Accessing DB Pension and increasing Contributions to DC

DRS1

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

The pension scheme only reclaims basic rate tax. 20% of £48k is £9600.  £48k - £9600 = £38,400.

Any extra tax relief is then reclaimed by the taxpayer directly either in their tax return or using a special form on GOV.UK

BUT you say you contribute by salary sacrifice so that means you actually pay NO personal contributions - they are all employer contributions which means the grossing up bit is irrelevant (it is only relevant to your personal contributions not your employer's contributions).  Your salary is reduced by the same amount as the employer contributes so you never pay tax (or NICs) on the amount contributed. No need to reclaim any higher rate tax either because you never paid it in the first place.

Yes you will have to see how much you can afford to contribute without leaving yourself short.  Matching the extra income from the DB scheme is easy because that is new money you aren't currently spending.

DRS1

Fairwinds said:

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

Then it makes sense to take it at 60 (though you will probably have to take the whole lot in one go and suffer the reduction of the one third with an NRA of 65).

Marcon

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).



Any flaws in this thinking I should be aware of?

Yes, the entirely understandable one of referring to a 'penalty' for taking a DB pension before the scheme's Normal Retirement Age (NRA). If you take your pension early, the starting level is reduced because it is being paid sooner than expected, and for a longer period. This is done by means of an actuarially-calculated 'early retirement factor', which is intended to be cost neutral (ie by the time you die, you will have received the same overall pension during your whole retirement as you would have received had you taken the pension at NRA). Whether the intention and reality match up is another matter, of course!

Rather than viewing (part of) your DB pension as having 'no early penalty', the lack of a reduction it is actually a hefty benefit, for which your employer is ultimately footing the cost. Worth bearing in mind, in case it colours your decision process.

Fairwinds

Marcon 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).



Any flaws in this thinking I should be aware of?

Yes, the entirely understandable one of referring to a 'penalty' for taking a DB pension before the scheme's Normal Retirement Age (NRA). If you take your pension early, the starting level is reduced because it is being paid sooner than expected, and for a longer period. This is done by means of an actuarially-calculated 'early retirement factor', which is intended to be cost neutral (ie by the time you die, you will have received the same overall pension during your whole retirement as you would have received had you taken the pension at NRA). Whether the intention and reality match up is another matter, of course!

Rather than viewing (part of) your DB pension as having 'no early penalty', the lack of a reduction it is actually a hefty benefit, for which your employer is ultimately footing the cost. Worth bearing in mind, in case it colours your decision process.

I hear what you are saying, but still feels like a penalty as it wasn't part of what i originally signed up to - if that's the only flaw then, i@m good with that - thanks

Fairwinds

DRS1 said:

Fairwinds said:

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

Then it makes sense to take it at 60 (though you will probably have to take the whole lot in one go and suffer the reduction of the one third with an NRA of 65).

Perfect - I will have to take the whole thing, but it definitely seems the way to go - Thank you

Albermarle

Is there not a potential issue with recycling?
The OP plans to take a £100K tax free lump sum, and at the same time significantly increase their pension contributions. 
OP - Suggest you have a read through this.
Recycling of tax-free cash - Royal London for advisers

Cobbler_tone

I have the same NRA’s on my DB and you can take the sections separately. i.e. some when you are 60 and some at 65, without reductions. Worth the question.
I’d imagine it could be worth considering taking your salary down to NMW into your DC. 

Fairwinds

Albermarle said:

Is there not a potential issue with recycling?
The OP plans to take a £100K tax free lump sum, and at the same time significantly increase their pension contributions. 
OP - Suggest you have a read through this.
Recycling of tax-free cash - Royal London for advisers

4. Contribution increase of more than 30% of tax-free cash

The increase in additional contributions is only significant if the total amount is more than 30% of the tax-free cash.

 

So I can safely increase contributions by up to £30k, if i'm interpreting that correctly  - but just further read it applies over 5 years - so i'm now not sure !

Fairwinds

Cobbler_tone said:

I have the same NRA’s on my DB and you can take the sections separately. i.e. some when you are 60 and some at 65, without reductions. Worth the question.
I’d imagine it could be worth considering taking your salary down to NMW into your DC. 

I know I can't with mine  - we can with my wifes

Albermarle

Fairwinds said:

Albermarle said:

Is there not a potential issue with recycling?
The OP plans to take a £100K tax free lump sum, and at the same time significantly increase their pension contributions. 
OP - Suggest you have a read through this.
Recycling of tax-free cash - Royal London for advisers

4. Contribution increase of more than 30% of tax-free cash

The increase in additional contributions is only significant if the total amount is more than 30% of the tax-free cash.

 

So I can safely increase contributions by up to £30k, if i'm interpreting that correctly  - but just further read it applies over 5 years - so i'm now not sure !

I think that is the correct interpretation.

So you need to be a bit careful. However it is often said on this forum, that instances of people being pursued for recycling seem relatively rare. The rules were originally set up to prevent it happening on a large scale by organised groups.