Take Pension at 55 with Lump Sum and Continue in Employment. Have I missed anything?

dodmwe

First world problems, I know, but here goes.

I have worked in my company for a long time and over the years amassed a DB pension at aged 55 of ~£51k pa in today's money. The DB scheme was shut a couple of years ago and the pension is now deferred. I now have to make a choice as the pension department have notified that the ERF is increasing (3% to 4% per year) and commutation factor falling. 

If I take my pension now, I can have a pension of ~£44k and no lump sum, or a pension of ~£36k and a lump sum of ~£238k. The commutation factor is 28.7 which feels very good. However, I enjoy my work and would pay 45% tax on the pension until I retire, which I plan to do at 60. I also have a £200k DC which I want to take 25% of, up to the max £268,275.

If I leave the pension until I am 60 it will have compounded to let's say 3% per year to ~£58k. I wouldn't have an ERF but the commutation factor falls from 28.7 to 20, so I'm having to give up a lot more of the DB pension to get the tax-free lump sum. I have run my numbers and thought about it a lot, and my spreadsheet tells me to take the pension now with the maximum lump sum for the following reasons;

- Even by paying 45% tax on my pension between 55 and 60, my spreadsheet tells me my income is higher and tax is lower through to 85, by ~£50k and ~£30k respectively. It seems that paying 45% tax for a few years is better than paying 40% tax when I'm over 60 for many years. I can broadly keep my pension income after 60 below the high-rate tax threshold if I max my lump sum.

- If I die the pension transferred to my wife is £35k, so either option make no difference.

- I can invest or save the £238k for 5 years until I'm 60. This makes taking the cash free lump sum even more attractive. My wife is a non-tax payer so I can get interest tax free 

- The £268,275 tax free amount is going to get significantly eroded over the next 5 years in real terms. It means I won't be able to convert the maximum DB pension at 60 to cash, as this will exceed £268,275. Plus at 60 I won't be able to take cash from my DC at all.

- Who knows what pension changes are going to come through for large pots.

- If I end up retiring before 60, then the decision is even better, as less pension will have been subject to 45% tax.

I think I have done my homework, and have the paperwork with me to fill out and sign and return to the pension department, but there are so many knowledgeable people on this forum, and just want to make sure I haven't missed anything in my thinking??

I am finding it a real struggle to give up a sizeable part of an index linked pension for life, even though my maths and other softer issues tell me it is the right thing to do. 

Many thanks in advance.

FIREDreamer

With figures like that I can only add one comment …

You only live once!

You could take the DB pension now and carry on working whilst maximising your pension contributions, up to your salary only, back into your existing DC scheme!

dodmwe

FIREDreamer said:

You could take the DB pension now and carry on working whilst maximising your pension contributions, up to your salary only, back into your existing DC scheme!

Thanks, I hadn't given that much consideration. I knew it was worth posting on here! I'm not in a pursuit of accumulating more money, but that may make financial sense.

Also, what would be the benefit beyond marginal tax gains? I would have no tax-free lump sum allowance left, so with salary sacrifice may get 47% tax relief on the way in (45% tax and 2% NI), but pay 40% on the way out. I guess 7 percentage point margin is OK though. Anything else to consider?

Trouble is, I didn't contribute much into a pension in 2020-21 or 2021-22 because of the LTA, but did put £85k into a DC in 2022-23 and £60k in 2023-24 after abolition of the LTA. If I plan to put £60k this year (2024-25) and £60k the following years, would that be considered pension recycling? I am showing that in the two tax years before I took the lump sum, I put in £60k or greater. So, adding £60k in the year I take the lump sum and subsequent years seem like a normal pattern, and not recycling? All a bit confusing, so any help would be appreciated.

I am taking the lump sum and pension early because of the change to ERF and commutation factor, so nothing is pre-planned for recycling.

Marcon

dodmwe said:

FIREDreamer said:

You could take the DB pension now and carry on working whilst maximising your pension contributions, up to your salary only, back into your existing DC scheme!

Thanks, I hadn't given that much consideration. I knew it was worth posting on here! I'm not in a pursuit of accumulating more money, but that may make financial sense.

Might be even better getting some proper (paid for) advice from an independent financial adviser. Who knows what else you might learn from someone with a full understanding of your circumstances, rather than just a few paragraphs on a public forum? Could be one of your best investments yet!

MetaPhysical

Marcon said:

dodmwe said:

FIREDreamer said:

You could take the DB pension now and carry on working whilst maximising your pension contributions, up to your salary only, back into your existing DC scheme!

Thanks, I hadn't given that much consideration. I knew it was worth posting on here! I'm not in a pursuit of accumulating more money, but that may make financial sense.

Might be even better getting some proper (paid for) advice from an independent financial adviser. Who knows what else you might learn from someone with a full understanding of your circumstances, rather than just a few paragraphs on a public forum? Could be one of your best investments yet!

100%.  With the sums the OP is talking about a few grand for tailored, structured advice is probably the best investment he will ever make.

leosayer

dodmwe said:

FIREDreamer said:

You could take the DB pension now and carry on working whilst maximising your pension contributions, up to your salary only, back into your existing DC scheme!

Thanks, I hadn't given that much consideration. I knew it was worth posting on here! I'm not in a pursuit of accumulating more money, but that may make financial sense.

Also, what would be the benefit beyond marginal tax gains? I would have no tax-free lump sum allowance left, so with salary sacrifice may get 47% tax relief on the way in (45% tax and 2% NI), but pay 40% on the way out. I guess 7 percentage point margin is OK though. Anything else to consider?

Trouble is, I didn't contribute much into a pension in 2020-21 or 2021-22 because of the LTA, but did put £85k into a DC in 2022-23 and £60k in 2023-24 after abolition of the LTA. If I plan to put £60k this year (2024-25) and £60k the following years, would that be considered pension recycling? I am showing that in the two tax years before I took the lump sum, I put in £60k or greater. So, adding £60k in the year I take the lump sum and subsequent years seem like a normal pattern, and not recycling? All a bit confusing, so any help would be appreciated.

I am taking the lump sum and pension early because of the change to ERF and commutation factor, so nothing is pre-planned for recycling.

Inheritance tax mitigation is another consideration, because DC pensions are not part of your estate.

Also, DC pensions are exempt from capital gains tax and other taxes on dividends and interest.

Of course, both tax rules may change in the future but I would echo other posters who say that you should take advise from an IFA who knows you full financial circumstances and goals. 

The sums involved are material and I would certainly avoid taking any irreversible decisions until you have taken advice.

dodmwe

Thanks for all your comments. Normally I would take advice. The challenge this time is, I am 55 and have not given my retirement a thought yet. I enjoy my job. I had no intention of taking my pension at 55, but with rising interest rates the company DB pension has had a major step change, and devalued the ERF and commutation factor significantly.

Hence, I have had to make some quick decisions. I only found out (I don't read my pension letters too closely!) a few days before the changes and secured a quotation just in time. Even though the terms have now worsened I have 3 months to decide and retrospectively take the old terms (now 6 weeks left).

Therefore, since I have no idea what my goals are at the moment, I have decided to do what generates most income and least tax based on a spreadsheet I have developed through to age 85. I have been watching James Shack and Meaningful Money on Youtube(!!) a lot and followed their advice.

Whether I want to or not, I know I have to take my lump sum at some point. If I didn't the extra income would be taxed at 40% from the moment I start the pension, so the lump sum tax at 0% is a no brainer.

My unreduced pension at 60 is £50,800. At 55.5 years old they have offered my £44,100 (no lump sum) and £35,800 with £238k lump sum.

I have modelled taking it unreduced at 60 (as that is a service they offer), and in today's money I would be offered £38,200pa and £245k lump sum because of the much poorer commutation factor (28.7 now versus 19.2 when I am 60). The 28.7 commutation factor is effectively 49 when I take into account 40% tax.

So, taking the pension lump sum at 55.5 appears a no brainer. I get 4.5 years extra pension, a lump sum that grows for 4.5 years, all for a ~£2.4k less pension per annum (that would be taxed at 40% anyway). Plus, from this forum I realised can out £60k into a DC for the next 4.5 years which seals the decision for me.

Phossy

That sounds like a fantastic offer all round. Even by taking it early, the actuarial reduction looks to be about 3%, which is also very good (normally 4 or 5% reduction per year).