Tax Free for higher tax oayer

Bighitter32

I will be a higher rate tax payer if I take my full DB pension, and am thinking there are benefits to taking a tax free lump sum and putting that to work whilst then falling into a lower tax band (I accept I lose year on year increases in the money I commute)….. the commutation factor is circa 20 and I projecting out (hoping for) 20 years of retirement…. Is there an easy way to determine a break even point

Dazed_and_C0nfused

Bighitter32 said:

I will be a higher rate tax payer if I take my full DB pension, and am thinking there are benefits to taking a tax free lump sum and putting that to work whilst then falling into a lower tax band (I accept I lose year on year increases in the money I commute)….. the commutation factor is circa 20 and I projecting out (hoping for) 20 years of retirement…. Is there an easy way to determine a break even point

Pick an average inflation rate for your pension and get on excel.

Gut feeling is the commutation factor, higher rate tax and fiscal drag will make taking the lump sum worthy of proper consideration.

Bighitter32

Thank you for the response, I’m thinking the same…. Just see so many comments like “If you don’t need it, leave it there”….. Of course specific individual situations are important. Not many folks talk about the tax band considerations.

hugheskevi

With a commutation factor of 20 and paying basic rate income tax, it would take 20 / 0.8 = 25 years to receive the same amount from taxed income (ignoring investment returns on lump sum, and inflation increases on pension).

With higher rate tax that becomes 20 / 0.6 = 33.3 years. 

Investment on lump sum, net of costs, should exceed the uprating on the pension (uprating might be important - is uprating capped for example, exposing you to inflation risk?). You also gain if you die earlier than expected. So main risk of loss would be living considerably longer than expected.

Also, are you being realistic about life expectancy? Planning to live until at least age 90 would be prudent.

Bighitter32

Thank you all clear. I have hopes of 20 years but genes do not support this….

Samuelsjourney

Just my thoughts. Im a LR tax payer at present (57 years of age). Plan on working till im 62. Im in a similar situation that i will be close to being a HR tax payer at 67 years of age depending on how i structure my DB pension and SIPP around my SP. My commutation factor is poor at 12. Ive decided to take my DB pension at 58 whilst continue to work and utilise it to build savings. Im looking at 50k injection into ISAs over that 4 year period whilst im working and drawing a DB pension. I will continue paying into my work Nest pension and adding to my SIPP. This for me seemed the best option. I can live a little bit better now (i virtually double my income at 58) and have a decent income at 67, circa 48k whilst sitting under the HR tax band in Scotland using DB/SIPP/SP and savings to fund my retirement years from 62.