Maximising Pension Lump Sum to Reduce Tax Burden at 40%

Tom_Bradbury

I've got a few years to go, but looking ahead, I'm at risk of becoming a 40% tax payer on my pension when I retire due to fiscal drag.

My pension has the option of taking a lump sum which would reduce my pension income, so keeping me below the 40% tax band.  Is this a worthwhile consideration or should I try to maximise my pension income and hope that over time, tax rates will increase to reduce or eliminate paying tax at 40% on part of my pension.

I've worked out based on current values, if I retire and take the maximum lump sum, then if I lived more than 12 years after I retire then I'd be out of pocket.

My pension is index linked by CPI plus 1.5%, so if I took the lump sum I'd need to invest it, and achieve at least the same sort of growth to maintain parity between taking the lump sum and keeping the money in my pension.

One of the considerations I've got is that the men in my family normally pop off not long after retiring, and none of my older male relatives have lived beyond 75!  Although my pension provides a survivor benefit, the amount paid doesn't change if I maximise the lump sum or not.  Taking a lump sum would mean I could leave any remaining lump sum as part of my inheritance, which wouldn't be available if I didn't take the lump sum as, apart form the survivor benefits, my pension would go up in smoke the same time I did.

Dazed_and_C0nfused

An exchange rate of 12:1 is about as bad as it gets and even with paying 40% on the pension I'm not sure it would remote me unless I had a burning need for the extra lump sum.

My pension is index linked by CPI plus 1.5%

Even once in payment?

Universidad

Dazed_and_C0nfused said:

An exchange rate of 12:1 is about as bad as it gets and even with paying 40% on the pension I'm not sure it would remote me unless I had a burning need for the extra lump sum.

My pension is index linked by CPI plus 1.5%

Even once in payment?

I would guess that's an NHS pension from the inflation indexation and poor commutation.

That commutation rate is not really good value for money, taken in isolation.

But if it enables you to do something that you really want to do, it's your money and there's no reason why you shouldn't. You seem to be aware of the factors to consider.

If you want to leave an inheritance, and you're a higher rate taxpayer now, and you say you have a few years to go - why not consider investing money into a Defined Contribution pot now? If your work has an AVC scheme you could get a lot of relief at source. If not, you can do it with a SIPP though you'll have to ask HMRC for the full 40%.

Just a thought, because if you do happen to pop off before 75, it will be left to your nominated person(s) tax free. 

And if not, it's not far off your own investment idea, except that it has longer to perform.

Dazed_and_C0nfused

I would guess that's an NHS pension from the inflation indexation and poor commutation

I thought it was only CPI once in payment though not CPI + 1.5% ??

Universidad

Dazed_and_C0nfused said:

I thought it was only CPI once in payment though not CPI + 1.5% ??

If it is the NHS scheme, I'm pretty sure you're right.

Marcon

Universidad said:

Dazed_and_C0nfused said:

I thought it was only CPI once in payment though not CPI + 1.5% ??

If it is the NHS scheme, I'm pretty sure you're right.

You are indeed right.

The NHS Pension Scheme 2015 Regulations provide for  annual revaluation by reference to changes in prices. For active members (those who are still building up benefits in this scheme) this is at the rate of CPI plus 1.5%; for deferred members (those who have left active membership of the scheme and are entitled to a pension at some future date) at the rate of CPI included in any Pension Increase (Review) Order.

Once you become a pensioner (ie your pension is actually in payment), the increase is CPI.