Maximum tax-free income

atw_uss

Apologies for a question which I suspect has been asked previously … a super simple explanation would be much appreciated!

I am trying to work out what would be the maximum I could ‘pay myself’ from my DB pension + DC pot. I will have the standard tax code and will be able to take 25% of the (currently uncrystallised) DC pot as a lump sum on retirement or as part of annual drawdown withdrawals. 

For example, if my provisional DB pension would be c.£10,000 pa, how can I maximise income while avoiding income tax (if possible) with a DC pot of c.£120,000. Would this be to pay myself an additional £2570 and then a portion of the 25% tax-free DC pot?

OH has a good pension, so mine would be used as a top-up - currently trying to work out when might be best to go. I can officially retire from this summer onwards (at 55). I may opt to get part-time work, but want to ensure we’d have enough to live well on if not! We will have full state pensions at 67.

Many thanks in advance.

Marcon

atw_uss said:

Apologies for a question which I suspect has been asked previously … a super simple explanation would be much appreciated!

I am trying to work out what would be the maximum I could ‘pay myself’ from my DB pension + DC pot. I will have the standard tax code and will be able to take 25% of the (currently uncrystallised) DC pot as a lump sum on retirement or as part of annual drawdown withdrawals. 

For example, if my provisional DB pension would be c.£10,000 pa, how can I maximise income while avoiding income tax (if possible) with a DC pot of c.£120,000. Would this be to pay myself an additional £2570 and then a portion of the 25% tax-free DC pot?

OH has a good pension, so mine would be used as a top-up - currently trying to work out when might be best to go. I can officially retire from this summer onwards (at 55). I may opt to get part-time work, but want to ensure we’d have enough to live well on if not! We will have full state pensions at 67.

Many thanks in advance.

If you've not taken any tax free cash from your DC pot, then each withdrawal will automatically include 25% tax free.

If you are trying to get to £12,750, with £10,000 from your DB scheme, then you need to draw £3,667* from your DC scheme (£916 will be tax free and the remaining £2,750 will be added to your potentially taxable income).

*multiply the amount you want to take out as potentially taxable income by 4, then divide by 3 - in this case, £2,750 x 4/3 = £3,667

draiggoch

Will you lose a lot of your DB pension via actuarial reduction if taken at 55? Could be worth using the DC pension for a few years to lessen the reduction of the DB. Many people take £16760 every year with the £12570 annual tax free allowance + 25% tax free portion. 

NannaH

You can also get another £900 a year as a tax free lump sum from a Cash Sipp that you pay £240 into (made up to £300 with tax relief)  montlhly.  So £1800 for the two of you yearly until you are 75.  You could use the cash built up over the years to defer your state pension,  which saves tax and gives the SP a nice boost. 

atw_uss

Thank you for your very helpful replies!

I’m in the USS pension scheme and have asked for a retirement forecast for if I finish at the earliest opportunity at 55. There doesn’t seem to be a massive actuarial reduction between finishing at 55 compared to 66 (according to the benefits modeller - about £3 pa, assuming I stop paying in at 55 too). It is also possible I might be able to take the entire DC pot (Investment Builder) as a tax-free lump sum, as I may be within the HMRC limit. I can see there would be potential issues with that given low interest rates currently (but maybe worth considering/reinvesting).

I’m also considering part-time too, if work will allow it, and then still paying into the pension, albeit at a lower rate. Lots of possibility but no easy decisions (except the attraction of having a less stressful existence with more time to do the things I want, of course)!

atw_uss

Just to add to my previous post … if (hypothetically) I was able to take all of my DC pot as a tax-free lump sum at the same time as my DB pension, would this trigger the MPAA? Both sit within my USS pension (i.e. there are both DB and DC elements). 

ussdave

atw_uss said:

Just to add to my previous post … if (hypothetically) I was able to take all of my DC pot as a tax-free lump sum at the same time as my DB pension, would this trigger the MPAA? Both sit within my USS pension (i.e. there are both DB and DC elements). 

If it's just the tax free element (i.e. none of the lump sum is taxable) then you will not trigger MPAA.

With the sorts of figures you gave above I don't think you'd be able to take the entire DC pot as TFLS.  After taking the maximum allowable as tax free, the remainder would become a standalone pot that can be drawn upon (which will in turn have a 25% tax free element).

So I think it would be something like this:

Assuming £10k RB payment and £120k in IB...

Max lump sum will be:
(23 * £10k + £120k) * 0.25 = £87.5k

This would be made up of:
£30k (3 * £10k) from RB
£57.5k funded by the IB pot

Leaving:
£62.5k as a separate pot to drawn down upon, 25% of which can also be drawn tax free.

At this point you will not have triggered MPAA.

So at that point you could follow what @Marcon said and draw:

"If you are trying to get to £12,750, with £10,000 from your DB scheme, then you need to draw £3,667* from your DC scheme (£916 will be tax free and the remaining £2,750 will be added to your potentially taxable income)."

This would give you a lump sum "in the bank" of £87.5k and an income of £13,667 free of tax - until the £62.5k is exhausted, of course.

Alternatively, if you had a need for the lump sum you could instead draw 25% of the £62.5k (this won't trigger MPAA, but the following step will) and then draw down just enough (£2,750) to hit your personal allowance, giving you a total lump sum of ~£103k and an income of ~£12,750.  I think Marcon's suggestion is a better idea though.

ussdave

atw_uss said:

Thank you for your very helpful replies!

I’m in the USS pension scheme and have asked for a retirement forecast for if I finish at the earliest opportunity at 55. There doesn’t seem to be a massive actuarial reduction between finishing at 55 compared to 66 (according to the benefits modeller - about £3 pa, assuming I stop paying in at 55 too). It is also possible I might be able to take the entire DC pot (Investment Builder) as a tax-free lump sum, as I may be within the HMRC limit. I can see there would be potential issues with that given low interest rates currently (but maybe worth considering/reinvesting).

I’m also considering part-time too, if work will allow it, and then still paying into the pension, albeit at a lower rate. Lots of possibility but no easy decisions (except the attraction of having a less stressful existence with more time to do the things I want, of course)!

I guess this will in part be due to some of the benefits you accrued having a target retirement age of 60?

atw_uss

Many thanks for this, @ussdave - very useful. I’ve asked USS for a forecast, so hope to have an accurate figure soon. The increased tax-free lump sum is a definite bonus. Just trying to weigh up options regarding part-time work or full retirement. The last couple of years have definitely taken their toll and the thought of being able to retire in just a few months is increasingly attractive!

atw_uss

Just picking this up again, if that’s OK.

So I now know that a portion of my DC pot (nearly £70/£105K currently) is made up of MPAVCs with Prudential (transferred in) which can still be converted to additional DB benefits (beyond the April 2022 cut-off for non-MPAVCs). This has been confirmed to me by USS. 

The question is, would this be good value? I cannot work out/do not properly understand the commutation factor and am unsure how this is worked out as being a good rate or not. I realise from posts here that CFs vary a lot from scheme to scheme. The choice seems to be more pension or less but a bigger lump sum.

Edit: 
Retirement Income Builder CF (pension into lump sum) = 28.8430

Retirement Income Builder CF (lump sum into pension) = 48.0840

Investment Builder and Prudential MPAVC CF = 57.96 (currently for DC into added DB)

Can anyone help point me in the right direction, please? My head is spinning and I hope I haven’t got it completely wrong @ussdave - is this something you can explain? I am still mulling over whether to go at 55 or wait. Work aren’t too keen on me going part-time, so I will need to make some big decisions soon! 

Thank you!

ussdave

atw_uss said:

Just picking this up again, if that’s OK.

So I now know that a portion of my DC pot (nearly £70/£105K currently) is made up of MPAVCs with Prudential (transferred in) which can still be converted to additional DB benefits (beyond the April 2022 cut-off for non-MPAVCs). This has been confirmed to me by USS. 

The question is, would this be good value? I cannot work out/do not properly understand the commutation factor and am unsure how this is worked out as being a good rate or not. I realise from posts here that CFs vary a lot from scheme to scheme. The choice seems to be more pension or less but a bigger lump sum.

Edit: 
Retirement Income Builder CF (pension into lump sum) = 28.8430

Retirement Income Builder CF (lump sum into pension) = 48.0840

Investment Builder and Prudential MPAVC CF = 57.96 (currently for DC into added DB)

Can anyone help point me in the right direction, please? My head is spinning and I hope I haven’t got it completely wrong @ussdave - is this something you can explain? I am still mulling over whether to go at 55 or wait. Work aren’t too keen on me going part-time, so I will need to make some big decisions soon! 

Thank you!

To be honest, the older Prudential AVC options I don't know my way around very well as I didn't start properly paying attention to my pension until it wasn't an option any more.

I'd suggest posting a separate thread with a title that specifically mentions commuting lump sum for pension (or vice-versa) and you'll hopefully attract some people that know about those factors and whether or not the ones you've been offered are worth it.

In terms of the regular IB, the recent changes mean that it is not really worth giving up lump sum for extra pension.  If I'm reading your figures correctly, it looks like the older Prudential AVC looks like it may be worth it.  I'd really want to get someone else's insight to make sure I've understood correctly though.