Lump Sum Question

zooks

I've read a lot on the forum about not taking a DB lump sum on retirement but a bit confused as to why?

My own circumstances are that I would like to take early retirement next year when i'm 56.

I will take a 24% hit due reduction factor applied to my DB pension as my normal retirement age would have been 63.

My pot value is aproximately 900k so I will hit the LTA before 63 anyway.

I have the option of taking a yearly pension of aprox 30k plus 3x lump sum, comutate some of my yearly pension to maximise the Lump or take no lump sum to maximise my yearly pension. Comutation factor of my companies pension scheme is 28:1.

I have enough savings to get by and no mortgage so I don't necessarily need the lump sum but i'd assumed that it was best to take as much tax free money as possible away from the taxmans grasp.

Have I got this wrong?

Dazed_and_C0nfused

There is no "pot" with a DB pension.

Plenty of schemes have standard PCLS elements which are often taken, it's taking over and above that which is often a poor choice financially.

A typical rate mentioned on here is 12:1.

So you gain say £12,000 as a one off PCLS in year one.  In return for missing out on £1,000 of taxable income.

In year 2 you get no PCLS and miss out on say £1,025 of taxable income.

In year 3 you get no PCLS and miss out on say £1,050.62 of taxable income.

And so on until you die.  By which point you could be easily missing out on £1500 of taxable income each year.  That £12,000 could effectively be a very expensive loan from yourself.

Marcon

zooks said:

I've read a lot on the forum about not taking a DB lump sum on retirement but a bit confused as to why?

My own circumstances are that I would like to take early retirement next year when i'm 56.

I will take a 24% hit due reduction factor applied to my DB pension as my normal retirement age would have been 63.

My pot value is aproximately 900k so I will hit the LTA before 63 anyway.

I have the option of taking a yearly pension of aprox 30k plus 3x lump sum, comutate some of my yearly pension to maximise the Lump or take no lump sum to maximise my yearly pension. Comutation factor of my companies pension scheme is 28:1.

I have enough savings to get by and no mortgage so I don't necessarily need the lump sum but i'd assumed that it was best to take as much tax free money as possible away from the taxmans grasp.

Have I got this wrong?

DB pensions don't have 'pots', so I assume you are talking about a Cash Equivalent Transfer Value you've received fairly recently? If so, that's not relevant to the LTA. The value used for a DB scheme is 20 times the pension plus any tax free lump sum available within the LTA, so you have masses of headroom before you get anywhere near the LTA, unless you have very substantial defined contribution pension savings you haven't mentioned?

Whether taking  tax free cash is a good idea depends on (a) the commutation rate offered by your particular scheme and (b) what you'd do with the cash (?could you get a return at least as good as the pension promised by your scheme ?do you need to pay off debts ?do you have plans which require a lump sum - I think not, from your post).

Marcon

Dazed_and_C0nfused said:

There is no "pot" with a DB pension.

Plenty of schemes have standard PCLS elements which are often taken, it's taking over and above that which is often a poor choice financially.

A typical rate mentioned on here is 12:1.

So you gain say £12,000 as a one off PCLS in year one.  In return for missing out on £1,000 of taxable income.

In year 2 you get no PCLS and miss out on say £1,025 of taxable income.

In year 3 you get no PCLS and miss out on say £1,050.62 of taxable income.

And so on until you die.  By which point you could be easily missing out on £1500 of taxable income each year.  That £12,000 could effectively be a very expensive loan from yourself.

Good explanation. Just one word of caution - 12:1 is more likely to be found in public sector schemes than the private sector (where it would be seen as very poor). OP is being offered 28:1, which for someone retiring at age 56 is pretty good. 

OP - it's not a cliff edge. You could always go for a halfway house and commute some of your pension to increase the lump sum, but not to the point where you maximise the tax free cash. 

Dazed_and_C0nfused

Marcon said:

Dazed_and_C0nfused said:

There is no "pot" with a DB pension.

Plenty of schemes have standard PCLS elements which are often taken, it's taking over and above that which is often a poor choice financially.

A typical rate mentioned on here is 12:1.

So you gain say £12,000 as a one off PCLS in year one.  In return for missing out on £1,000 of taxable income.

In year 2 you get no PCLS and miss out on say £1,025 of taxable income.

In year 3 you get no PCLS and miss out on say £1,050.62 of taxable income.

And so on until you die.  By which point you could be easily missing out on £1500 of taxable income each year.  That £12,000 could effectively be a very expensive loan from yourself.

Good explanation. Just one word of caution - 12:1 is more likely to be found in public sector schemes than the private sector (where it would be seen as very poor). OP is being offered 28:1, which for someone retiring at age 56 is pretty good. 

OP - it's not a cliff edge. You could always go for a halfway house and commute some of your pension to increase the lump sum, but not to the point where you maximise the tax free cash. 

Fair point 

zooks

Dazed_and_C0nfused said:

There is no "pot" with a DB pension.

Plenty of schemes have standard PCLS elements which are often taken, it's taking over and above that which is often a poor choice financially.

A typical rate mentioned on here is 12:1.

So you gain say £12,000 as a one off PCLS in year one.  In return for missing out on £1,000 of taxable income.

In year 2 you get no PCLS and miss out on say £1,025 of taxable income.

In year 3 you get no PCLS and miss out on say £1,050.62 of taxable income.

And so on until you die.  By which point you could be easily missing out on £1500 of taxable income each year.  That £12,000 could effectively be a very expensive loan from yourself.

Sorry, when I say pot i'm refering to the value of my benifits and percentage of LTA from my yearly pension statement.

I think I can take 25% of this value tax free but i might be wrong on that!

Thanks for the examples. I can see the argument for not taking the PCLS now.

As my comutation is 28:1 but its definatey something worth considering with the pension rise capped at 5% CPI against any posible interest earn't.

Dazed_and_C0nfused

Would agree 28:1 makes it much more worthy of consideration.

Wouldn't be so sure about the 25% though.

Most DB schemes have specific rules such as 3 X annual pension and 25% is more usually associated with the TFLS which can be taken from DC funds.

Marcon

zooks said:

Dazed_and_C0nfused said:

There is no "pot" with a DB pension.

Plenty of schemes have standard PCLS elements which are often taken, it's taking over and above that which is often a poor choice financially.

A typical rate mentioned on here is 12:1.

So you gain say £12,000 as a one off PCLS in year one.  In return for missing out on £1,000 of taxable income.

In year 2 you get no PCLS and miss out on say £1,025 of taxable income.

In year 3 you get no PCLS and miss out on say £1,050.62 of taxable income.

And so on until you die.  By which point you could be easily missing out on £1500 of taxable income each year.  That £12,000 could effectively be a very expensive loan from yourself.

Sorry, when I say pot i'm refering to the value of my benifits and percentage of LTA from my yearly pension statement.

I think I can take 25% of this value tax free but i might be wrong on that!

Thanks for the examples. I can see the argument for not taking the PCLS now.

As my comutation is 28:1 but its definatey something worth considering with the pension rise capped at 5% CPI against any posible interest earn't.

If it's a DB scheme, then it's almost certainly not 25% - that %age applies to defined contribution schemes. Some DB schemes do 'work out' at 25% (e.g. the NHS), but you'd need to check because DB schemes have a maximum set down in their own rules. This maximum may be lower (but cannot exceed) the maximum allowed by HMRC, so it isn't a nice neat answer in all cases! 

From the figures you've given above, I think your yearly statement is referring to retirement at 63? 

zooks said:

As my comutation is 28:1 but its definatey something worth considering with the pension rise capped at 5% CPI against any posible interest earn't.

Bear in mind that inflation is at a 40-year high, and interest rates are roaring away - but that doesn't mean either situation is going to continue long term, or even in the medium term. Taking a long-term decision based on a snapshot in time - and one which the majority of well-informed commentators regard as a blip, albeit a hefty one - isn't always a guarantee of a great longer-term outcome.

zooks

Marcon said:zooks said:

I've read a lot on the forum about not taking a DB lump sum on retirement but a bit confused as to why?

My own circumstances are that I would like to take early retirement next year when i'm 56.

I will take a 24% hit due reduction factor applied to my DB pension as my normal retirement age would have been 63.

My pot value is aproximately 900k so I will hit the LTA before 63 anyway.

I have the option of taking a yearly pension of aprox 30k plus 3x lump sum, comutate some of my yearly pension to maximise the Lump or take no lump sum to maximise my yearly pension. Comutation factor of my companies pension scheme is 28:1.

I have enough savings to get by and no mortgage so I don't necessarily need the lump sum but i'd assumed that it was best to take as much tax free money as possible away from the taxmans grasp.

Have I got this wrong?

DB pensions don't have 'pots', so I assume you are talking about a Cash Equivalent Transfer Value you've received fairly recently? If so, that's not relevant to the LTA. The value used for a DB scheme is 20 times the pension plus any tax free lump sum available within the LTA, so you have masses of headroom before you get anywhere near the LTA, unless you have very substantial defined contribution pension savings you haven't mentioned?

Whether taking  tax free cash is a good idea depends on (a) the commutation rate offered by your particular scheme and (b) what you'd do with the cash (?could you get a return at least as good as the pension promised by your scheme ?do you need to pay off debts ?do you have plans which require a lump sum - I think not, from your post).

Yes sorry got that wrong. As I understand it Its not a CETV. I did enquire what a CETV would be a couple of years ago and it was higher than my pension statement.

I think the figure i'm quoting is the value (theoretical?) of my benifits at my normal retirement age based on my input into the scheme so far.

Dazed_and_C0nfused

zooks said:

Marcon said:zooks said:

I've read a lot on the forum about not taking a DB lump sum on retirement but a bit confused as to why?

My own circumstances are that I would like to take early retirement next year when i'm 56.

I will take a 24% hit due reduction factor applied to my DB pension as my normal retirement age would have been 63.

My pot value is aproximately 900k so I will hit the LTA before 63 anyway.

I have the option of taking a yearly pension of aprox 30k plus 3x lump sum, comutate some of my yearly pension to maximise the Lump or take no lump sum to maximise my yearly pension. Comutation factor of my companies pension scheme is 28:1.

I have enough savings to get by and no mortgage so I don't necessarily need the lump sum but i'd assumed that it was best to take as much tax free money as possible away from the taxmans grasp.

Have I got this wrong?

DB pensions don't have 'pots', so I assume you are talking about a Cash Equivalent Transfer Value you've received fairly recently? If so, that's not relevant to the LTA. The value used for a DB scheme is 20 times the pension plus any tax free lump sum available within the LTA, so you have masses of headroom before you get anywhere near the LTA, unless you have very substantial defined contribution pension savings you haven't mentioned?

Whether taking  tax free cash is a good idea depends on (a) the commutation rate offered by your particular scheme and (b) what you'd do with the cash (?could you get a return at least as good as the pension promised by your scheme ?do you need to pay off debts ?do you have plans which require a lump sum - I think not, from your post).

Yes sorry got that wrong. As I understand it Its not a CETV. I did enquire what a CETV would be a couple of years ago and it was higher than my pension statement.

I think the figure i'm quoting is the value (theoretical?) of my benifits at my normal retirement age based on my input into the scheme so far.

What you contribute to a DB scheme is usually irrelevant, you accrue benefits under the scheme rules.

For example with a DB CARE scheme you might pay 10% pension contribution to accrue say 1.85% pension.  Probably with an annual inflation revaluation to what's been accrued.

Or with a final salary DB scheme you might pay 10% to build up 1/60th of your final salary for each year of service.

Marcon

zooks said:

Marcon said:zooks said:

I've read a lot on the forum about not taking a DB lump sum on retirement but a bit confused as to why?

My own circumstances are that I would like to take early retirement next year when i'm 56.

I will take a 24% hit due reduction factor applied to my DB pension as my normal retirement age would have been 63.

My pot value is aproximately 900k so I will hit the LTA before 63 anyway.

I have the option of taking a yearly pension of aprox 30k plus 3x lump sum, comutate some of my yearly pension to maximise the Lump or take no lump sum to maximise my yearly pension. Comutation factor of my companies pension scheme is 28:1.

I have enough savings to get by and no mortgage so I don't necessarily need the lump sum but i'd assumed that it was best to take as much tax free money as possible away from the taxmans grasp.

Have I got this wrong?

DB pensions don't have 'pots', so I assume you are talking about a Cash Equivalent Transfer Value you've received fairly recently? If so, that's not relevant to the LTA. The value used for a DB scheme is 20 times the pension plus any tax free lump sum available within the LTA, so you have masses of headroom before you get anywhere near the LTA, unless you have very substantial defined contribution pension savings you haven't mentioned?

Whether taking  tax free cash is a good idea depends on (a) the commutation rate offered by your particular scheme and (b) what you'd do with the cash (?could you get a return at least as good as the pension promised by your scheme ?do you need to pay off debts ?do you have plans which require a lump sum - I think not, from your post).

Yes sorry got that wrong. As I understand it Its not a CETV. I did enquire what a CETV would be a couple of years ago and it was higher than my pension statement.

I think the figure i'm quoting is the value (theoretical?) of my benifits at my normal retirement age based on my input into the scheme so far.

Please could you have a look at your statement and see how it describes the £900K - you might see something like 'indicative transfer value' (which is the most likely)?