Lump sum on defined benefit pensions

Kitschnkarma

Hi 
I am currently working and paying tax at 40%.  At age 60 - this month- i have two deferred defined benefit pension schemes that i can claim. One is a nhs 1995 scheme and the other a local govt scheme deferred from when i was much younger (sigh) .  The normal retirement age for both is 60.  Both offer a lump sum but taking this reduces each pension by around 2k a year. The conversion rate for the lump sum is 12. 
What are the pros and cons of taking the tax free element of the lump sums please? (apart from the reduction in pension)
Also can i take BOTH lump sums tax free? Would there be any benefit in leaving it and the pension where they are?or would that just mean I lose out on a pension i could be drawing albeit at a high tax rate? The pension is linked to cost of living inflation and not investments. Thanks 

GazzaBloom

I'm sure some may recommend you to leave it as long as possible before taking it but I have just taken my DB pension early at age 55 with the commencement lump sum (tax free).

I calculated the benefits it would pay out taken early with the reduced amount, and also benefits taken at the normal retirement date at the higher amount, made some assumptions on annual inflation as a portion of it is index linked. I plotted the expected cumulative benefits over the years going forward.

The sums showed that it would take over 20 years after taking it at normal retirement date (65) caught up then took over as being the most beneficial. That would be age 85. I saw more benefit in taking it early as we have a use for the lump sum now (home renovations).

It may be worth you doing the same calcs to see if that helps. if you decide to take it you could put the lump sum in ISAs if you have no particular need for the money now.

Kitschnkarma

Thanks for this, we need some home renovations too. Good luck with yours

Albermarle

 Both offer a lump sum but taking this reduces each pension by around 2k a year. The conversion rate for the lump sum is 12. 

A commutation rate of 12 is poor but seems to be typical for some public sector pensions. So if you do not need the lump sum then normally better to not take it and have the higher pension. However if you intend to continue working for a few years and paying 40% tax then the decision could get a bit more 50:50.

Also can i take BOTH lump sums tax free? Yes

Would there be any benefit in leaving it and the pension where they are?or would that just mean I lose out on a pension i could be drawing albeit at a high tax rate? The pension is linked to cost of living inflation and not investments. 

DB pensions are never reliant on investment performance , that is why they are so good. 

If you did not take it at 60 , it would still revalue with inflation . Would it go up more as you have not taken it - probably not but all these schemes have different rules.

xylophone

At age 60 - this month- i have two deferred defined benefit pension schemes that i can claim. One is a nhs 1995 scheme and the other a local govt scheme deferred from when i was much younger (sigh) .  The normal retirement age for both is 60.  

In the case of the LGPS this is true only for certain categories of member? You fall into one of the categories?

I am currently working and paying tax at 40%.

You intend to continue to work?

 If so,  and if you are permitted under scheme rules to convert the tax free lump sums to monthly pensions, will not the whole of those pensions be taxable at 40%?

Would you not be better off taking the tax free lump sums and investing as much as possible into an ISA as soon as possible?

If you were to regard the balance of the lump sums as a salary replacement, you might be able to make a higher contribution (tax relievable) to your current occupational scheme?

Or is there any benefit (late retirement increase?) to deferring the LGPS pension to a time when you are no longer a 40% tax payer?  You should check on this.

As far as I remember there are no such increases in the 1995 NHS scheme but you should check.

Have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

Kitschnkarma

xylophone said

Would you not be better off taking the tax free lump sums and investing as much as possible into an ISA as soon as possible?

If you were to regard the balance of the lump sums as a salary replacement, you might be able to make a higher contribution (tax relievable) to your current occupational pension

MAYBE AM NOT SURE

xylophone said:

At age 60 - this month- i have two deferred defined benefit pension schemes that i can claim. One is a nhs 1995 scheme and the other a local govt scheme deferred from when i was much younger (sigh) .  The normal retirement age for both is 60.  

In the case of the LGPS this is true only for certain categories of member? You fall into one of the categories? 

IT SAYS THAT THE RETIREMENT AGE FOR BOTH IS 60. 

I am currently working and paying tax at 40%.

You intend to continue to work?

YES I AM GOING TO WORK FOR NOW ON AN INTERIM BASIS

 If so,  and if you are permitted under scheme rules to convert the tax free lump sums to monthly pensions, will not the whole of those pensions be taxable at 40%?

MY UNDERSTANDING WAS THAT THE LUMP SUMS ARE SEPARATE TO ANY PENSION? 

Excuse my capitals, am not shouting but couldnt find the bold font! 

Lemon_dr1zzle

When did you leave your LGPS role?

Kitschnkarma

I left local govt role  around 25 years ago, and left nhs about 15 years ago and now work via agency contracts. So no restrictions on working. 

Silvertabby

If all the LGPS service is pre April 2008 then it's quite likely that OP meets R85 at 60 (age plus actual service plus deferred service = at least 85).

Not taking the LGPS at 60, when there are no early retirement reductions, is on a par with giving money away.  Even after paying 60% tax the remaining 40% is better than 0%.

Kitschnkarma

Silvertabby said:

If all the LGPS service is pre April 2008 then it's quite likely that OP meets R85 at 60 (age plus actual service plus deferred service = at least 85).

Not taking the LGPS at 60, when there are no early retirement reductions, is on a par with giving money away.  Even after paying 60% tax the remaining 40% is better than 0%.

That's what i thought was the case since it is a defined amount of pension. Thank you

QrizB

Silvertabby said:

Not taking the LGPS at 60, when there are no early retirement reductions, is on a par with giving money away.  Even after paying 60% tax the remaining 40% is better than 0%.

If the OP has headroom within the Annual Allowance, I guess they could pay a sum equal to their net pension income into a new SIPP and gain tax relief, then draw it down once they actually retire and may have a lower marginal tax rate?