Over 55. Taking 25% of pension

Moneybagsmbmbmb

Hi all, I’m 56 years old. Currently not working. 
I have 2 pensions, a final salary pension, value approx 400k (20 x 20k) and a SIPP, worth approx 400k. So, in all, approx 800k worth of pension.
My question is, I would like to ‘take 25% of my pension, ie 200k. However, I don’t want to touch my final salary pension. I want to keep that as it is (not convert it or cash it in or anything like that). Could I take the full 25% (ie, 200k) of my pension from the SIPP pot? or will I be limited to taking just 25% of my SIPP pot, ie 100k ?
Thanks for your help on this - I’ve searched everywhere for help on this, but it doesn’t seem to be covered anywhere.

Dazed_and_C0nfused

There is no 25% TFLS with a DB pension like there is with DC schemes.

You may get a (tax free) PCLS from the DB scheme but that will be based on the scheme rules.  And normally is only paid at the point the pension starts to be paid.

So you can take 25% of the DC fund as a TFLS, £100k.

L9XSS

From your DC pension, taking 25% will give you £100k as a tax free lump sum, any more from this pot would be taxed at your marginal rate, I’m presuming 20% due to you not working. You could withdraw a further yearly £12,570 up to your personal allowance again at 0% tax. Your final salary pension isn’t a pot as such, you may be able to commute some cash as a lump sum payment with a reduced pension. 

jimi_man

Hi.
I'm almost positive the answer is no. The Final salary pension doesn't have a 'value' technically, only if you transfer it out. So 25% of your 'pot' is £100k. If you want more then you'll have to take the lump sum from the pension (if one is offered). 

dunstonh

a final salary pension, value approx 400k 

As mentioned higher up, there is no 25% PCLS on a DB scheme.   And the DB scheme doesn't have a value.   You have a pension that provides defined benefits based on the rules of the scheme.   No more. No less.    

My question is, I would like to ‘take 25% of my pension, ie 200k

So, the only bit you can take 25% from is the SIPP.  And that is £100k.

Do remember though that taking the 25% up front, rather than on drip, will usually result in higher taxation over your retirement.   However, the degree of that will depend on your drawdown rate.   

The DC pension is also outside of your estate for IHT purposes.    So, using money outside of your estate instead of money from inside your estate could create future increased taxation.

Albermarle

a final salary pension, value approx 400k (20 x 20k) 

If you mean that you have a DB pension that will pay you £20K pa , then it is worth a lot more than £400K.

The 20X is just an arbitrary figure used for Lifetime Allowance calculations. A more accurate value would be to multiply the annual salary by 25 to 35 , depending on how good the terms and conditions of the pension were. In reality the 'value' is a bit meaningless but thought it was worth pointing it out.

It does not mean any tax free lump sum will be based directly on the theoretical value, as it depends on the schemes own internal calculations, but I would guess it would be more than £100K though.

Moneybagsmbmbmb

Many thanks to everyone that replied.
ALL very useful information and food for thought.

So, not wanting to interfere with my DB pension, I’ll take 100k from my SIPP.
I wasn’t aware that taking the 25% up front may result in higher taxation over my retirement. I’m also unaware of the issues regarding using this money (outside my estate for IHT purposes) could create future increased taxation.
I may have to do more research into those subjects. Thanks for bringing that to my attention.
Thanks….

Pat38493

Moneybagsmbmbmb said:

I wasn’t aware that taking the 25% up front may result in higher taxation over my retirement. I’m also unaware of the issues regarding using this money (outside my estate for IHT purposes) could create future increased taxation.
I may have to do more research into those subjects. Thanks for bringing that to my attention.
Thanks….

I would guess that one thing you could do to mitigate this to some extent, if you are not working, would be to take out your personal allowance amount from the SIPP each year that you have no other income - then you don’t pay any tax on that withdrawal and you may be able to invest it outside the SIPP, but you would then have to pay attention to any potential tax liability outside or use ISA allowances to re-invest it.

However this would very much depend on your personal circumstances and long term spending needs I think.

Dazed_and_C0nfused

Moneybagsmbmbmb said:

Many thanks to everyone that replied.
ALL very useful information and food for thought.

So, not wanting to interfere with my DB pension, I’ll take 100k from my SIPP.
I wasn’t aware that taking the 25% up front may result in higher taxation over my retirement. I’m also unaware of the issues regarding using this money (outside my estate for IHT purposes) could create future increased taxation.
I may have to do more research into those subjects. Thanks for bringing that to my attention.
Thanks….

By taking the £100k upfront you are crystallizing your whole (current) DC pension.

£100k TFLS is exactly 25% of your fund so leaves the remaining £300k as the taxable element.

Move forward 3 years and your £300k has grown to £330k.  The whole £330k is still taxable (when taken out of the fund).

dunstonh

I wasn’t aware that taking the 25% up front may result in higher taxation over my retirement.

IF taken up front, that is the last time you get 25% TFC on that pension regardless of the value it goes up to in the future.

If you take it on drip, either using phased UFPLS, where each withdrawal is split between 25% Tax free and 75% taxable) then the remaining fund always has 25% of its value available tax free.   As the value goes up over time, the amount you can draw tax free goes up with it.

Alternatively,  if you only crystallised some of the pension, whatever is left uncrystallised will have 25% of that available.  As that goes up, so does the amount you can take tax free.

This can be important if you have excess personal allowance available or higher pension income post state pension age.   Having that 25% to use later rather than sooner can result in lower taxation over the remainder of your life.

Effectively, you should be modelling your retirement plans over your lifetime and seeing which methods work best for your objectives.

 I’m also unaware of the issues regarding using this money (outside my estate for IHT purposes) could create future increased taxation.

Some people take the  25% up front and stick it in a savings account.   A bit of a daft thing to do but plenty to do it.   If your estate is close to or over the IHT threshold, then taking money out of the pension, where it is free of IHT and putting it into an account where it could be subject to IHT is just gifting revenue to HMRC.  If you plan to spend the money and it will be gone all in one go pretty much immediately, then that is less of an issue.      However, if you have that amount already in other savings or investments, it may be better to use them rather than the 25% TFC on the pension)

xylophone

If you wish, you can make an appointment with Pension Wise for guidance on taking benefits from your DC pension (SIPP).

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise