Hybrid DB & DC Scheme Question

Blue_Horizon

I am just about to make a decision on a pension scheme that I'd built up between 2018-2022.  In short, the scheme has awarded my partial ill-health benefits, which provides enhanced benefits now.  I'm 61 years old.  I have a choice to make between maximum pension, circa £7k per year or maximum tax free amount, circa £37k and a reduced pension of circa £5.8k pa.  The maximum pension option comes with £20k DC pension that cannot be converted into an annual pension.  My question is can the £20 be provided tax-free?  Given the LTA of this option is around £130k.  I'm inclined to take the first option as this provides £1,200 additional annual pension for around £17k (7%), and my wife would receive 50% after my death.

Dazed_and_C0nfused

Do you mean the choices are

£7k pension + £20k TFLS

Or

£7k pension + £20k DC pot + £0 TFLS

Or

£5.8k pension + £37k TFLS + £0 DC pot

Bit confused as to what your choices actually are.

Marcon

Blue_Horizon said:

I am just about to make a decision on a pension scheme that I'd built up between 2018-2022.  In short, the scheme has awarded my partial ill-health benefits, which provides enhanced benefits now.  I'm 61 years old.  I have a choice to make between maximum pension, circa £7k per year or maximum tax free amount, circa £37k and a reduced pension of circa £5.8k pa.  The maximum pension option comes with £20k DC pension that cannot be converted into an annual pension.  My question is can the £20 be provided tax-free?  Given the LTA of this option is around £130k.  I'm inclined to take the first option as this provides £1,200 additional annual pension for around £17k (7%), and my wife would receive 50% after my death.

I too am confused! You're saying you have a £20K DC pension, but it can't be converted into an annual pension, so presumably £20K is the value of the DC 'pot'? Where does the Lifetime Allowance of 'around £130K' come into it? 

Your scheme administrators are best placed to clarify.

Blue_Horizon

Dazed_and_C0nfused said:

Do you mean the choices are

£7k pension + £20k TFLS

Or

£7k pension + £20k DC pot + £0 TFLS

Or

£5.8k pension + £37k TFLS + £0 DC pot

Bit confused as to what your choices actually are.

Almost, the last two options have been provided to me, together with the associated LTA figures of £160k and £153k.  I've posed the question as to why the DC pot in the first (your second option) can't be provided as TFLS.

swindiff

Is this a USS hybrid pension?  I know with the USS Hybrid scheme it is calculated as 20x the annual pension + DB Lump sum + DC lump sum.  So if you had a £7k pension, that would be valued at £140k, plus the DB lump sum which would be 3x the pension, so £21k, plus the DC value of £20k.
This would give a total of £181k, 25% of which could be taken tax free = £45,250

Blue_Horizon

swindiff said:

Is this a USS hybrid pension?  I know with the USS Hybrid scheme it is calculated as 20x the annual pension + DB Lump sum + DC lump sum.  So if you had a £7k pension, that would be valued at £140k, plus the DB lump sum which would be 3x the pension, so £21k, plus the DC value of £20k.
This would give a total of £181k, 25% of which could be taken tax free = £45,250

Yes it is a USS pension.

swindiff

In that case as well as the DC Lump sum you should also have a DB lump sum and the calculations I gave for how to calculate the maximum you can take tax free should apply.

daveshep26

swindiff said:

In that case as well as the DC Lump sum you should also have a DB lump sum and the calculations I gave for how to calculate the maximum you can take tax free should apply.

Believe you're limited to a maximum of 3* pension and the DC pot though - being £41k in this case ; ie you are fairly close - but have a bit more headroom for optimising total tax free amount

swindiff

No you can take the full 25% tax free lump sum but this will slightly reduce the annual DB pension.

Cornish_mum

It might be helpful to post what your investment builder and DB accrued are; you can find these numbers on your myUSS account.  Rather than just use the pension modeller (which I suspect you have your numbers from) which isn’t very helpful in my experience, as it doesn’t allow you to understand the underlying tax situation very well, as it’s oversimplified (in my opinion). 

Blue_Horizon

Cornish_mum said:

It might be helpful to post what your investment builder and DB accrued are; you can find these numbers on your myUSS account.  Rather than just use the pension modeller (which I suspect you have your numbers from) which isn’t very helpful in my experience, as it doesn’t allow you to understand the underlying tax situation very well, as it’s oversimplified (in my opinion). 

OK, I'd rounded the numbers on my original post:

Benefits summary, prior to retirement options:
Annual pension: £5538
TFLS: £16614
IB DC: £21055

Max Pension Option:
AP: £6570
TFLS: £0
DC Fund: £21055

Max TFLS Option:
AP: £5557
TFLS: 37052
DC Fund: £0

I think the reason is that the IB DC fund cannot be provide tax free, although I suspect that I could take 25% as TFLS at some point?