Accessing DB Pension and increasing Contributions to DC

Fairwinds

Hi everyone, I have a DB pension that has no early penalty at Age 60 on 2/3rds of it. I'll be 60  in a year's time, and if I stay in the DB scheme, I think my annual pension would only increase by about 2k/year ( reduced early penalties on the other third). The pension at 60 would be worth approx 20k or 15k and a 100k lump sum (preferred option).

It seems to me I would be better taking this pension at 60, while still working.

My question is, am I able to put the majority of this income into my DC scheme and reduce the tax (42% Scotland) I'd pay on this additional income? I'd like to do this for approximately 2 years before possibly retiring at 62.

Any flaws in this thinking I should be aware of?

El_Torro

There are people on this forum a lot more knowledgeable than me about DB pensions but I'll give it a go:

Yes, it makes sense to take it at 60, even if you're still working. If you wait to take it later there is usually no benefit, you just lose out on the income that you could have had. Different DB pensions have different rules.

Strictly speaking you can't put your pension income into a pension. However you can put some (or all) of your salary into a pension and live off your pension income. As you say it's a good way to avoid higher rate tax. 

Brie

Can you access the money and keep contributing to the DB scheme??  If not, I wouldn't do this myself.  

What affect would the extra income (£20k or £15k) have on your tax situation while you continue to work?  

DRS1

Fairwinds said:

Hi everyone, I have a DB pension that has no early penalty at Age 60 on 2/3rds of it. I'll be 60  in a year's time, and if I stay in the DB scheme, I think my annual pension would only increase by about 2k/year ( reduced early penalties on the other third). The pension at 60 would be worth approx 20k or 15k and a 100k lump sum (preferred option).

It seems to me I would be better taking this pension at 60, while still working.

My question is, am I able to put the majority of this income into my DC scheme and reduce the tax (42% Scotland) I'd pay on this additional income? I'd like to do this for approximately 2 years before possibly retiring at 62.

Any flaws in this thinking I should be aware of?

You are going to need to put some figures on this for better information.

For example what is your current income, what pension scheme do you belong to (DB or DC), what contributions do you and your employer make to the scheme, do you have a pension input amount for the DB scheme, are you currently bumping up against the annual allowance or the earnings limit on your personal contributions.  An extreme example: if you are salary sacrificing £60k of your salary into the DC pension and have been doing that for the last three years then there is no way you could up the contributions by the amount of the DB pension you receive.

Another thing to consider is what late retirement factors does the DB scheme use and when do they apply - eg from age 60 for all or part of the benefits?  Or from age 65 or 67 for all or the balance of the benefits?

Fairwinds

Brie said:

Can you access the money and keep contributing to the DB scheme??  If not, I wouldn't do this myself.  

What affect would the extra income (£20k or £15k) have on your tax situation while you continue to work?  

Db Scheme was closed last September and we were all moved to DCscheme, now deferred memebr of the DB scheme. 

Fairwinds

DRS1 said:

Fairwinds said:

Hi everyone, I have a DB pension that has no early penalty at Age 60 on 2/3rds of it. I'll be 60  in a year's time, and if I stay in the DB scheme, I think my annual pension would only increase by about 2k/year ( reduced early penalties on the other third). The pension at 60 would be worth approx 20k or 15k and a 100k lump sum (preferred option).

It seems to me I would be better taking this pension at 60, while still working.

My question is, am I able to put the majority of this income into my DC scheme and reduce the tax (42% Scotland) I'd pay on this additional income? I'd like to do this for approximately 2 years before possibly retiring at 62.

Any flaws in this thinking I should be aware of?

You are going to need to put some figures on this for better information.

For example what is your current income, what pension scheme do you belong to (DB or DC), what contributions do you and your employer make to the scheme, do you have a pension input amount for the DB scheme, are you currently bumping up against the annual allowance or the earnings limit on your personal contributions.  An extreme example: if you are salary sacrificing £60k of your salary into the DC pension and have been doing that for the last three years then there is no way you could up the contributions by the amount of the DB pension you receive.

Another thing to consider is what late retirement factors does the DB scheme use and when do they apply - eg from age 60 for all or part of the benefits?  Or from age 65 or 67 for all or the balance of the benefits?

Salary approx £60k
DB scheme deferred member, DC Scheme contributing monthly
DC scheme company 15.5% ( for 5 years, till i'm 62, com part of DB closure settlement) if i contribute 4%, actually contributing 20% 
Wouldn't imagine i'm near any limits but i guess the reason for this post is i'm not fully aware of what they are .

2/3 of DB is penalty free from 60,  other 1/3 has penalties till 65 - think equating to about £2k

DRS1

2/3 of DB is penalty free from 60,  other 1/3 has penalties till 65 - think equating to about £2k

You're still talking early retirement factors there.  I was asking about late retirement factors.  So if you wait till 65 to take the DB pension does the bit due at 60 get increased because you took it 5 years late?

Fairwinds

DRS1 said:

2/3 of DB is penalty free from 60,  other 1/3 has penalties till 65 - think equating to about £2k

You're still talking early retirement factors there.  I was asking about late retirement factors.  So if you wait till 65 to take the DB pension does the bit due at 60 get increased because you took it 5 years late?

No, NRA is 65, just I have a clause that lets me access early, late payment would only come in after 65

DRS1

Salary approx £60k

DB scheme deferred member, DC Scheme contributing monthly

DC scheme company 15.5% ( for 5 years, till i'm 62, com part of DB closure settlement) if i contribute 4%, actually contributing 20% 

Wouldn't imagine i'm near any limits but i guess the reason for this post is i'm not fully aware of what they are 

Well the first limit is on your personal contributions.  You can't contribute and get tax relief on more than your taxable earnings.

I may be misinterpreting your figures (eg is salary pre or post your pension contributions and do you use salary sacrifice for the contributions).  But if your salary is £60k and you are already making personal contributions of 20% of that that is £12k (again I am going to assume this is £12k gross not net.  I could be wrong).  That would mean you could contribute another £48k (gross - ie pay in £38400 and scheme reclaims £9600 to bring it up to £48k gross).  So plenty of room for the £15k DB pension.

The second limit is the annual allowance which coincidentally is also £60k.  That limit includes employer contributions.  If I am right then employer contributions are 15.5% of £60k so £9300. add that to your £12k gives £21300 so plenty of scope within the £60k AA for the DB pension.  I confess I am not sure if deferred pensioners have a positive pension input amount in a DB pension.  I sort of assume not but someone will correct me if I am wrong.

Fairwinds

DRS1 said:

Salary approx £60k

DB scheme deferred member, DC Scheme contributing monthly

DC scheme company 15.5% ( for 5 years, till i'm 62, com part of DB closure settlement) if i contribute 4%, actually contributing 20% 

Wouldn't imagine i'm near any limits but i guess the reason for this post is i'm not fully aware of what they are 

Well the first limit is on your personal contributions.  You can't contribute and get tax relief on more than your taxable earnings.

I may be misinterpreting your figures (eg is salary pre or post your pension contributions and do you use salary sacrifice for the contributions).  But if your salary is £60k and you are already making personal contributions of 20% of that that is £12k (again I am going to assume this is £12k gross not net.  I could be wrong).  That would mean you could contribute another £48k (gross - ie pay in £38400 and scheme reclaims £9600 to bring it up to £48k gross).  So plenty of room for the £15k DB pension.

The second limit is the annual allowance which coincidentally is also £60k.  That limit includes employer contributions.  If I am right then employer contributions are 15.5% of £60k so £9300. add that to your £12k gives £21300 so plenty of scope within the £60k AA for the DB pension.  I confess I am not sure if deferred pensioners have a positive pension input amount in a DB pension.  I sort of assume not but someone will correct me if I am wrong.

Thanks so much for taking the time to answer on a Friday night - yes Gross not nett and current contibutions are through salary sacrafice into EmployerDC scheme- so I am thinking this would be the best course of action for me  - access money at 60 and put as much of 75k-43k= 32k as i can afford into DC
75k - salary +pension payment
43k is Higher tax band limit in Scotland

( I'm not following the calc of £38.4k reclaim £9.6k 25% - if you could explain)

Dazed_and_C0nfused

Fairwinds said:

DRS1 said:

Salary approx £60k

DB scheme deferred member, DC Scheme contributing monthly

DC scheme company 15.5% ( for 5 years, till i'm 62, com part of DB closure settlement) if i contribute 4%, actually contributing 20% 

Wouldn't imagine i'm near any limits but i guess the reason for this post is i'm not fully aware of what they are 

Well the first limit is on your personal contributions.  You can't contribute and get tax relief on more than your taxable earnings.

I may be misinterpreting your figures (eg is salary pre or post your pension contributions and do you use salary sacrifice for the contributions).  But if your salary is £60k and you are already making personal contributions of 20% of that that is £12k (again I am going to assume this is £12k gross not net.  I could be wrong).  That would mean you could contribute another £48k (gross - ie pay in £38400 and scheme reclaims £9600 to bring it up to £48k gross).  So plenty of room for the £15k DB pension.

The second limit is the annual allowance which coincidentally is also £60k.  That limit includes employer contributions.  If I am right then employer contributions are 15.5% of £60k so £9300. add that to your £12k gives £21300 so plenty of scope within the £60k AA for the DB pension.  I confess I am not sure if deferred pensioners have a positive pension input amount in a DB pension.  I sort of assume not but someone will correct me if I am wrong.

Thanks so much for taking the time to answer on a Friday night - yes Gross not nett and current contibutions are through salary sacrafice into EmployerDC scheme- so I am thinking this would be the best course of action for me  - access money at 60 and put as much of 75k-43k= 32k as i can afford into DC
75k - salary +pension payment
43k is Higher tax band limit in Scotland

( I'm not following the calc of £38.4k reclaim £9.6k 25% - if you could explain)

With relief at source contributions you pay the net amount and 25% is added by the pension company.  Which equates to 20% of the gross contribution.