DB Pension and TFLS Calculation Question

KevinTHFC

QrizB said:

KevinTHFC said:

Thank you. I make the commutation rate 16.3!

I calculated that  by dividing the TFLS by the difference between the Pension paid in A and B.  ie 159508.99 / (33712.18 - 23926.35)

You've used 23296.35 in your first post, but 23926.35 in this one.

Which is the correct value?

The correct value is 23926.35

KevinTHFC

Albermarle said:

Perhaps more to the point is that whether it is 15 or 16, it is a relatively poor commutation rate.

Although to have a proper view we would need to know the details of the pension when in payment. For example; how much will it increase annually? by RPI? by CPI? by a fixed % ? no increases?
What is the spousal provision ( if you die before them) ?

The better the terms of the pension, the worse that figure of 15 ( or 16) looks.

Also it depends on your wider financial position. If you have no debts, and plenty of cash/investments, then it makes less sense to give up guaranteed income for a lump sum. 

The pre 88 GMP of £4,719.00 will not be increased, the post 88GMP of £4,527.24 will increase to the CPI to a max of 3%. The balance will be in line with the RPI to a max of 5%. My Wife will get 50% of the  full pension amount i.e. £16,855.53 irrespective of any TFLS taken.

My intention was not to take any TFLS but since the change to CGT I may change my mind. I expect to have at least 200K left in my LTD company when I wind it up. I had planned to do this as a Members Voluntary Liquidation and pay CGT at 10% on the money left in the company. But now that is not such an attractive route. Therefore, I am considering what alternatives I have. The obvious route is to maximise our pension contributions, my wife is also an employee of the company.  I currently have about £400K in a DC pension and my wife has about £100K. Ideally, I would like to pay more into her pension than mine as she has no other pensions and is unlikely to hit 40% tax but, I believe that may be an issue for the inland revenue if employees getting the same PAYE salary are not receiving similar pension payments. All contributions into our pensions are made by the Company, we do not contribute personally and there get no tax relief added by the government.

So I am trying to weigh up if taking a TFLS will be more tax efficient in the long run than having a Higher pension that will mean that nearly everything generated by my DC pension will attract 40% tax.

KevinTHFC

If I did take a lump sum are there any tax implications If I give this money to my wife to put into a SIPP?

She is very unlikely to hit the 40% tax level when she starts to withdraw.

Linton

KevinTHFC said:

If I did take a lump sum are there any tax implications If I give this money to my wife to put into a SIPP?

She is very unlikely to hit the 40% tax level when she starts to withdraw.

No tax implications as long as your wife has sufficient earned income to cover the amount.  It will be counted as a contribution by your wife and so subject to her pension contribution limits.

LHW99

And she gets the tax relief!

KevinTHFC

Linton said:

No tax implications as long as your wife has sufficient earned income to cover the amount.  It will be counted as a contribution by your wife and so subject to her pension contribution limits.

My Company is paying in 50K a year into her company pension but that does not attract any tax relief as she does not make any personal contributions. I was not expecting the government to add any tax relief to any lump sum I take from my  pension and give my wife to put into a personal pension of her own. Would she still have to have sufficient earned income to cover the lump sum amount?

Lowtrawler

KevinTHFC said:

Linton said:

No tax implications as long as your wife has sufficient earned income to cover the amount.  It will be counted as a contribution by your wife and so subject to her pension contribution limits.

My Company is paying in 50K a year into her company pension but that does not attract any tax relief as she does not make any personal contributions. I was not expecting the government to add any tax relief to any lump sum I take from my  pension and give my wife to put into a personal pension of her own. Would she still have to have sufficient earned income to cover the lump sum amount? Am I not allowed to gift my wife money for her to put into a new pension of her own?

You can gift as much money as you wish to your wife. Most (all) pension providers will only accept personal contributions on which you can claim tax relief. This will mean she can only contribute a value equal to her relevant earnings. e.g. if her relevant earnings are £20k, she could contribute £16k and the pension provider will claim £4k tax relief. In addition, as 50k has already been contributed via the Company, the £20k will exceed the 60k annual allowance and she would need to have sufficient unused allowance from prior years to carry-back the excess.

The idea of putting already taxed savings into a pension without tax relief on the way in is not sensible. This is because 75% of it will be taxed on the way out. This is why providers will only deal with personal contributions on which you can claim tax relief.

The 50k pension contributions paid by the company are effectively getting tax relief via reduced Corporation Tax and reduced National Insurance. You could increase this to 60k as she does not make any personal contributions.

KevinTHFC

The TFLS from my DB pension is not already taxed savings is it, perhaps it is?

My wife gets paid £50K and the company contributes £50K to her pension. Her employment costs of £100K, go towards offsetting  the Corporation Tax paid  by the company. Would she be 'allowed' any tax relief on payments made into a SIPP  based on those figures? Obviously the Company is paying less Corporation tax and therefore gaining a 'benefit' but she is not personally. To me it does not seem 'fair' that someone in her position could have 50K  paid into pension A at no cost herself and then "claim" tax relief on contributions she is making into Pension B. If this is allowable could she claim tax relief on the whole 50K?

AlanP_2

KevinTHFC said:

The TFLS from my DB pension is not already taxed savings is it, perhaps it is?

My wife gets paid £50K and the company contributes £50K to her pension. Her employment costs of £100K, go towards offsetting  the Corporation Tax paid  by the company. Would she be 'allowed' any tax relief on payments made into a SIPP  based on those figures? Obviously the Company is paying less Corporation tax and therefore gaining a 'benefit' but she is not personally. To me it does not seem 'fair' that someone in her position could have 50K  paid into pension A at no cost herself and then "claim" tax relief on contributions she is making into Pension B. If this is allowable could she claim tax relief on the whole 50K?

Think about this logically as if your wife was just ANO employee called "Fred".

Would you be concerned if you thought "Fred" was contributing to a personal pension outside his employment, in face would you even know let alone care?

At the moment your wife is not contributing to a pension, her employer is, so she can not get any tax relief on the £50k employer contribution.

What she does with her personal money (albeit that may be gifted to her by you) is entirely separate and if she made pension contributions she would be entitled to tax relief just like the rest of the UK population.

As noted she would need to stay inside the earnings and Annual Allowance limits, again just like anybody else.

Lowtrawler

KevinTHFC said:

The TFLS from my DB pension is not already taxed savings is it, perhaps it is?

My wife gets paid £50K and the company contributes £50K to her pension. Her employment costs of £100K, go towards offsetting  the Corporation Tax paid  by the company. Would she be 'allowed' any tax relief on payments made into a SIPP  based on those figures? Obviously the Company is paying less Corporation tax and therefore gaining a 'benefit' but she is not personally. To me it does not seem 'fair' that someone in her position could have 50K  paid into pension A at no cost herself and then "claim" tax relief on contributions she is making into Pension B. If this is allowable could she claim tax relief on the whole 50K?

Your TFLS stands for Tax Free Lump Sum and is the 25% of pension not taxed on the way out.

There are 2 limitations on how much your wife can pay into a pension personally and gain tax relief:

1. Her relevant earnings - most likely the 50k paid to her from your company but also any other earnings she has from work. She cannot personally pay into a pension more than this. However, the 50k paid in by the company does not count.
2. Total pension contributions (company and personal) cannot exceed 60k unless she has unused allowance from the past 3 tax years. As the company has contributed 50k, she can only contribute 10k (8k net) despite having 50k of relevant earnings. You need to look back at 2021/22; 2022/23 and 2023/24 tax years to determine whether she has any unused allowance from those years. Prior to 2023/24, the limit was 40k instead of 60k and has been 60k from 2023/24. You look at 2021/22 first, then 2022/23, then 2023/24. For example, if you were paying 30k from the company into her pension in each of those tax years and no other pension payments were being made, she would have 10k unused allowance from 2021/22 and 2022/23 and 30k unused from 2023/24. This would make it possible for her to personally contribute her full 50k relevant earnings from the current tax year - in the following order:

a) 10k (net 8k) based on 2024/25 (60k limit less 50k paid by company)
b) 10k (net 8k) from 2021/22 cfwd (40k limit less 30k paid by company)
c) 10k (net 8k) from 2022/23 cfwd (40k limit less 30k paid by company)
d) 20k (net 16k) from 2023/24 cfwd - (60k limit less 30k paid by company restricted as she would be unable to fully use the 30k because of the relevant earnings limit from 1 above)

Thus, she could make personal contributions of 40k which, with tax relief, would get 50k added to the pension. You need to create a schedule of what pension payments were made in each of these tax years and determine whether she has any unused allowance to use in this way.