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Defined Benefit and Drawdown

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Hi, I am running the numbers in preparation for retirement in a year or two and I have a simple question that I cannot find an answer to...

Is the 25% maximum tax free drawdown based on the pension pot or the transfer value of a defined benefit pension?

I have always assumed it's the pension pot value, but it would be far more logical for it to be the transfer value as drawdown confers all the benefits to the fund of a transfer out... it is equivalent.

Given the large gap between the two values at the moment it makes a real difference.

Many thanks to anyone who can clarify,

Anthony.

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  • xylophone
    xylophone Posts: 45,620 Forumite
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    https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-commencement-lump-sum-tax-free-cash/

    Have you seen the above?

    You have obtained a CETV and are considering transferring from a DB to a SIPP/other personal pension?


  • AlanP_2
    AlanP_2 Posts: 3,520 Forumite
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    edited 10 November 2021 at 7:02PM
    Hi, I am running the numbers in preparation for retirement in a year or two and I have a simple question that I cannot find an answer to...

    Is the 25% maximum tax free drawdown based on the pension pot or the transfer value of a defined benefit pension?

    I have always assumed it's the pension pot value, but it would be far more logical for it to be the transfer value as drawdown confers all the benefits to the fund of a transfer out... it is equivalent.

    Given the large gap between the two values at the moment it makes a real difference.

    Many thanks to anyone who can clarify,

    Anthony.

    A DB pension doesn't have a pension pot with your name on it although you can get a transfer value for some DB pensions (the majority of public sector schemes can't be transferred).

    The 25% TFLS limit is an HMRC limit and for a DB scheme has no connection with the transfer value. It is calculated as 25% of ((20 * Annual Pension) + Lump Sum).


    Some schemes have an automatic lump sum in their rules (say 3 times annual pension) and some (probably most if not all) allow you to commute (or swap) some annual pension for a lump sum and the maximum has to fit within the above formula.

    The commutation rate will vary from scheme to scheme. It may be detailed in your scheme booklet or the administrators can tell you the rate.

    With the Local Gov scheme, and all public sector ones I think, the rate is very low 12:1 so give up £1,000 of annual pension for life to get £12,000 now.
  • Thanks, but that link doesn't appear to answer my question.... or, if it does, it goes over my head.
  • NoMore
    NoMore Posts: 1,581 Forumite
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    edited 10 November 2021 at 7:25PM
    For DB, its scheme dependant (and it won't be based on the CETV). Its not necessarily 25% of anything but just a PCLS (Pension Commencement Lump Sum) which is tax free.

    Ask your scheme, nobody here can tell you unless you at least name the scheme.
  • xylophone
    xylophone Posts: 45,620 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    Thanks, but that link doesn't appear to answer my question.... or, if it does, it goes over my head.

    Let's suppose that you have a DB pension.

    When the time comes to draw your pension, scheme rules will determine how any  tax free Pension Commencement Lump Sum is calculated (see the post above).


    If you obtain a CETV and then proceed to a transfer out to a SIPP say, you will have a certain amount of cash within your pension.


    You will then have the option of taking a tax free Pension Commencement Lump Sum -  see


    https://techzone.abrdn.com/public/pensions/Tech-guide-tax-free-cash

    under

    Maximum tax free cash - defined contribution (DC) schemes

  • OK... So my question was a bit confused. Thanks all for answering and helping me to get a better grip.
  • mullsy
    mullsy Posts: 14 Forumite
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    does anyone know of a company that will accept a db transfer with negative advice (as expected when the starting point is no)
  • dunstonh
    dunstonh Posts: 119,702 Forumite
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    mullsy said:
    does anyone know of a company that will accept a db transfer with negative advice (as expected when the starting point is no)
    There are no known providers accepting negative advice.   There was a firm mentioned on another thread that would transact insistent clients but that is highly unusual nowadays.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • xylophone
    xylophone Posts: 45,620 Forumite
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    There was a firm mentioned on another thread that would transact insistent clients but that is highly unusual nowadays.


    See https://forums.moneysavingexpert.com/discussion/comment/78900215/#Comment_78900215

    https://forums.moneysavingexpert.com/discussion/comment/78900963/#Comment_78900963
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