Tax free lump sums

Justso65

Hi

I have both a DC and DB pension.  As it currently stands, were I to take the full TFLS from my DC pension that would be just over £160k.  However, I'm not going to take that all in one go.  Instead I will crystalise the amount I need each year and take a TFLS from that figure.  So over the course of my retirement I expect the amount I would get from my DC pot would be greater than the £160k if I took that in one go.

I now have a DB pension to consider.  At my planned date of drawing that pension, 5 years hence, it is currently quoting a lesser pension with a TFLS of £90k or a higher amount with no tax free cash.

I believe the limit for tax free cash from pensions is currently £268275k. 

So considering my DC pot value would it be a no-brainer just to not take a TFLS from the DB pot and, instead, take an increased pension?

Thanks, JS.

DE_612183

If you take a higher DB pension, then it gets taxed as income ( first 12750 free rest @ 25% ) - have you considered taking the TFLS from the DB and putting it into an ISA or soemthing?

Justso65

Yes, I realise it will be taxed but if I take it then I will easily exceed the lifetime TFLS limit.  I also can't get £90k into an ISA quickly. 

So my thinking is I prefer the increased DB pension and allow some headroom for my DC pension TFLS's.

kempiejon

I think I would generally prefer a larger guarenteed income - the DB I guess will grow in some way?
From what I have seen generally the rate at which income is sacrificed to buy the lump sum isn't particularly special. Maximising the tax free 25% portion of my pensions was never a specific goal, sustainable, rising income sure is.

DRS1

So my thinking is I prefer the increased DB pension and allow some headroom for my DC pension TFLS's.

Typically you can only take 25% of your DC pot as a TFLS.  Do you believe the pot will be over £1million?

And remember you only get one shot at the PCLS from the DB scheme.

You probably need to do some sums to see how the higher pension would interact with your other income including what you draw from the DC pot in terms of income tax bands and giving you enough to live on

Justso65

My DC pot is not over £1m but the TFLS from the size as it stands plus a potential PCLS would take me near to £268k. 

Secret2ndAccount

I understand your position. The DB is liable to end up being taxed whether you take it as a lump sum or a monthly payment. However, tax perhaps shouldn't be your first consideration with the DB. What is your commutation rate? If you give up £1000/yr in exchange for a £12k lump sum, your commutation rate is 12:1, which is terrible. If you give up £1000/yr in exchange for a £30k lump sum, your commutation rate is much better, and you might well want to take the lump sum. What is your commutation rate?

With a good size pot, a decent DB, and then the SP to come are you sure you can get all the money out without paying any higher rate tax? If 40% becomes a factor then it tips the scales back in favour of a lump sum.

Justso65

My commutation rate is 15:1

DavidT67

OP, do you know the commutation rate for taking pension commencement lump sum from your defined benefit pension scheme?  If that's above average you might be better off taking tax free cash from there rather than your defined contribution pot.

DRS1

15 sounds pretty normal to me but I am not in a DB scheme.
So you would be potentially able to take an extra £6k of pension a year (and that would presumably increase in line with inflation capped at either 5% or 2.5%) so it is not an insignificant amount.  How close is the extra going to get you to a tax threshold?  Some people on here worry about hitting basic rate levels and others worry about hitting the higher rate.  Others still worry about the £100k mark.  It sounds to me as if you will be thinking higher rate but I don't know and once the DB pension starts you can play with the amounts you draw from the DC pension to keep below any threshold that worries you.
It sounds like you will be taking UFPLS from the DC scheme - I do not know what information they require when you do that about other tax free lump sums but I imagine you will have to keep a running tally of the tax free lump sums you have taken whether you take one from the DB Scheme or not.
I suppose it all boils down to whether you think that over the remainder of the life of the DC scheme you will be able to grow it by another £400k such that you would actually make use of the headroom allowed by not taking the £90k from the DB scheme.
Personally I think there is a lot to be said for taking more tax free lump sum earlier (I don't think the Lump Sum Allowance is going to go up any time soon) but I can see that it can be perfectly sensible to take as much DB pension as you can especially as that is a guaranteed pension for life with increases to keep at least some inflation at bay.

The other way to look at it is ask yourself what income you need and do I need the higher rate of the DB pension to cover that?

Secret2ndAccount

15:1 not good. Unless you have a very good use for the TFLS, forego it and take the extra guaranteed income.