Close Small Pension, Start Main Pension Later with 25% Tax Free?

PerfectChoice

Could do with checking if this approach is possible as a way forward for my sister who is 57 years old. She wishes to surrender/cash-in a small old pension who she tells me the cash equivalent or surrender value is around £2K, to raise some capital she needs.  Her main pension is a NHS pension which she plans to start that when she reaches 60. The NHS pension is much larger and if she takes a 25% tax free cash lump, she tells me that will be around £30K.

The question then, will surrendering that old pension to receive that £2K be counted as the "one-off" tax free lump sum taken, so when she takes a lump sum from her NHS pension she will be taxed? She clearly wants to avoid that. Or alternatively, would surrendering an old small pension (I think its from the 1990s and will be defined benefit then) have no impact on later actually starting her `NHS pension with a tax free lump sum?

So will the latter apply, or the former which she would not want? The aim is to acquire some cash now while not affecting her much larger pension she wishes to start in 3 years time.

She has also considered transferring the smaller pension to the NHS pension then take a small cash lump sum with the rest in 3 years time but I've said this may not be possible, as I believe while a cash lump sum may be invoked and paid in 3 year stages I believe, those years have to be concurrent and cannot be delayed e.g. invoke cash lump sum in 2022 for £2K, then year 2 and 3 would be 2025 and 2026 for the balance of the £30K she can take out as a lump sum from her NHS pension. I don't exact details on this, but she tells me she actually cannot start her  NHS pension before 60 years off age without penalty or just unable to do so. Just mentioning this to give the complete picture off the possibility of transferring instead our surrendering.  

Views welcome as I clearly don't want her to make a mistake and have advised her to hold off doing anything for now, if it would penalise her later taking her NHS pension at 60.

NoMore

No each pension is treated individually with respect to tax free lump sums, taking one pension will not affect the tax free lump sum from another (unless your above the LTA, which is unlikely to be the case here).

What you may be getting confused about is the MPAA which affects future contributions to DC pensions if you access taxable income from a pension. It limits it to 4k per year, However  this doesn't apply to the NHS pension as its a DB pension and from what you describe I'm not certain if the 2k would be seen as taxable income.

Marcon

PerfectChoice said:

Could do with checking if this approach is possible as a way forward for my sister who is 57 years old. She wishes to surrender/cash-in a small old pension who she tells me the cash equivalent or surrender value is around £2K, to raise some capital she needs.  Her main pension is a NHS pension which she plans to start that when she reaches 60. The NHS pension is much larger and if she takes a 25% tax free cash lump, she tells me that will be around £30K.

The question then, will surrendering that old pension to receive that £2K be counted as the "one-off" tax free lump sum taken, so when she takes a lump sum from her NHS pension she will be taxed? She clearly wants to avoid that. Or alternatively, would surrendering an old small pension (I think its from the 1990s and will be defined benefit then) have no impact on later actually starting her `NHS pension with a tax free lump sum?

So will the latter apply, or the former which she would not want? The aim is to acquire some cash now while not affecting her much larger pension she wishes to start in 3 years time.

If her 'old' pension is a DB scheme, has she checked with the administrators of the old scheme that she can take the lot as cash at her current age, that she would receive a lump sum (the jargon she's likely to see is 'full commutation on grounds of triviality'), and how much of that lump sum would be tax free? The rules of the old scheme will dictate the maximum tax free cash she can take.

As NoMore has said, it won't impact on her ability to take tax free cash from her NHS pension when she starts to draw that.

PerfectChoice said:

She has also considered transferring the smaller pension to the NHS pension then take a small cash lump sum with the rest in 3 years time but I've said this may not be possible, as I believe while a cash lump sum may be invoked and paid in 3 year stages I believe, those years have to be concurrent and cannot be delayed e.g. invoke cash lump sum in 2022 for £2K, then year 2 and 3 would be 2025 and 2026 for the balance of the £30K she can take out as a lump sum from her NHS pension. 

She can't transfer her old pension in to the NHS scheme, given it is over 12 months since she joined/became eligible to join the NHS scheme.

PerfectChoice said:

she tells me she actually cannot start her  NHS pension before 60 years off age without penalty or just unable to do so. Just mentioning this to give the complete picture off the possibility of transferring instead our surrendering.  

It sounds as if you are both rather out of your depth in the murky waters known as pensions (join most of the rest of the UK population!), but free, impartial and expert information is readily available: https://www.moneyhelper.org.uk/en/pensions-and-retirement if she'd like to avail herself of it. Be aware that PensionWise appointments are for those with DC schemes, but the main MoneyHelper helpline will be well able to deal with her questions.

Albermarle

The NHS pension is much larger and if she takes a 25% tax free cash lump, she tells me that will be around £30K.

You/she is thinking too much about the lump sum payment. The real benefit of the NHS pension is a guaranteed income for life, going up with inflation for life. 

PerfectChoice

Thanks for all that feedback, it's  given me a clearer route forward.

Just to  clarify a few points. My sister want to take 100% of the old pension but that is only around £2K, then preserve the 25% tax free lump some later for her NHS pension.She  nowhere near LTA. But as you say NoMore each pension can be treated individually. But I think she is looking for more than £500 (25%) so intends to take all the cash value.

Yes this old pension is a DB scheme Marcon and I will check what details she has from the administrators against the points you have raised to see if she is entitled to take all the cash and its tax free status. Know she has enquired and receives letters back but she may possibly have asked the right question so I will check, thanks.

Your comment about not being able to transfer into the NHS scheme is noted so I will inform her of that. And thanks for that  link to money helper I will certainly make sure she makes uses that service.

I actually know the DC pension arrangements quite well but know little about DB arrangements as I don't have one myself as I have one DC pension myself and a SIPP. So really appreciate the above comments, thanks.

Oh and agree Albermarle, the NHS pension is going to give  her  guaranteed inflation protected income for life which is a great situation to be in. Its far more challenging with a DC pension scheme especially in current turbulent markets! However, she does need capital now, so if she can obtain all the cash from this smaller pension, then that will "bridge the gap" for now until she is 60 and able to commence her NHS pension.

Dazed_and_C0nfused

Just to clarify a few points. My sister want to take 100% of the old pension but that is only around £2K, then preserve the 25% tax free lump some later for her NHS pension.She nowhere near LTA. But as you say NoMore each pension can be treated individually. But I think she is looking for more than £500 (25%) so intends to take all the cash value.

Assuming you are referring to the normal NHS schemes (1995, 2008 and 2015 versions) you have misunderstood one vital element of the NHS pension scheme.

They are DB schemes and there is no 25% TFLS.

Depending on which scheme(s) she is in there may well be a (tax free) pension commencement lump sum but the standard amount of that will be defined by the NHS scheme rules as the NHS scheme isn't providing a pot of money.

I think the 1995 scheme provides a PCLS of 3 x the annual pension.

But there is no automatic PCLS with the later schemes.  You can commute some pension in return for a PCLS but in public sector schemes like the NHS they tend to be poor value, typically offering £12 one off tax free amount in return for giving up £1 of pension for ever.

cloud_dog

PerfectChoice said:

Could do with checking if this approach is possible as a way forward for my sister who is 57 years old. She wishes to surrender/cash-in a small old pension who she tells me the cash equivalent or surrender value is around £2K, to raise some capital she needs. 

Coming at this from a completely different angle, might this need for capital be addressed via a different method, for example a loan?  Is the necessity of the situation that critical that the only option is to cash out the small DB?