DB and DC rules - who can help?

madaboutspots

Hi… can anyone help me with a question please?

Hubby and I both have DB pensions from old corporate world. Lucky and happy are we.

We know what we’re getting for the year (when the time comes) but a little confused on the lump sum.

We both also have quite small auto enrolled DC contributions we’re still contributing to.

Hubby has a few DC pots we’re not sure what to do with. Both around the 18k mark.

Currently we have no desire or need to do anything with our various pots. Still both working, still contributing.

However, we’d like to understand our options as and when the time comes and of course 55 is the earliest “option” which he will be next year and myself in ‘25.

When it’s talked about that you can take out 25% of your pension pot tax free….. if you have DBs and DCs - how is that calculated?

His in particular are 1 x DB (very healthy) and 2 x 18k we think we could (forget want for now) cash in at 55 without penalty.

Q1 - is this accurate or are we mistaken?
Q2 - does this decision have any other implications?

We of course realise that is reduces the whole pot but it’s more the rules we’re struggling with. 

We’d love to simply know what our options are without influence on our decisions. We’re not a spendy pair overall, earn well and almost MF after nearly 10 years rather than the 25 we signed up for. We are considering retirement but not actually ready to leave the business for a while yet. It’s more about the rules really at this stage.

Thanks for anyone reading and particularly so if you can help 😁 (no offence to those that perhaps can’t x)

Dazed_and_C0nfused

Each pension has to be looked at separately.

1.  DB.  Any tax free lump sum (sometime called pension commencement lump sum) is determined by the scheme rules.  There may be no automatic lump sum.  Or it could 3 X the pension.  Or something different.  You need of read the scheme rules to know for certain.

2.  DC.  You can take 25% of each DC pension as a TFLS.  Modern pensions will have options on how this is done.  The two normal most common are to take the TFLS at the start (irrespective of whether any taxable income is taken or not).  Or you can take 25% of each withdrawal as a TFLS.  This can result in more tax free income overall.

madaboutspots

Thank you for your answer…

So we can’t cash in both the 18k pots as 25% of the “whole” of all his pensions? 

I take it from your answer that each separate pension pot is counted as a pot - rather than all pensions together taken as 1 pot?

Joey_Soap

madaboutspots said:

Thank you for your answer…

So we can’t cash in both the 18k pots as 25% of the “whole” of all his pensions? 

I take it from your answer that each separate pension pot is counted as a pot - rather than all pensions together taken as 1 pot?

1 No you can't.

2 That's correct.

Dazed_and_C0nfused

madaboutspots said:

Thank you for your answer…

So we can’t cash in both the 18k pots as 25% of the “whole” of all his pensions? 

I take it from your answer that each separate pension pot is counted as a pot - rather than all pensions together taken as 1 pot?

No.

You can 25% of each DC pot.  Or combine the two and take 25% of the total.  Either way if you take the TFLS up front you get £9k tax free out of a total of £36k.

madaboutspots

Thank you so much for giving us that clarity. Every day’s a school day.

So as and when we decide we’d like to start taking 25% of any pension pots - are there any implications overall we should consider? (Apart from the obvious smaller pots). We plan to still be working for the foreseeable and paying into our auto enrolled.

Also, with out DB - if we took our TFLS allowed - does this “trigger” anything for that particular pension? Can we take that but leave the remainder intact for another day?

gm0

The other rule to be aware of if draining down DC via the various mechanisms "small pots rule",  TFC / single or multiple UFPLS or annuity purchase is the ruleset around Annual Allowance. This matters while still earning and wanting to save in a DC

The first 1p of income taken beyond TFC only that you take clamps the annual allowance from 40k to 4k.  All pensions for that individual not just that one scheme.

Limiting future saving close to the non-earnings limit - 2880/3600.  This matters - or it doesn't based on your plans for income, pension saving and when all this happens.  So be aware of it.

Dazed_and_C0nfused

Taking the TFLS means you have crystallised some or all of a particular pension so that will count against the Lifetime Allowance.

If you take 1p or more in taxable income* from a DC pension then that triggers the Money Purchase Annual Allowance which means you can never ever contribute more than £4k a year (gross) into a DC pension.

*buying an annuity is an exception to this

I'm not aware of any DB pensions which allow you to take the PCLS/TFLS ahead of the pension.  Have a look at the scheme rules but I suspect that will be a no.

QrizB

madaboutspots said:

Also, with out DB - if we took our TFLS allowed - does this “trigger” anything for that particular pension? Can we take that but leave the remainder intact for another day?

As explained by D&C above the tax-fee part of a DB pension is almost always a PCLS, Pension Commencement Lump Sum. You get the lump sum when you commence your pension. In order to take the PCLS you also have to start taking your pension and keep taking it for the rest of your life.

If you start taking your DB pension at age 55 it's likely to be actuarily reduced to reflect that you're claiming it before normal pension age (which could be 60, 65, or some other age). The reduction could be 5% per year, so by taking it at 55 you could end up receiving (100-5x10=) 50% of the pension that you would do at 65.

Then, if you continue to work, your pension payments will add to your taxable income.

sheslookinhot

Watch taking a DB pension and DC pension simultaneously. It could tip you into paying higher rate tax.

madaboutspots

Oh what a mine field! I’m sorry to still be confused. 

Thank you for all the responses.

Ridiculously one of our concerns is retiring with more money than we know what to do with. 

Our DBs are to remain untouched for some time yet. We’re aware if we take a TFLS from them we trigger the yearly pension and the younger we are the more it’s reduced.

Is each separate pot effectively ring fenced though? If we start taking from 1 x DC is it only that one we then start taking a yearly (small) amount from?

Also we do understand about the impact on future pension savings being limited.

We’re likely to inherit significant sums (oh the hardship!) with 1 x approx £300k and the other probably larger. 

With such good pensions in our DBs already we’d have a greater income than we do now and we’re still paying a mortgage. 

Trying to get the balance between saving for our future and enjoying the here and now to the full (financial freedom) seems to be a balancing act we’re unclear on how to do. 

We have just 1 adult child to leave all/anything to and our view is the entire house and contents is plenty. 

My research suggests that a couple will need an income of £47,200/year for a comfortable retirement. This is more than we have now whilst still putting £800 against our mortgage and saving £1k/month for final payment end ‘23. 

So what to do really? Don’t die richer than we’ve ever been. Don’t fritter it all away and run out - hardly likely with 2 x good DBs and no debt.

Should we even be bothering to pay off the mortgage early? We’d both love to be debt free and move house to a more expensive area - not being flash - would just prefer to return “home” which is more expensive. Work doesn’t allow it for now and we’re happy to wait and save for the move.

Thanks for reading and helping x