Taking pensions whilst contributing to other pensions

deeleys

Hi All

I've got a deferred DB pension including a lump sum from one council and I am currently paying into another DB from another council.  I've also got two DC pensions.

I'm 55 this year.  Would it be within the tax rules to take the 25% tax free amount from the DC's, take the deferred DB pension with 25% tax free lump sum, carry on paying into the current DB and start an additional AVC pension to keep my taxable income below the 40% threshold?  Annual pension and AV Contributions (including employer) would be below £60K.

Thanks

Dazed_and_C0nfused

DB pensions tend not to have a 25% TFLS in the same way a DC pension has.

They have a (tax free) Pension Commencement Lump Sum (PCLS) paid according to the scheme rules.  Have you checked the rules for your DB scheme?

Not all pension contributions methods reduce your taxable income so if that is important you need to understand the method being used for the additional AVC (net pay, relief at source of salary sacrifice).

But even if they don't reduce your taxable income they can help you avoid higher rate tax, it's just a more convoluted process.

Marcon

Dazed_and_C0nfused said:

DB pensions tend not to have a 25% TFLS in the same way a DC pension has.

They have a (tax free) Pension Commencement Lump Sum (PCLS) paid according to the scheme rules.  Have you checked the rules for your DB scheme?

Sounds as if OP is in the LGPS - it has a 25% lump sum based on the capital value of the pension.

OP - to answer your question. Yes, it's within tax rules.

Brie

Marcon said:

Dazed_and_C0nfused said:

DB pensions tend not to have a 25% TFLS in the same way a DC pension has.

They have a (tax free) Pension Commencement Lump Sum (PCLS) paid according to the scheme rules.  Have you checked the rules for your DB scheme?

Sounds as if OP is in the LGPS - it has a 25% lump sum based on the capital value of the pension.

OP - to answer your question. Yes, it's within tax rules.

But isn't that 25% still a commencement lumpsum?  In which case the OP will be starting to take their taxable pension as well so might possibly push them into a higher tax bracket.

And isn't there something still about taking money from a DC that limits the tax free amount one can contribute to a current work pension?  Or have the rules changed?

GunJack

@Brie yes if the DB lump sum is taken it (nearly) always means taking the pension income too - there may be an odd private sector scheme that allows it to be split but not likely.

If taking taxable income from a DC scheme, it limits how much you can put into another DC scheme, but OP is in lgps still which is a DB scheme so MPAA limit doesn't apply - the clue is in the title, Money Purchase Annual Allowance.

Brie

GunJack said:

@Brie yes if the DB lump sum is taken it (nearly) always means taking the pension income too - there may be an odd private sector scheme that allows it to be split but not likely.

If taking taxable income from a DC scheme, it limits how much you can put into another DC scheme, but OP is in lgps still which is a DB scheme so MPAA limit doesn't apply - the clue is in the title, Money Purchase Annual Allowance.

Thanks for clarification.  Would the MPAA affect AVCs or putting money into a private pension??

zagfles

Sounds like you'll be OK for the MPAA but the other issue is recycling rules if you take tax free cash and then increase pension contributions. Google "HMRC recycling rules" 

deeleys

Hi All

Thanks for your responses.  Yes the DB's are both LGPS.  The first DB has a 25% tax free lump sum due to rules at that time.  I believe the additional AVCs would be taken at source before tax. 

GunJack

That's a point, is the lgps AVC considered an integral part of the main dB scheme, or treated as a standalone DC?? May have a bearing....calling @Silvertabby 🙂

AlanP_2

Brie said:

GunJack said:

@Brie yes if the DB lump sum is taken it (nearly) always means taking the pension income too - there may be an odd private sector scheme that allows it to be split but not likely.

If taking taxable income from a DC scheme, it limits how much you can put into another DC scheme, but OP is in lgps still which is a DB scheme so MPAA limit doesn't apply - the clue is in the title, Money Purchase Annual Allowance.

Thanks for clarification.  Would the MPAA affect AVCs or putting money into a private pension??

It would yes, but the OP plans to take only the TFLS from the DCs and not any taxable income. The taxable income would come from the deferred LGPS DB scheme.

More to the point on whether the MPAA would be triggered or whether recycling would apply can we just step back a minute and clarify why the OP wants to take these steps?


The normal guidance on here is not to take the entire TFLS from a DC pot in one go unless you need it e.g. to pay off a mortgage.

Similarly the normal guidance on here is not to commence a DB scheme too early as the actuarial reduction factors reduce the payments (albeit they will theoretically be paid for longer).

OP what are you trying to achieve as there may be a better "mix" that gets you there whilst leaving you with more pension income / investments for when you actually retire.

Silvertabby

GunJack said:

That's a point, is the lgps AVC considered an integral part of the main dB scheme, or treated as a standalone DC?? May have a bearing....calling @Silvertabby 🙂

As long as it was taken out as an in-house AVC, then it's integral.  ie, the maximum tax free cash would be 25% of the total of 20 X annual pension (after reductions for early payment) plus 1 X AVC fund. (Subject to HMRC limit).
Note:  Some LGPSs are now using a more convoluted maximum tax free cash calculation, but the old one will be close enough for a quick assessment.  
Further note:  If both/either of these were deferred before 1 April 2014 then the option to use some or all of the AVC funds to buy additional LGPS benefits doesn't apply.  Instead, any residual AVCs could buy an annuity with, say,  the AVC provider.