TFLS across DB & DC Pensions

Ducatiandy

Hi
I currently have both a DB final salary and a DC Lifesight (AVC's) scheme through my current employer. I have the option when I retire (I'm 54 and can take my DB benefits from 50) hopefully soon to transfer my Lifesight funds back into my DB part to fund the TFLS. Currently this is about £285k and I would select the option to cap it at the £268k max and leave the balance in Lifesight.

My understanding is that I could also leave my Investments currently in the DC Lifesight part to grow (do not need as I am happy with the £40k annual DB) and when I need to drawdown on either the whole 25% tax free part from Lifesight in future in is calculated as 25% over both pots, and I could do this at any point in time if no tax free has been taken. I would therefore assume I would have to have some form of Certificate for the DB part as a full value when commenced which I can then use to add to the snapshot of my DC fund / pot at the time of any Tax free withdrawl if that's the correct terms. Or is just the case of any withdrawls either part or whole only have 25% tax free calculated on the DC withdrawls / pot and not both? Hopefully I haven't got it around my neck if anyone can enlighten me please, many thanks.

Dazed_and_C0nfused

Ducatiandy said:

Hi
I currently have both a DB final salary and a DC Lifesight (AVC's) scheme through my current employer. I have the option when I retire (I'm 54 and can take my DB benefits from 50) hopefully soon to transfer my Lifesight funds back into my DB part to fund the TFLS. Currently this is about £285k and I would select the option to cap it at the £268k max and leave the balance in Lifesight.

My understanding is that I could also leave my Investments currently in the DC Lifesight part to grow (do not need as I am happy with the £40k annual DB) and when I need to drawdown on either the whole 25% tax free part from Lifesight in future in is calculated as 25% over both pots, and I could do this at any point in time if no tax free has been taken. I would therefore assume I would have to have some form of Certificate for the DB part as a full value when commenced which I can then use to add to the snapshot of my DC fund / pot at the time of any Tax free withdrawl if that's the correct terms. Or is just the case of any withdrawls either part or whole only have 25% tax free calculated on the DC withdrawls / pot and not both? Hopefully I haven't got it around my neck if anyone can enlighten me please, many thanks.

I might be missing something but you seem to be saying you will ensure you can take the maximum TFLS from your DB pension (partly or fully by using the associated Lifesight funds).

But then want to take further TFLS from the residual amount left in your Lifesight DC pot.

Is that correct?  And if so why do you think further tax free cash would be available if you had already taken £268k?

Ducatiandy

Hi Dazed
No sorry if I confused you  

The first paragraph was the 1st option being use Lifesight to fully fund and take the TFLS at point of retirement and commenced DB final salary.

Or 2nd paragraph, only take the DB on retirement and leave the Lifesight to grow, and either take the TFLS at a later date and the Lifesight pot may have grown 50% (and at this point do you add its value and the 'value of the DB pot' - I take it you must get some kind of valuation certificate) or can I not do this and can only take 25% of the DC Lifesight pot (which has still grown).

In a nutshell I'm wondering if to leave the Lifesight part to grow and take the TFLS at a later date. Hope that makes sense. Thanks

leosayer

I've got the same...a DB scheme with a linked DC/AVC now with LifeSight. 

I recieved a retirement quotation from my DB administrator last year and it differs from what you said. 

In summary, the quotation explains that I can use the LifeSight pot to fund the DB tax free cash if I retire from both schemes at the same time thereby starting my DB pension and taking tax free cash from DB and DC at the same time, without reducing my annual DB pension.

The other point is that this is a protected lump sum which means I can take more than 25% tax free and more than the lump sum allowance.

Secret2ndAccount

You should take the 268k lump sum, linked to the DB. If you do that, you pay zero tax on 268k. If you leave it in the DC, only 25% of the whole DC pot (say 72k) will come out tax free. In your position, you could easily be a 40% taxpayer. I would hate to pay 40% tax (or even 20%) on 200k that I could have pulled out tax free.

Are you sure you can get all the way to 268k lump sum? In other words, is your notional pot valued at 1.073m when you include the AVC? I think it is, but it looks close.

Now you are left with a secondary problem: you have 1/4mil in cash which you have to take care of, and protect from inflation. You are likely to pay some tax on the growth, and you might find yourself managing a GIA, and paying capital gains tax too. I see these as lesser problems than guaranteeing a future tax bill.

Of course, you could always spend some of it…

Ducatiandy

Thank you both for the replies. Leosayer, yes my scheme also says I would need to transfer my LIfesight back into the DB scheme if I want to take the TFLS , the estimate and modeller give me the choice to limit the value brought back to equal the max TFLS of the whole lot or the 25%, and leave the remainder in LIfesight or bring the whole lot back and the excess would have to buy a scheme annuity. It’s therefore not protected like yours. The scheme also allows me to have other options such as take an enhanced 
Pension and forgo some of my state pension and again either take the TFLS, using the LIfesight or not.
Secret2ndaccount I guess this is the bit I’m getting lost on why isn’t the TFLS worked out on the whole pots if I take it later? Rather than on just the DC part? Then I would let it grow and keep taking slices when required and 25% is tax free, calculated at that point in time?
Currently my estimate shows that the whole pot is approx £1m or 97% of the lifetime allowance and the LIfesight DC is currently at £285k. Also at the point of retirement I can pay in quite a lot extra as I have banked holidays, can cash a whole years holidays and my last weeks pay which could be another £20k. So I would assume with this years pay rise at a couple of percentage I will be at the £1.073m. Many thanks

Secret2ndAccount

If a person has 10 separate pensions, they have 10 separate lump sum allowances. You can’t, for example, empty the smallest one and take it all tax free because it’s less than 25% of the whole collection. Each pension is treated separately. You are receiving a one-time opportunity to count two of your pensions together, and to take a large amount out of your AVC to fund the lump sum of your DB. Once that opportunity passes, your AVC becomes just like any other pension: no more than 25% of it can be taken tax free.

The reason this is a valuable opportunity is that typically a DB does not pay out a 25% lump sum. 25% is the maximum permitted by the taxman, and not a guaranteed right. Your scheme rules will tell you how your Pension Commencement Lump Sum is calculated. Maybe it’s 3 years of annual pension. That’s perhaps equivalent to 14% of the worth of your pension. So the linked AVC can be used to top you up to 25%. Even better, it is possible that you can entirely use the AVC to pay the lump sum. This leaves the 3 years of pension (that would have paid for your PCLS) in your DB, and can therefore lead to a larger annual payout. Once again, you need to understand your scheme rules – each is different.

One of the holy grails of pension saving is if you can get tax relief on the way in, then pay zero tax on the way out. So, for many people, using the AVC to fund the PCLS is the way to go.

Ducatiandy

Ah thankyou Secret2ndaccount that makes perfect sense now. I have a copy of the leaving paperwork and the Pension booklet but I guess not the full scheme rules. I guess I was assuming when you see a statement combining the worth of both and giving a Lifetime value that this would still apply even if you only took the DB side. Therefore why take the LIfesight out to then perhaps pay it back into another investment pot, just seemed like moving money for the sake of it.

The leaving booklet only states/implies the transfer back to the main plan of the avc to take the TFLS cannot be done after, I understand why now.

Also all the pension chats about taking 25% of all your pensions never really explains the DB side or that the one time link of the DB and Avc/DC pots with one employer.

Thankyou for the clear explanation, I guess I’m still in a good/lucky position. Glad I always paid the extra AVC’s in to finance it as well.

GunJack

Secret2ndAccount said:

One of the holy grails of pension saving is if you can get tax relief on the way in, then pay zero tax on the way out. So, for many people, using the AVC to fund the PCLS is the way to go.

What a load of tosh!! That would mean you've got such a small pension you'd end up living pretty much on the breadline....even after the tfls, with full state pension, you'd be paying tax on pretty much all your private pension income.

Nice idea maybe, but the maths is well and truly flawed, especially in Ducati Andy's case as his DB is so big!!

The idea of pensions is that you've got enough income to support yourself in a reasonably comfortable manner, not scraping around the personal allowance..

Shadyocuk

GunJack said:

Secret2ndAccount said:

One of the holy grails of pension saving is if you can get tax relief on the way in, then pay zero tax on the way out. So, for many people, using the AVC to fund the PCLS is the way to go.

What a load of tosh!! That would mean you've got such a small pension you'd end up living pretty much on the breadline....even after the tfls, with full state pension, you'd be paying tax on pretty much all your private pension income.

Nice idea maybe, but the maths is well and truly flawed, especially in Ducati Andy's case as his DB is so big!!

The idea of pensions is that you've got enough income to support yourself in a reasonably comfortable manner, not scraping around the personal allowance..

You seem to have completely misunderstood the concept of using the AVC to fund the PCLS , a one off opportunity to take all (or upto what would have been the PCLS) of the AVC tax free and keep the fully DB pension. Rather than being a load of tosh its something that most of us would love to have the chance to do , especially if you where likely to be a higher rate tax payer.

leosayer

Shadyocuk said:

GunJack said:

Secret2ndAccount said:

One of the holy grails of pension saving is if you can get tax relief on the way in, then pay zero tax on the way out. So, for many people, using the AVC to fund the PCLS is the way to go.

What a load of tosh!! That would mean you've got such a small pension you'd end up living pretty much on the breadline....even after the tfls, with full state pension, you'd be paying tax on pretty much all your private pension income.

Nice idea maybe, but the maths is well and truly flawed, especially in Ducati Andy's case as his DB is so big!!

The idea of pensions is that you've got enough income to support yourself in a reasonably comfortable manner, not scraping around the personal allowance..

You seem to have completely misunderstood the concept of using the AVC to fund the PCLS , a one off opportunity to take all (or upto what would have been the PCLS) of the AVC tax free and keep the fully DB pension. Rather than being a load of tosh its something that most of us would love to have the chance to do , especially if you where likely to be a higher rate tax payer.

Agreed. 

I've got around £600k in DC pots and, thanks to this feature I can take around half of that tax free without reducing my DB pension. 

It creates the 'problem' of how to wrap these funds tax efficiently but the link below might be of some help to the OP.

https://monevator.com/should-you-borrow-to-fill-your-isa-each-year/