Tax free lump sums

bjorn_toby_wilde

Secret2ndAccount said:

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.

A very good point about 40% tax. Do you plan to retire before SPA?  The DB plus state pension might push you close to the higher rate band.

I plan to take out as much as possible of my DC pension and move it into ISAs before State Pension Age to avoid that issue.

Taking the DB lump sum doesn’t look like a great deal at 15:1 unless the in payment inflation increases are poor.

thunderroad88

I took a £110k db lump sum two years ago at 60. I put £40k immediately into topping up my wife and I’s 2023 equity ISAs. The remaining £70k I put into one and two year fixed rate online bank deposit bonds (in my non tax paying wife’s name) at nearly 6% and put another £40k into the ISAs last year. The final £30k will go into the ISAs this year. My conviction is that the lump sum invested over 15 years will generate better tax free annual returns than the £7k per annum extra taxable salary I gave up, but of course, it may not. I realise everyone’s circumstances are different though..

bjorn_toby_wilde

thunderroad88 said:

I took a £110k db lump sum two years ago at 60. I put £40k immediately into topping up my wife and I’s 2023 equity ISAs. The remaining £70k I put into one and two year fixed rate online bank deposit bonds (in my non tax paying wife’s name) at nearly 6% and put another £40k into the ISAs last year. The final £30k will go into the ISAs this year. My conviction is that the lump sum invested over 15 years will generate better tax free annual returns than the £7k per annum extra taxable salary I gave up, but of course, it may not. I realise everyone’s circumstances are different though..

I took a lump sum from one of my DBs but the decision was heavily influenced by the high commutation factor (in the mid 20’s from memory) and the fact that only 1/3 of the pension increased by CPI capped at 5%. The rest was split between a 2.5% cap and discretionary increases (in reality no increase).  In circumstances like that it becomes an easier decision to take and invest.

My main DB has much better guaranteed increases and I won’t touch the lump sum on that one.

thunderroad88

bjorn_toby_wilde said:

thunderroad88 said:

I took a £110k db lump sum two years ago at 60. I put £40k immediately into topping up my wife and I’s 2023 equity ISAs. The remaining £70k I put into one and two year fixed rate online bank deposit bonds (in my non tax paying wife’s name) at nearly 6% and put another £40k into the ISAs last year. The final £30k will go into the ISAs this year. My conviction is that the lump sum invested over 15 years will generate better tax free annual returns than the £7k per annum extra taxable salary I gave up, but of course, it may not. I realise everyone’s circumstances are different though..

I took a lump sum from one of my DBs but the decision was heavily influenced by the high commutation factor (in the mid 20’s from memory) and the fact that only 1/3 of the pension increased by CPI capped at 5%. The rest was split between a 2.5% cap and discretionary increases (in reality no increase).  In circumstances like that it becomes an easier decision to take and invest.

My main DB has much better guaranteed increases and I won’t touch the lump sum on that one.

My db pension sounds very like that one, with less than generous increases exactly as yours is. My commutation was 15. We also have a pretty healthy amount in our ISAs and a good cash buffer of 6 years, so we weren’t desperate for a guaranteed extra £7k income per annum so I suppose that makes it an easier decision.