Lump sum on defined benefit pensions

Kitschnkarma

Paying it into a sipp to get tax relief might be a very good idea, thanks 

Albermarle

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? 

The lump sum would be separate from the pension and tax free. The other poster was just asking if you were able not to take the lump sum would you definitely be paying 40% tax on all the pension .

From what you have said the answer is yes, to begin with at least .

Andy_L

The NHS 1995 scheme provides an automatic lump sum of 3x the annual pension with no reduction. It is the 2015 scheme that has no automatic lump sum but allows you to trade in pension for lump sum

Since your LGPS pension is even early I suspect it also has an automatic lump sum as well.

Secret2ndAccount

Both of those pensions are payable at 60 without reduction. Therefore you should elect to start both pensions at 60. Otherwise you are simply giving away money. Both pensions receive annual increases to fight inflation.
Your plan should be to live off the pension money, and pay a large proportion of your salary from your job into a pension. The pension contributions will benefit from 40% relief, so, in effect, you won't be paying extra tax for taking the pension.
If your employer offers Salary Sacrifice, you should sacrifice down to the minimum wage or close to. Salary Sacrifice is the most efficient way of paying into a pension as it reduces your NI too. Failing that, or for the rest of your contributions, use a SIPP, or your employer's scheme. Pay in at least enough to get you out of the higher rate tax band.
We don't know how much you earn. There are some upper limits. You can only contribute to a pension as much as you earn (salary, not pensions) each year. There is a further max of 40k/yr. This 40k limit can be exceeded for several years - get back to us if it applies to you. There is a lifetime allowance which makes it not worth having much more than a million in lifetime pensions. Add together 20 x your DBs + lump sums + any other pensions you will get - everything except the state pension. If that's over a million, there are some big tax implications and that changes the maths again.
I don't recommend taking the lump sums. 12:1 is a poor rate. Yes, the 12:1 is somewhat mitigated by tax, but for how long do you expect to be a higher rate taxpayer? If it will continue into retirement, then there is a better argument for accepting the lump sum. Also if you are close to that lifetime allowance.   Otherwise, you'd better really need that cash, and be sure you have enough for your later years. If your 70's and 80's are well covered, then it's up to you. Maybe you feel you can enjoy the money more now, even though it will cost you money in total over an average lifetime.
If you're happy to post up all your numbers, we can take a closer look for you. Otherwise, here's one made up example:
Current salary 55k.   Add two pensions: +18k.  Total income 73k
Contribute 23k to your pension. If your employer takes 23k out of your salary, you only pay tax on 32k - that's basic rate.
Pensions are also taxed, but only at basic rate, as your total income is only 50k.
Before: 55k less tax and NI = 40k
After:  32k less tax and NI = 25,400 
Pensions: 18k less tax = 14,400
After, total = 39,800
So your take-home remains the same, but your pension pot grows 23k/yr

This example is in the sweet spot: you don't exceed the 40k/yr Annual Allowance limit on contributions, and it's unlikely you will hit the Lifetime Allowance of 1,037,000.    If your numbers are double the above, it's more complicated.

sammyjammy

GazzaBloom said:

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.

OP is not proposing to take the pensions early, the NRA is 60 for both

Kitschnkarma

Secret2ndAccount said:

Both of those pensions are payable at 60 without reduction. Therefore you should elect to start both pensions at 60. Otherwise you are simply giving away money. Both pensions receive annual increases to fight inflation.
Your plan should be to live off the pension money, and pay a large proportion of your salary from your job into a pension. The pension contributions will benefit from 40% relief, so, in effect, you won't be paying extra tax for taking the pension.
If your employer offers Salary Sacrifice, you should sacrifice down to the minimum wage or close to. Salary Sacrifice is the most efficient way of paying into a pension as it reduces your NI too. Failing that, or for the rest of your contributions, use a SIPP, or your employer's scheme. Pay in at least enough to get you out of the higher rate tax band.
We don't know how much you earn. There are some upper limits. You can only contribute to a pension as much as you earn (salary, not pensions) each year. There is a further max of 40k/yr. This 40k limit can be exceeded for several years - get back to us if it applies to you. There is a lifetime allowance which makes it not worth having much more than a million in lifetime pensions. Add together 20 x your DBs + lump sums + any other pensions you will get - everything except the state pension. If that's over a million, there are some big tax implications and that changes the maths again.
I don't recommend taking the lump sums. 12:1 is a poor rate. Yes, the 12:1 is somewhat mitigated by tax, but for how long do you expect to be a higher rate taxpayer? If it will continue into retirement, then there is a better argument for accepting the lump sum. Also if you are close to that lifetime allowance.   Otherwise, you'd better really need that cash, and be sure you have enough for your later years. If your 70's and 80's are well covered, then it's up to you. Maybe you feel you can enjoy the money more now, even though it will cost you money in total over an average lifetime.
If you're happy to post up all your numbers, we can take a closer look for you. Otherwise, here's one made up example:
Current salary 55k.   Add two pensions: +18k.  Total income 73k
Contribute 23k to your pension. If your employer takes 23k out of your salary, you only pay tax on 32k - that's basic rate.
Pensions are also taxed, but only at basic rate, as your total income is only 50k.
Before: 55k less tax and NI = 40k
After:  32k less tax and NI = 25,400 
Pensions: 18k less tax = 14,400
After, total = 39,800
So your take-home remains the same, but your pension pot grows 23k/yr

This example is in the sweet spot: you don't exceed the 40k/yr Annual Allowance limit on contributions, and it's unlikely you will hit the Lifetime Allowance of 1,037,000.    If your numbers are double the above, it's more complicated.

Hi. It is more complicated as my outgoings per month are just under 3k. I still have a small mortgage with 8 years on it tho i am hoping to reduce this time by overpaying. I work via an umbrella company so could pay more pension through that i think as at the moment i am paying the minimum which i can see now is not sensible. I need to invest in the pension from the umbrella company as i currently get no personal tax allowance. 

Lemon_dr1zzle

If you left pre 1998 then your LGPS pension can’t be deferred past age 60 

ChocolateWombat

Did you see the previous comments pointing out that your pensions are from the time of automatic lump sums.  You won’t have to sacrifice any pension to get those 3x yearly pension automatic lump sums.  These might well be sufficient for you needs and mean you don’t have to sacrifice yearly pension income.

Kitschnkarma

ChocolateWombat said:

Did you see the previous comments pointing out that your pensions are from the time of automatic lump sums.  You won’t have to sacrifice any pension to get those 3x yearly pension automatic lump sums.  These might well be sufficient for you needs and mean you don’t have to sacrifice yearly pension income.

Thanks, i will also consider these lesser amounts, but am not sure if that means i cant ever have anymore lump sums

Dazed_and_C0nfused

Kitschnkarma said:

ChocolateWombat said:

Did you see the previous comments pointing out that your pensions are from the time of automatic lump sums.  You won’t have to sacrifice any pension to get those 3x yearly pension automatic lump sums.  These might well be sufficient for you needs and mean you don’t have to sacrifice yearly pension income.

Thanks, i will also consider these lesser amounts, but am not sure if that means i cant ever have anymore lump sums

Each pension is separate.

The PCLS from a defined benefit pension is set by the scheme rules.  3x the annual pension not being unusual.

The TFLS from a defined contribution pension is 25% of the fund.

If you have say 5 pensions, 2 DB and 3 DC you will have the opportunity to take upto 5 different tax free amounts, 2 from the DB pensions (within the scheme rules) and 3 from the DC pensions.