Defined Benefit 25% Tax Free Income?

dodmwe

If I have a defined benefit (DB) pension worth £40k per annum and I elect not to take the tax free lump sum, is £30k per annum (75%) of that DB pension income subject to tax, and £10k of DB pension income per annum (25%) tax free? 

Or is the whole £40k per annum subject to tax, and the only way to get a tax free element of a DB pension is to take the full 25% lump sum as cash when the pension commences?

molerat

The monthly income is 100% subject to tax even if you increase that by reducing the tax free lump sum.  The only tax free element is the tax free commencement lump sum.  A DB scheme does not have 25% tax free, the tax free lump sum is as defined in the scheme rules.

DullGreyGuy

dodmwe said:

If I have a defined benefit (DB) pension worth £40k per annum and I elect not to take the tax free lump sum, is £30k per annum (75%) of that DB pension income subject to tax, and £10k of DB pension income per annum (25%) tax free? 

Or is the whole £40k per annum subject to tax, and the only way to get a tax free element of a DB pension is to take the full 25% lump sum as cash when the pension commences?

Its only if you take it as a lump sum that its tax free. 

Whatevers left (75%-100%) will be paid as income and be subject to normal income tax. Obviously with most people's income there is a £12,570 tax free allowance on income

Marcon

dodmwe said:

If I have a defined benefit (DB) pension worth £40k per annum and I elect not to take the tax free lump sum, is £30k per annum (75%) of that DB pension income subject to tax, and £10k of DB pension income per annum (25%) tax free? 

Or is the whole £40k per annum subject to tax, and the only way to get a tax free element of a DB pension is to take the full 25% lump sum as cash when the pension commences?

There's a one off chance to take tax free cash from a DB scheme, which is at the point you first start to draw your benefits from that scheme.

How much tax free cash you can take depends on the rules of the individual scheme, up to a maximum stipulated by HMRC. For some schemes (eg some sections of the NHS pension scheme), that's 25%, but it will be different for other schemes, so you'd need to check with the administrators of your scheme.

dodmwe

Thanks and dang it. Looks like I am going to have to take a large DB pension tax free lump sum, to keep me out of 40% tax on retirement income given other DC pensions I also want to drawdown, and when state pension kicks in. 

I don’t want to take the lump sum, but it appears the only tax efficient option, and realise it is a first world problem.

xylophone

Or is the whole £40k per annum subject to tax, and the only way to get a tax free element of a DB pension is to take the full 25% lump sum as cash when the pension commences?

It would appear that your scheme does not offer an automatic Pension Commencement Lump Sum or an automatic PCLS with the option of increasing it by commutation of the annual pension?

If this is the case, your pension options letter will likely offer either options of either the full monthly pension or a reduced pension and maximum/minimum PCLS calculated under the rules of the scheme.

See https://techzone.abrdn.com/public/pensions/Tech-guide-tax-free-cash

Only the PCLS will be tax free - the balance is taxable as income.

QrizB

dodmwe said:

Thanks and dang it. Looks like I am going to have to take a large DB pension tax free lump sum, to keep me out of 40% tax on retirement income given other DC pensions I also want to drawdown, and when state pension kicks in. 

I don’t want to take the lump sum, but it appears the only tax efficient option, and realise it is a first world problem.

What is the commutation rate? A poor rate might make paying 40% tax a better option than taking a large PCLS.

dodmwe

QrizB said:

dodmwe said:

Thanks and dang it. Looks like I am going to have to take a large DB pension tax free lump sum, to keep me out of 40% tax on retirement income given other DC pensions I also want to drawdown, and when state pension kicks in. 

I don’t want to take the lump sum, but it appears the only tax efficient option, and realise it is a first world problem.

What is the commutation rate? A poor rate might make paying 40% tax a better option than taking a large PCLS.

Good point. I have just turned 55, so planning at the moment as I can take unreduced at 60, or -3% per year below 60 if I am a ‘good leaver’. When ready, I’ll post specific details to get more opinions as the crowd here is very knowledgeable.

Ksw3

You can usually take less than maximum cash, you could request £× per annum and them get the rest as TFC, assuming its less than
max.

Albermarle

Ksw3 said:

You can usually sometimes take less than maximum cash, you could request £× per annum and them get the rest as TFC, assuming its less than
max.

Small amendment