Transfer Defined Benefit lump sum into a SIPP ??

Sayr

Hi. I have a local authority defined benefit pension which I intend to take next year when I retire at the age 56. I've been paying Additional Voluntary Contributions as a salary sacrifice through the council for a few years and will have a combined lump sum (based on 25%) of around £120k. I also have a small separate SIPP of around £30k. Here is my question: Can I officially retire from the council, then take my £120k lump sum and soon afterwards put all this money into my SIPP (into a global index fund such as Vanguard)? Not sure if you are allowed to officially retire and then place a large lump sum into a SIPP to maximise growth/limit tax, or am I restricted because I have already officially retired? Can this be done or are there restrictions? Thanks.

Marcon

Sayr said:

Hi. I have a local authority defined benefit pension which I intend to take next year when I retire at the age 56. I've been paying Additional Voluntary Contributions as a salary sacrifice through the council for a few years and will have a combined lump sum (based on 25%) of around £120k. I also have a small separate SIPP of around £30k. Here is my question: Can I officially retire from the council, then take my £120k lump sum and soon afterwards put all this money into my SIPP (into a global index fund such as Vanguard)? Not sure if you are allowed to officially retire and then place a large lump sum into a SIPP to maximise growth/limit tax, or am I restricted because I have already officially retired? Can this be done or are there restrictions? Thanks.

No. You are limited by two things:

• pension recycling rules (clear breach!)
• tax-relievable contributions to pension schemes are limited by two things: the annual allowance (£60K) and the amount you earn in the tax year when you make the contribution.

If you want to maximise growth and limit tax, wouldn't it make more sense to take a smaller lump sum and have a bigger pension?

The title of your thread refers to 'transferring', which is a different thing altogether (and you'd have to transfer the whole pension, not just the lump sum element). Have a browse on this forum for why transfers from DB schemes to DC schemes is often a seriously bad idea...

daveyjp

You state your lump sum is £120k based on 25%.  25% of what figure?  Reason for asking is it reads as if you may be getting your DB and DC rules mixed up.

DB lump sum is what ever is stated on your annual pension statement, with an option to increase it by buying more lump sum and reducing your annual pension.

Subject to very generous limit your AVC is 100% tax free

Marcon

daveyjp said:

You state your lump sum is £120k based on 25%.  25% of what figure?

25% of £480K= £120K.

Sayr

Thanks for the advice - I note the pension recycling rules which was a new one for me. Thanks again. 

Cobbler_tone

Even if it wasn't breaking recycling rules, why would you want to put tax free cash into somewhere that you were ultimately going to get taxed on a large proportion of it? ISA, savings account (to get tax free allowance, or even pay a bit of tax), premium bonds, under your bed....or as pointed out, exchange for a larger guaranteed pension. 

Secret2ndAccount

daveyjp said:

You state your lump sum is £120k based on 25%.  25% of what figure?  Reason for asking is it reads as if you may be getting your DB and DC rules mixed up.

DB lump sum is what ever is stated on your annual pension statement, with an option to increase it by buying more lump sum and reducing your annual pension.

Subject to very generous limit your AVC is 100% tax free

OP is not mixed up. There IS a 25% in play here. You calculate a notional value for the whole pension, then 25% of it is the maximum that can be taken tax free. This often enables the entire AVC to be taken as part of the TFLS, but the check has to be performed.

Marcon said:

If you want to maximise growth and limit tax, wouldn't it make more sense to take a smaller lump sum and have a bigger pension?

It normally makes sense to take the entire AVC as a lump sum, since it is tax free. Leave any AVC behind, and it becomes an ordinary DC, 75% taxable. OP is not talking about commutation.

To the OP, yes, take the AVC as a lump sum (all of it if possible) to get maximum tax benefit. No, you can't pay it into a SIPP. If you don't have any earnings in a tax year (pension doesn't count) you can only pay £2,880 into a SIPP.
In your final year of work, you likely have some headroom to pay into a pension. You can pay in up to your salary (if it's 20k or 30k or 40k) minus what you have already contributed to your work pension (that will be zero if it's all salary sacrifice). If you have any savings, it might make sense to add extra to your AVC if it's less than 25% and if your employer will accommodate you. After you receive your lump sum, you can pay some into a SIPP. Your final year salary is the primary limit, but read about recycling and decide what you feel comfortable with.
So the upshot is you are stuck with much of your 120k lump sum... 20k into an ISA, perhaps twice - before and after April 6th. High interest savings accounts; General investment account; Premium bonds even. There's no simple answer.

pterri

Secret2ndAccount said:

daveyjp said:

You state your lump sum is £120k based on 25%.  25% of what figure?  Reason for asking is it reads as if you may be getting your DB and DC rules mixed up.

DB lump sum is what ever is stated on your annual pension statement, with an option to increase it by buying more lump sum and reducing your annual pension.

Subject to very generous limit your AVC is 100% tax free

OP is not mixed up. There IS a 25% in play here. You calculate a notional value for the whole pension, then 25% of it is the maximum that can be taken tax free. This often enables the entire AVC to be taken as part of the TFLS, but the check has to be performed.

Marcon said:

If you want to maximise growth and limit tax, wouldn't it make more sense to take a smaller lump sum and have a bigger pension?

It normally makes sense to take the entire AVC as a lump sum, since it is tax free. Leave any AVC behind, and it becomes an ordinary DC, 75% taxable. OP is not talking about commutation.

To the OP, yes, take the AVC as a lump sum (all of it if possible) to get maximum tax benefit. No, you can't pay it into a SIPP. If you don't have any earnings in a tax year (pension doesn't count) you can only pay £2,880 into a SIPP.
In your final year of work, you likely have some headroom to pay into a pension. You can pay in up to your salary (if it's 20k or 30k or 40k) minus what you have already contributed to your work pension (that will be zero if it's all salary sacrifice). If you have any savings, it might make sense to add extra to your AVC if it's less than 25% and if your employer will accommodate you. After you receive your lump sum, you can pay some into a SIPP. Your final year salary is the primary limit, but read about recycling and decide what you feel comfortable with.
So the upshot is you are stuck with much of your 120k lump sum... 20k into an ISA, perhaps twice - before and after April 6th. High interest savings accounts; General investment account; Premium bonds even. There's no simple answer.

Yep this is my (nice) problem. I’ll have £135k plus in AVCs linked to my DB so will pop into a GIA  then feed into an isa. It’s that or buy an annuity which 8 have no interest in doing unless the rates go up dramatically 

Marcon

Secret2ndAccount said:

Marcon said:

If you want to maximise growth and limit tax, wouldn't it make more sense to take a smaller lump sum and have a bigger pension?

It normally makes sense to take the entire AVC as a lump sum, since it is tax free. Leave any AVC behind, and it becomes an ordinary DC, 75% taxable. OP is not talking about commutation.

OP most certainly is talking about commutation, even if they aren't familiar with the term!

I didn't suggest doing other than taking whole AVC tax free. There is plenty of scope for taking the whole AVC tax free and taking a smaller lump sum/bigger pension from the main scheme. With a commutation rate of 12:1, the commutation rate is pretty poor, so taking the maximum cash might not be a great deal, especially as OP doesn't seem from their post to have an immediate use for a cash lump sum - and indeed was talking about immediately putting it into another pension scheme.

OP - see https://www.lgpsmember.org/your-pension/planning/taking-a-lump-sum/#:~:text=You%20can%20exchange%20part%20of,the%20right%20decision%20for%20you.