To Bridge or not to Bridge? DB Pension Options

Sparky95

Hello Everyone!

I've been a usual reader of this Forum for quite a while, but now my time has come to decide on how to best access my DB Pension, so here I am asking for opinions.

A bit of background information first, I'll be 58 by the time my pension starts, stopped working 2 years ago and I have no intentions to go back. I have a full State Pension forecast at 67 ( so does my OH, 9 months after me, with no other income), I have two DC pensions valued at around 90K, we own our home outright and have no debts, also have a sufficient amount of savings. In terms of income requirements, we are perfectly happy with around £17k a year for day to day living, assuming any big extras would be funded from savings.
Now, I have already narrowed my options by deciding I will take a Tax free Lump Sum given that I'm offered a commutation factor of 23.7, which is really 29.7 after tax. So I'm left with the following:

1. Yearly Income of £16765 plus TFLS of £69855, or

2. A Bridging Pension Option ( BPO), where I would get an income of £22566 per year until my State Pension age ( next 9 years) and from then on a yearly income of £11965. The idea being to provide a stable income throughout, including the State Pension. Plus a TFLS of £108529.

In all options the Spouse's pension, paid on death, is the same and the revaluation is based on RPI capped at 5%, apart from GMP (£2827) which is based on CPI and capped at 3%, but for the first 5 years this doesn't apply. 

The big dangling carrot in front of me of £108.5k is tempting, but I'm mostly concerned about the effect of inflation and worried that the £11965 might eventually become worthless. I am aware that given our other assets we'd still probably be okay, but our other goal is to give our son a big help at some point to buy a property, probably when we decide to downsize (and he actually wants to move out). The steady income seems like the conservative option, if not necessarily the best financially, but I'm struggling trying to decide one way or the other and would appreciate other opinions.

xylophone

Is your OH working?

If so, why is she not enrolled in a workplace pension?

If not, (or her salary is under £3,600 gross per annum), why not the "£3,600 option"?

https://www.hl.co.uk/help/sipp,-drawdown-and-annuity/sipp/contributions/can-i-invest-in-a-pension-if-i-dont-have-earnings

Is your son age over 18? If so, does he have a LISA?

If you took the BP option, would it be a good idea to gift half the lump sum to your spouse and for you both then to each make an immediate gift of your half to your son (assuming he is unlikely to blow it on cigarettes and whisky and wild,wild, wimmin...)?.  

This could be efficient IHT planning.

He could could then LISA/ISA/ fixed term account the cash for a couple of years while he considers his house purchase.

In the meanwhile, your pension income would be greater than your income requirement and you could use the "£3,600 option" to build up your DC provision which you could access to supplement your income once you reach SPA?

Sparky95

https://forums.moneysavingexpert.com/discussion/comment/80026758#Comment_80026758

OH doesn't work and is already using the £3600 SIPP option. And our son is over 18 , doesn't have a LISA but contributes to his workplace pension through salary sacrifice as it's more tax efficient, but has other savings and is very unlikely to blow any sum we'd give him; if we gave him any money now he'd end up paying tax on interest but we did consider transferring some to him now rather than later and will probably do so in the near future, but the thing is, at the moment, he is not interested in buying a property.

xylophone

"OH doesn't work and is already using the £3600 SIPP option"

Then your comment in your post post concerning her pension situation is not quite accurate?

"I have a full State Pension forecast at 67 ( so does my OH, 9 months after me, with no other income),"

She has the option of drawdown from her pension at or after the minimum age at which it would be permitted.

I am assuming that if she has no earned income, then the bulk of your non tax privileged savings is in her sole name.

With regard to your son and his tax situation, you could still gift him £20,000 a year between you so that he could make a full subscription to some kind of ISA each tax year.

Presumably your intention is that your son should inherit the family home and most if not all of the rest of your estate.

Under the current IHT regime and even taking full advantage of the family home provision, there would likely be a hefty bill from HMRC.

Therefore it could be worth considering making gifts as soon as possible - you might even consider making regular gifts from income depending on how your situation develops?

Milltir

What is the impact on annual allowance? Temporary increase in pension usually counts as extra pension for the annual allowance limit - can be significant.

Sparky95

https://forums.moneysavingexpert.com/discussion/comment/80027348#Comment_80027348

I'm sorry, but I don't know which annual allowance you referring to.

Milltir

This wasn't the scheme I was in, but it was very similar, see page 10 of pdf which illustrates:

https://cadentgaspensions.com/storage/app/uploads/public/5ff/5cd/bba/5ff5cdbba738b229901600.pdf

xylophone

https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance

What counts towards your lifetime allowance
Defined contribution - personal, stakeholder and most workplace schemes	Money in pension pots that goes towards paying you, however you decide to take the money
Defined benefit - some workplace schemes	Usually 20 times the pension you get in the first year plus your lump sum - check with your pension provider

Your pension provider may ask for information about other pension schemes you’re in so they can check if you’re above your lifetime allowance, and how much tax-free lump sum you can get when you:

• decide to take money from a pension pot
• turn 75
• transfer your pension overseas

https://www.linkedin.com/pulse/how-take-account-bridging-pensions-dave-king#:~:text=In%20most%20cases%2C%20a%20bridging,payable%20for%20a%20limited%20period.

Sparky95

So that's why the bridging option uses up around 15% of Lifetime Allowance more than the other option. Good to know, but in either case I'm well under the maximum, so not a deal breaker in any case. I'm still trying to evaluate/estimate/guess potential scenarios to choose one option.