Tax treatment of enhanced Defined Benefit Lump Sum?

GenX0212

Long story short I have a DB pension which was originally part of the Electricity Supply Pension Scheme (ESPS) {non-protected person status} and which is now managed as a Serco employer scheme despite me never having ever been employed by Serco - don't ask!

Anyway I have enquired about early retirement options and have been offered the following options:

Option 1 An estimated annual pension of: £13,610 a year

Plus an additional cash lump sum of: £36,890

Plus an estimated annual spouse’s death after retirement pension of: £6,805 a year

Option 2 An estimated cash lump sum – Serco Scheme: £40,990

Plus an additional cash lump sum of: £36,890

Plus an estimated reduced annual pension of: £11,682 a year

And an estimated annual spouse’s death after retirement pension of: £6,805 a year

 

So an extra £41k lump sum in lieu of a guaranteed £2k per year. As the £2k would be subject to marginal tax then it is effectively £1.6k which makes the £41k equate to 25.6 years payments.
Pension payments are uplifted by CPI each year to a maximum of 5% but £41k invested into a stocks ISA could potentially yield a greater return as well as acting as a ready reserve.

Age 55 I currently have about £600k in separate DC schemes planned to be taken via drawdown and I am already eligible for full state pension. No decisions made as yet but it makes the option of the £41k upfront an interesting problem.

The documentation I have received so far isn't clear. Would the enhanced lump sum be fully tax free?

Dazed_and_C0nfused

GenX0212 said:

Long story short I have a DB pension which was originally part of the Electricity Supply Pension Scheme (ESPS) {non-protected person status} and which is now managed as a Serco employer scheme despite me never having ever been employed by Serco - don't ask!

Anyway I have enquired about early retirement options and have been offered the following options:

Option 1 An estimated annual pension of: £13,610 a year

Plus an additional cash lump sum of: £36,890

Plus an estimated annual spouse’s death after retirement pension of: £6,805 a year

Option 2 An estimated cash lump sum – Serco Scheme: £40,990

Plus an additional cash lump sum of: £36,890

Plus an estimated reduced annual pension of: £11,682 a year

And an estimated annual spouse’s death after retirement pension of: £6,805 a year

 

So an extra £41k lump sum in lieu of a guaranteed £2k per year. As the £2k would be subject to marginal tax then it is effectively £1.6k which makes the £41k equate to 25.6 years payments.
Pension payments are uplifted by CPI each year to a maximum of 5% but £41k invested into a stocks ISA could potentially yield a greater return as well as acting as a ready reserve.

Age 55 I currently have about £600k in separate DC schemes planned to be taken via drawdown and I am already eligible for full state pension. No decisions made as yet but it makes the option of the £41k upfront an interesting problem.

The documentation I have received so far isn't clear. Would the enhanced lump sum be fully tax free?

Isn't it being referred to as an additional/increased PCLS?

Is there any reason why you think it might be treated differently to the standard PCLS of £36,890?

GenX0212

Dazed_and_C0nfused said:

GenX0212 said:

Long story short I have a DB pension which was originally part of the Electricity Supply Pension Scheme (ESPS) {non-protected person status} and which is now managed as a Serco employer scheme despite me never having ever been employed by Serco - don't ask!

Anyway I have enquired about early retirement options and have been offered the following options:

Option 1 An estimated annual pension of: £13,610 a year

Plus an additional cash lump sum of: £36,890

Plus an estimated annual spouse’s death after retirement pension of: £6,805 a year

Option 2 An estimated cash lump sum – Serco Scheme: £40,990

Plus an additional cash lump sum of: £36,890

Plus an estimated reduced annual pension of: £11,682 a year

And an estimated annual spouse’s death after retirement pension of: £6,805 a year

 

So an extra £41k lump sum in lieu of a guaranteed £2k per year. As the £2k would be subject to marginal tax then it is effectively £1.6k which makes the £41k equate to 25.6 years payments.
Pension payments are uplifted by CPI each year to a maximum of 5% but £41k invested into a stocks ISA could potentially yield a greater return as well as acting as a ready reserve.

Age 55 I currently have about £600k in separate DC schemes planned to be taken via drawdown and I am already eligible for full state pension. No decisions made as yet but it makes the option of the £41k upfront an interesting problem.

The documentation I have received so far isn't clear. Would the enhanced lump sum be fully tax free?

Isn't it being referred to as an additional/increased PCLS?

Is there any reason why you think it might be treated differently to the standard PCLS of £36,890?

As far as I know an enhanced lump sum was never an option under the original ESPS scheme rules so this seems to be offered by virtue of being 'adopted' into the Serco scheme. Hence seeking to clarify it would be fully tax free.

GunJack

This sounds like it's a case of ask the scheme administrator for clarification..... personally I'd hate to have to pay it back if it was found to be an error further down the line after you'd taken it..

hyubh

GenX0212 said:

Dazed_and_C0nfused said:

GenX0212 said:

Long story short I have a DB pension which was originally part of the Electricity Supply Pension Scheme (ESPS) {non-protected person status} and which is now managed as a Serco employer scheme despite me never having ever been employed by Serco - don't ask!

Anyway I have enquired about early retirement options and have been offered the following options:

Option 1 An estimated annual pension of: £13,610 a year

Plus an additional cash lump sum of: £36,890

Plus an estimated annual spouse’s death after retirement pension of: £6,805 a year

Option 2 An estimated cash lump sum – Serco Scheme: £40,990

Plus an additional cash lump sum of: £36,890

Plus an estimated reduced annual pension of: £11,682 a year

And an estimated annual spouse’s death after retirement pension of: £6,805 a year

 

So an extra £41k lump sum in lieu of a guaranteed £2k per year. As the £2k would be subject to marginal tax then it is effectively £1.6k which makes the £41k equate to 25.6 years payments.
Pension payments are uplifted by CPI each year to a maximum of 5% but £41k invested into a stocks ISA could potentially yield a greater return as well as acting as a ready reserve.

Age 55 I currently have about £600k in separate DC schemes planned to be taken via drawdown and I am already eligible for full state pension. No decisions made as yet but it makes the option of the £41k upfront an interesting problem.

The documentation I have received so far isn't clear. Would the enhanced lump sum be fully tax free?

Isn't it being referred to as an additional/increased PCLS?

Is there any reason why you think it might be treated differently to the standard PCLS of £36,890?

As far as I know an enhanced lump sum was never an option under the original ESPS scheme rules so this seems to be offered by virtue of being 'adopted' into the Serco scheme. Hence seeking to clarify it would be fully tax free.

They are quoting you the max PCLS (i.e. tax free lump sum) for the pension (25% the capital value, using the LTA multiplier of 20), on the assumption the scheme rules were changed when the concept of taking max 25% was introduced into covering pensions legislation in 2006 (i.e. the so-called 'A Day' changes that rationalised pensions taxation rules). If I were a betting man I would guess the scheme rules were indeed changed, like they were in the public sector schemes the ESPS was originally a peer of. But the administrator would be able to confirm that.

NB - while the terminology of an 'enhanced' lump sum might be used by the scheme to mean 'additional lump sum by commutation', unless my arithmetic had gone haywire, it would be incorrect to use that terminology more generally, since this isn't a lump sum beyond the A Day 25% maximum.