Thoughts on additional TFLS

Chewbecca

Hello,

I'm taking my pension at the age of 50 early next year. The pension is part DB and part DC. I'll be taking all the DC as TFLS but it is less that 25% of total so I am offered an exchange of some of my DB for additional TFLS. 

The amount offered is an extra £87,265 in return for a reduction of £2,562 pa of my DB pension. 

On the surface, this looks good but my gut says no, I'd prefer the annual income.  I would appreciate any thoughts. 

Other factors include:

- I'll be a basic rate taxpayer in retirement
- my DB pension will increase with CPI but capped (some at 5%, some 2.5%)
- I don't have a need for the cash

- I won't be able to put the additional TFLS into ISA for some time because of the annual limit.

Thanks!

Marcon

Chewbecca said:

Hello,

I'm taking my pension at the age of 50 early next year. The pension is part DB and part DC. I'll be taking all the DC as TFLS but it is less that 25% of total so I am offered an exchange of some of my DB for additional TFLS. 

The amount offered is an extra £87,265 in return for a reduction of £2,562 pa of my DB pension. 

On the surface, this looks good but my gut says no, I'd prefer the annual income.  I would appreciate any thoughts. 

Other factors include:

- I'll be a basic rate taxpayer in retirement
- my DB pension will increase with CPI but capped (some at 5%, some 2.5%)
- I don't have a need for the cash

- I won't be able to put the additional TFLS into ISA for some time because of the annual limit.

Thanks!

You might look at what sort of annuity you could buy if you tax maximum tax free cash. Once you've taken cash out of the DB scheme, it becomes 'your' money and you could use it to buy a 'personal' (as opposed to 'pension') annuity. Part of any annuity purchased using 'your' money is treated as a return of capital, so is not subject to tax - the rest is taxed at your marginal rate. You could also choose the terms of your annuity - duration, rate of increase, provision for spouse etc - rather than being bound by the rules of your DB scheme.

Worth checking what sort of increase is awarded to pensioners for 2023 - it should give you an indication of whether the scheme is likely to pay discretionary increases when inflation is very high, which could have an impact on your decision.

Albermarle

It is an unusually large commutation factor but then again you are taking your DB pension at an unusually early age. It is diffcult to easily calculate if it is good value for money or not. I would suspect it is 50:50 assuming you live to an average age ( about 85) 

Pat38493

Just curious but how can you take your pension at age 50?  I thought that normally you are not allowed to access pension benefits until you reach 55 in the UK?

dunstonh

Pat38493 said:

Just curious but how can you take your pension at age 50?  I thought that normally you are not allowed to access pension benefits until you reach 55 in the UK?

A very tiny number of legacy pension schemes have age 50 as a protected scheme age.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm062210

DavidT67

34:1 commutation factor at age fifty with life expectancy of 84 makes sense. I was recently offered 29:1 at age fifty five. 

So provided you know whether your date of death will be above or below eighty four, you'll know whether to take the lump sum or the annuity...

Chewbecca

Ok, thanks, that's a good way of looking at it. I don't feel so bad about feeling it's wrong to not want to take it now! 

This year's award is based on September's CPI and they will announce in January if any enhancement will be given or not. Unfortunately I will miss that one but it gives a hint of whether it might keep track or fall below the market in a period or high inflation. Fingers crossed the BOE's forecast of lower inflation from late 23 is correct anyway. 

Obviously I haven't a clue but my guess (based on family history) is I could live to 85 but not be that healthy. If I don't live that long, I don't care very much anyway as I won't be around to worry and DH (who is older anyway) will be fine regardless of this decision. 

Yes, it is an old pension scheme I joined in 1990 which has protected benefits and is available from 50 is in some circumstances.

xylophone

https://forums.moneysavingexpert.com/discussion/comment/79600094/#Comment_79600094

What is your state pension situation?

Chewbecca

I've got to pay 3 more years for full SP. I was planning to leave paying the extra for a full SP until closer to SPA as I might do some more paid work, I might not. 

But actually, a full SP may push me into the higher rate tax bracket but seems like such a long time away currently. 

Albermarle

Obviously I haven't a clue but my guess (based on family history) is I could live to 85 but not be that healthy

You may see figures saying average life expectancy is less than that, but the fact that you have already made it to 50, means that you should live on average another 35years ( slightly less for a man and slightly more for a woman).

As this is an average, it means 50% will live longer than that. If you have no significant long term health issue, not too many bad habits, are educated, have money, not a manual worker etc you are more likely to be in this 50%.