Defined Benefit 25% Restriction

segovia

My wife's DB scheme does not allow a full 25% tax free lump sum to be taken when she decides to take her pension, its something more like 15%.  

Would there be a 10% tax free allowance on the annual pension after taking a 15% lump sum?

Pablo7474

No there wouldn’t. You say it is only 15%, are you basing it on a transfer value? If so, it doesn’t work like that. 

sammyjammy

25% tax free option does not apply to DB pensions only DC.  Taxation on the pension income would depend on her earnings and would be at her standard rate.  Any lump sum that forms part of a DB pension is tax free.

Albermarle

As far as I know ,  it is not possible to easily calculate what the tax free lump sum will be for a DB pension, as there is no specific pot of money allocated to you . It depends on the scheme .

For sure it is not 25% of any recently quoted CETV and will be significantly less. One of the obvious and immediate plus points for transferring out of a DB pension with the current high CETV valuations is a bigger tax free lump sum. 

With a DB scheme the decision is more whether you take the lump sum and a reduced pension or no lump sum and a full pension. If it is inflation linked ( with a limit) and minimum 50% spouse pension, then probably better to not take the lump sum ( although most do ) 

xylophone

https://techzone.adviserzone.com/anon/public/pensions/Tech-guide-tax-free-cash#:~:text=Separate lump sum,-Some DB schemes&text=The calculation can vary depending,each year of scheme membership

may be of interest.

Pablo7474

Albermarle said:

One of the obvious and immediate plus points for transferring out of a DB pension with the current high CETV valuations is a bigger tax free lump sum. 

 

Not if there is no reason to take a larger lump sum. Just taking it because it is tax free will probably end up sitting in a bank account losing real value or in an account that is subject to other taxes (CGT for example) or ultimately IHT. 

Dazed_and_C0nfused

segovia said:

My wife's DB scheme does not allow a full 25% tax free lump sum to be taken when she decides to take her pension, its something more like 15%.  

Would there be a 10% tax free allowance on the annual pension after taking a 15% lump sum?

There is no TFLS in the normal sense with DB schemes, there will be a PCLS set by the scheme rules (which in turn will comply with HMRC regulations).

The pension itself will all be taxable.

RoadToRiches

The PCLS is a choice you would have to make too before you start taking the pension. No flexibility to take it as and when, or at a later time.  It's all or nothing, very rigged rules.

dunstonh

My wife's DB scheme does not allow a full 25% tax free lump sum to be taken when she decides to take her pension, its something more like 15%. 

There is no 25% with any DB scheme.  There is no 15% either.  DB schemes have no fund value to apply a percentage to.   Instead they use a calculation to decide the ratio of income given up in return for a lump sum.   Some DB schemes do it the other way and have a default lump sum which you may be able to give some up in exchange for an increased income.

Albermarle

Pablo7474 said:

Albermarle said:

One of the obvious and immediate plus points for transferring out of a DB pension with the current high CETV valuations is a bigger tax free lump sum. 

 

Not if there is no reason to take a larger lump sum. Just taking it because it is tax free will probably end up sitting in a bank account losing real value or in an account that is subject to other taxes (CGT for example) or ultimately IHT. 

Yes I know it is not so cut and dried but for most people the large difference sort of hits you in the face .
I turned down a reasonably generous offer to transfer out of my DB scheme , but rationally or not the one point I still think about is that instead of £80K tax free lump sum , I could have had £125K . Plus of course no need to take it all at once , like with the DB scheme, and could have spread out taking it over a number of years and straight into S&S ISA's

Anyway I did not transfer and did not even take the DB lump sum, as seemed a bit illogical to stick with the DB scheme and then give up some of the valuable guaranteed income.

segovia

sammyjammy said:

25% tax free option does not apply to DB pensions only DC.  Taxation on the pension income would depend on her earnings and would be at her standard rate.  Any lump sum that forms part of a DB pension is tax free.

Thanks, four years of deliberating and three IFA's later and we only just find out DB pensions don't have a Tax Free element!