and means 25% of each payment is tax free and 75% taxable.  How does it work with a DB pension, particularly if the TFLS is actually taken upfront 

Maybe the way I wrote it or the way I think it works.
Wife
Paid into ex employers  DB pension and also paid into AVc's
Left employ about 5 years ago so no more contributions.
Pension forecast goes up every year based on these past payments-assuming because of stock market performance.
AFAIK She can take Db and DC separate however the "easy" option is :-
4 options given-
Option 4 
Combined Tax free lump Sum, (55K)
annual DB pension (8K)
and UFPLS (25K)

Dazed_and_C0nfused

The plan is for her to take the State pension and defer both mine and her DB and AVC one until we possibly run out of the £100k savings-maybe in 10 years.

Do you get extra income if you defer your DB pension? I believe some schemes dont do this. 

Yes we do.

Deferring DB pensions for 10 years after NPA is quite unusual so I would want to be absolutely certain you aren't going to miss out on 10 years of pension before going ahead with this part of your plan.

80% of something is better than 100% of nothing.

Notepad_Phil

blindman said:

Linton said:

Do you get extra income if you defer your DB pension?  I believe some schemes dont do this.  

Yes we do.
I looked into deferring State pension when I was due to take mine and the consensus is now it's not worth it.

That might well be true for a man but possibly not so much for a woman - it's something that I'm definitely considering for Mrs Notepad as she is in good health and even after deferring for a few years could easily have 20+ years of state pension to look forward to.

jamesd

blindman said:

The plan is for her to take the State pension and defer both mine and her DB and AVC one until we possibly run out of the £100k savings-maybe in 10 years.
So until that point she will be not paying tax

Yes I have checked her state pension forecast.

I do mean the UFPLS-The Tax free lumps sum with that option is £55K
Thanks

blindman said:

Linton said:

Do you get extra income if you defer your DB pension?  I believe some schemes dont do this.  

Yes we do.
I looked into deferring State pension when I was due to take mine and the consensus is now it's not worth it.

You need to get a consensus from better informed people. It usually is worth it when holding cash savings is the alternative. There's a calculator that compares it to what else will be done with the money linked from this post: 

https://forums.moneysavingexpert.com/discussion/comment/70696778/#Comment_70696778

In addition, there's an extra choice: does deferring the DB gain more or less than deferring the state pension? The DB deferral increases I've seen gave been around 1% a year Vs the 5.8% for the state pension. Takes many years to match the total amount of the DB but it's almost certainly going to be a better deal to defer SP than DB.

PCLS: pension commencement lump sum. The up to 25% of a pension pot or the initial lump sum from a defined benefit pension that is tax free. For the pot, the other 75% normally goes into flexi-access drawdown to be taken as taxable income whenever desired. These are what is normally meant by a pension tax free lump sum. 55k tax free lump sum from a pot implies 165k into flexi-access drawdown.

UFPLS: uncrystallised funds pension lump sum. A single lump sum of which 25% is tax free and 75% is taxable. 55k tax free implies taking 165k of taxable money at the same time. The income tax personal allowance will be lost because of annual income over 100k by far enough, most of the taxable will be taxed at 40% but some at 45% and some at 20%. It's an extremely inefficient approach that wastes a huge amount of money on avoidable income tax. Spreading it over just two tax years can save tens of thousands in tax.

If you really do mean taking a before tax UFPLS lump of £220k to get £55k tax free then we really need to discuss why the taxable part is so desperately needed and what a more efficient way of achieving the result is.

jamesd

blindman said:

Me       66        Retired                        Income from 2 pensions (Military and State
                        Two works pensions deferred for now
                        1. DB and AVC's       One option £8K pension and £25K UFPLS-others options give lower pension and higher lump sum

This means that:

A. There is a DB pension with no tax free lump sum and

B. There is an AVC pot worth £25k, all of which can be taken as a UFPLS with 25% tax free and 75% taxable and

C. The DB income can be reduced to get some PCLS tax free lump sum.

This is a very unlikely situation but not an impossible one - there are some DB schemes with no default lump sum.

A much more common situation would be substituting PCLS for UFPLS in your post. That would mean the very common:

A. There is an AVC pot and 25% of the combined DB and DC value allows 100% of the AVC to be taken as tax free lump sum if it's taken at the same time as the DB part and
B. In addition you can sacrifice some DB income to get more PCLS.

In both cases the pot portion would allow options for the pot part beyond just UFPLS but a transfer out may be needed to use them. Old schemes only offering UFPLS so you have to transfer a pot out to use PCLS and drawdown isn't uncommon and scheme letters might only describe what they provide, not all options.

blindman

jamesd said:

I looked into deferring State pension when I was due to take mine and the consensus is now it's not worth it.

You need to get a consensus from better informed people. It usually is worth it when holding cash savings is the alternative. There's a calculator that compares it to what else will be done with the money linked from this post: 

I though I did

 does deferring the DB gain more or less than deferring the state pension? The DB deferral increases I've seen gave been around 1% a year Vs the 5.8% for the state pension

I need to look into that

blindman

jamesd said:

blindman said:

Me       66        Retired                        Income from 2 pensions (Military and State
                        Two works pensions deferred for now
                        1. DB and AVC's       One option £8K pension and £25K UFPLS-others options give lower pension and higher lump sum

This means that:

A. There is a DB pension with no tax free lump sum and

B. There is an AVC pot worth £25k, all of which can be taken as a UFPLS with 25% tax free and 75% taxable and

C. The DB income can be reduced to get some PCLS tax free lump sum.

This is a very unlikely situation but not an impossible one - there are some DB schemes with no default lump sum.

A much more common situation would be substituting PCLS for UFPLS in your post. That would mean the very common:

A. There is an AVC pot and 25% of the combined DB and DC value allows 100% of the AVC to be taken as tax free lump sum if it's taken at the same time as the DB part and
B. In addition you can sacrifice some DB income to get more PCLS.

In both cases the pot portion would allow options for the pot part beyond just UFPLS but a transfer out may be needed to use them. Old schemes only offering UFPLS so you have to transfer a pot out to use PCLS and drawdown isn't uncommon and scheme letters might only describe what they provide, not all options.

Thanks for the posts and the link to what looks like an excellent read.
This is her option 4:-
C. The DB income can be reduced to get some PCLS tax free lump sum.

The document if Retirement Options statement she has is quite clear re UFPLS 
The AVC pot is about 80K
The DB value is £230K IIRC