Using AVC as 100% Tax Free Lump Sum from Defined Benefit Pension

philng

I have a Defined Benefit Pension which if drawn now would pay around £20400 index linked and also an AVC linked to it with a current value around £108000.

The Defined Benefit Pension will hit £23000 if I leave it till age 60 (currently aged 56 years 3 months).

I am on the understanding that I can draw my whole AVC tax free as a lump sum without having to reduce my DB Pension as this was the reason why I built up the AVC when I was working.

Are there any maximum rules which would prevent this?

Silvertabby

The LGPS allows all of the AVC fund to be taken as tax free cash, provided that it falls within HMRC limits.  Not all pension schemes do this, but as you appear to have told that you can then I'm going to assume LGPS.

The initial calculation is:

20 x annual pension + 1 x any automatic lump sum + 1 x AVC

25% of total = maximum tax free cash.

You don't mention any automatic lump sum, which there would be if you are LGPS with pre 2008 service, but even using the figures you have quoted your AVC looks to be within the tax free range.

Before I go any further, can you confirm which pension fund you are in - and if it is the LGPS, your automatic lump sum.

TVAS

If you are in a private sector DB. They key factor is the commutation rate. This means how much pension you give up for cash. So 20:1 means you give up £1 of pension for £20 cash. Anything over 20:1 is a generous commutation rate. This means you can consider separating the AVC from the main scheme pension although work is required. 

If you have a commutation rate below 20:1 as you have said it makes sense to use the whole of the AVC fund first for tax free cash to limit or eradicate the need for a reduced pension that will probably increase in payment. 

Commutation rates change so what is in force now may not be what is in force at age 60. 

philng

The scheme is a major UK Bank. They have offered the following options if I were to draw now:

Option One

Pension £20477
Plus
Tax Free Lump Sum £27193
Taxable Lump Sum £81580

Or

Option Two

Pension £19424
Plus
Tax Free Lump Sum £131624

Bearing in mind the AVC value is around £108000 I was expecting to be able to draw the full £20477 pension PLUS the whole AVC £108k be Tax Free?

I am 56 years and 3 months old with an expected full pension if I leave it till 60 of around £23000.

philng

Also just an additional point I am in no desperate urgency to draw the pension now but just wanted to know where I stood.

tigerspill

philng said:

The scheme is a major UK Bank. They have offered the following options if I were to draw now:

Option One

Pension £20477
Plus
Tax Free Lump Sum £27193
Taxable Lump Sum £81580

Or

Option Two

Pension £19424
Plus
Tax Free Lump Sum £131624

Bearing in mind the AVC value is around £108000 I was expecting to be able to draw the full £20477 pension PLUS the whole AVC £108k be Tax Free?

I am 56 years and 3 months old with an expected full pension if I leave it till 60 of around £23000.

I think you need to query your pension people.  My pension worked as you expect, but this was because this is defined clearly in the pension documentation.  This as I understand it will be down to the specific rules of your pension fund and I don't think can be assumed.