Commute balance of PCLS from DB scheme or not? Tax man skewing the decision.

Mutton_Geoff

I'm just about to retire with a combination of DB and DC schemes (company scheme and a SIPP) plus cash in interest bearing accounts, PBs and a healthy ISA. I will be a higher rate tax payer in retirement.

I know the tax tail shouldn't wag the investment dog but just about to push the button on my DB scheme commencement in the next tax year. My question is I have a small percentage of PCLS remaining to me (about £30k) and I am able to commute some of my DB scheme to pay this at around 19.1x. The scheme is RPI linked (max 5%) but the higher rate tax issue is skewing my decision since not taking the TFC produces a higher pension only to be taxed at 40%. The effective commutation rate (after tax) is therefore more like 32x. At age 65, even with inflation, that is a long game on retaining full DB benefits and not taking the TFC.

Any views from the experts why I shouldn't take the last bit of tax free money and put in my ISA?

No dependants/widow benefits payable on the DB scheme.

leosayer

A stock market crash and / or sustained period of high inflation could wipe out much of that 32x multiple.

Why take TFC and expose yourself to those risks if (I assume) you don't need the cash? 

What % of your retirement income will be from the DB?

Does the lifetime allowance factor into your tax calcs?

draiggoch

As the DB pension has no spousal benefit, if you do have a spouse and they are still employed you could put some of the PCLS in their pension as a compromise. 

Mutton_Geoff

draiggoch said:

As the DB pension has no spousal benefit, if you do have a spouse and they are still employed you could put some of the PCLS in their pension as a compromise. 

Not an option for me I'm afraid. I am quite happy to spend the money as there is plenty I want to do with it but wondering whether I'd regret giving up some DB pension for it.

To answer previous question, DB represents about 25-30% of my income for the first decade, increasing as the ISA/cash elements are spent down to leave just a rainy day pot.

To answer the other question, my LTA balance will be fully used when commencing the DB scheme so the income from that is already reduced by the tax charge on exceedance beyond that remaining. 

Pensions_matter_2

Co-incidently, I was just about to post with a similar question, except that it will be when I start my SP in a few years that I will likely end up in the higher rate tax band (though in contrast with your situation, this is not certain as depends on future inflation, whether/by how much tax bands increase, whether triple lock continues etc). At the moment I am trying to decide now whether to take my full DB pension (the bulk of my income) or a little tax free cash and a slightly reduced pension, to leave some headroom later. 

I wonder if its possible to pay pension contributions up to £3600 gross per year to avoid or reduce the higher rate tax? The experts on here may be able to comment. If that works, then you could leave the pension funds to dependants if you have any? May be worth considering. My position is less clear cut as I dont know how above factors will work our over the next few years to SPA.

Mutton_Geoff

Pensions_matter_2 said:

I wonder if its possible to pay pension contributions up to £3600 gross per year to avoid or reduce the higher rate tax?

That wouldn't work for me as I have bust the LTA even with an IP.

Dazed_and_C0nfused

Pensions_matter_2 said:

Co-incidently, I was just about to post with a similar question, except that it will be when I start my SP in a few years that I will likely end up in the higher rate tax band (though in contrast with your situation, this is not certain as depends on future inflation, whether/by how much tax bands increase, whether triple lock continues etc). At the moment I am trying to decide now whether to take my full DB pension (the bulk of my income) or a little tax free cash and a slightly reduced pension, to leave some headroom later. 

I wonder if its possible to pay pension contributions up to £3600 gross per year to avoid or reduce the higher rate tax? The experts on here may be able to comment. If that works, then you could leave the pension funds to dependants if you have any? May be worth considering. My position is less clear cut as I dont know how above factors will work our over the next few years to SPA.

If you have no earnings for pension purposes and are under 75 then you can still pay £3,600 gross each tax year and this will increase your basic rate band by £3,600.

The exact benefit will depend on whether you leave the £3,600 in the pension or take some (or all) of it out in the same tax year.

But in simple terms it could save up to £720 in personal tax liability (£3,600 taxed at 20% instead of 40%).

So the pension fund of £3,600 may have a real cost of just £2,140.

And potentially more savings can be had if this moves you into being a basic rate payer and free up the potential to receive Marriage Allowance and have a larger savings nil rate band (£1,000 rather than £500).

Marcon

Mutton_Geoff said:

Pensions_matter_2 said:

I wonder if its possible to pay pension contributions up to £3600 gross per year to avoid or reduce the higher rate tax?

That wouldn't work for me as I have bust the LTA even with an IP.

Not sure what sort of IP you have, but is paying in to 3 different personal pensions and then cashing each in while still at 'small pot' levels (i.e. no more than £10K per pot at the time you encash the pot in question) a possibility? If so, that would give you up to another £30K on top of the LTA, since using the small pots regime uses 0% of the LTA.

Mutton_Geoff

Marcon said:

Not sure what sort of IP you have, but is paying in to 3 different personal pensions and then cashing each in while still at 'small pot' levels (i.e. no more than £10K per pot at the time you encash the pot in question) a possibility? If so, that would give you up to another £30K on top of the LTA, since using the small pots regime uses 0% of the LTA.

That's a good tip. I have IP2016 at £1.25m but pension values still around £550k in excess of that.

I have around £40k uncrystallised in an Aviva SIPP run by my employer. I was planning to sell investments within & move this across to my own SIPP at retirement but are you saying I could open two more SIPPs, move £9.9k into each, reduce the Aviva to £9.9k and then take out of the three by way of 25% TFC then taxed at marginal rate on the balances?

If so, this would be a tasty way to provide a few months income into retirement.

I've looked at LeoSayer's comment and if inflation were to run high for a decade, he is correct that if my DB pension rose by the max 5% a year, it would only be 10 years before I broke even with taking TFC vs income.

Marcon

Mutton_Geoff said:

Marcon said:

Not sure what sort of IP you have, but is paying in to 3 different personal pensions and then cashing each in while still at 'small pot' levels (i.e. no more than £10K per pot at the time you encash the pot in question) a possibility? If so, that would give you up to another £30K on top of the LTA, since using the small pots regime uses 0% of the LTA.

That's a good tip. I have IP2016 at £1.25m but pension values still around £550k in excess of that.

I have around £40k uncrystallised in an Aviva SIPP run by my employer. I was planning to sell investments within & move this across to my own SIPP at retirement but are you saying I could open two more SIPPs, move £9.9k into each, reduce the Aviva to £9.9k and then take out of the three by way of 25% TFC then taxed at marginal rate on the balances?

If so, this would be a tasty way to provide a few months income into retirement.

I've looked at LeoSayer's comment and if inflation were to run high for a decade, he is correct that if my DB pension rose by the max 5% a year, it would only be 10 years before I broke even with taking TFC vs income.

Check if Aviva will let you make partial transfers.  

There's a detailed explanation of the small pots regime here: https://professionalparaplanner.co.uk/techzone/small-pots-and-defined-benefit-trivial-commutations/

Mutton_Geoff

Thank you for that link Marcon. Yes, Aviva will allow partial transfers out provided it's less than 95% of the invested total to keep the company scheme alive. The scheme will not receive any more company contributions after this month in any case. I was surprised there wasn't anything in the rules about deliberately setting up short term small pots for tax avoidance in this way but it does provide £7.5k of TFC plus subject the remaining £22.5k to marginal tax alone instead of LTA tax then marginal income tax so a further £5,625 tax saving.

The £30k will then net me £21k instead of £13.5k so that will pay for another holiday ;-)

I've got a dormant Vanguard account and will open an HL or similar now.