Defined Benefit 25% Restriction

RoadToRiches

segovia said:

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! 

Most will have a tax free amount you can take in place of some promised income, but you have to take it right at the start and it's not 25%

Albermarle

segovia said:

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! 

That is a misunderstanding of what sammyjammy said .

There is a tax free lump sum with a DB pension, but it is not 25% of a larger sum ( as with a DC scheme) .
It is a sum calculated by certain rules within the scheme.

Normally you are offered two options
Tax free lump sum + reduced annual pension OR no tax free lump sum and a full pension.
Sometimes there may also be options inbetween ie smaller lump sum but less reduction of pension.

Secret2ndAccount

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?

Has your wife paid any AVC's (additional voluntary contributions) into a non-DB scheme that forms part of this same pension? Do they have such a scheme?

xylophone

we only just find out DB pensions don't have a Tax Free element! 

That's not what has been said in the previous posts.

Did you have a look at the link here

https://forums.moneysavingexpert.com/discussion/comment/78570728/#Comment_78570728

segovia

xylophone said:

we only just find out DB pensions don't have a Tax Free element! 

That's not what has been said in the previous posts.

Did you have a look at the link here

https://forums.moneysavingexpert.com/discussion/comment/78570728/#Comment_78570728

Yes, its complex but we have established the initial lump sum is tax free, thanks 

segovia

Secret2ndAccount said:

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?

Has your wife paid any AVC's (additional voluntary contributions) into a non-DB scheme that forms part of this same pension? Do they have such a scheme?

No AVC's made 

ManMadeWays

I've seen the 25% mentioned in both my (now cashed in)  DB pension paper work and my wifes (NHS).

You can exchange (upto) 25% of your pension for a lump sum of 20 times (or as low as 12 in some schemes) the amount of the reduction.

ie a £20k pension can become £15k + (20*£5k) £100k tax free, or 12 *£5k, £60k in meaner schemes

Marcon

ManMadeWays said:

I've seen the 25% mentioned in both my (now cashed in)  DB pension paper work and my wifes (NHS).

You can exchange (upto) 25% of your pension for a lump sum of 20 times (or as low as 12 in some schemes) the amount of the reduction.

ie a £20k pension can become £15k + (20*£5k) £100k tax free, or 12 *£5k, £60k in meaner schemes

Well spotted! That's because the rules of these particular schemes allow up to 25% tax free cash - but it isn't quite as simple as a DC scheme where the 25% is based on the value of the 'pot'.

Good explanation here for anyone moved to read more: https://www.bma.org.uk/pay-and-contracts/pensions/calculating-your-pension/calculating-your-pension-lump-sum

jimi_man

In my (public sector) pension scheme you could take over the 25% due to the increase in commutation factors. This meant that an unauthorised excess tax charge was placed on the bit over the 25% and yet most people still seemed to take it and happily pay the tax charge. Weird.

Albermarle

jimi_man said:

In my (public sector) pension scheme you could take over the 25% due to the increase in commutation factors. This meant that an unauthorised excess tax charge was placed on the bit over the 25% and yet most people still seemed to take it and happily pay the tax charge. Weird.

Most people see the tax free ( or not all tax free in this case ) lump sum, as a kind of retirement bonus to be spent on holidays , cars etc . I think the ones who actually sit down and try and work out if taking it is the best value for money or not, are very much in the minority.