Which pension lump sum?

Whiterose23

LHW99 said:

If you put DB1 into payment, it covers the amount you want with the PCLS, and you could use the monthly payment to increase your current payments to the DC pension?

BTW - you have checked your SP position, not just assumed you need 35 years?

That was one of my thoughts … I wasn’t sure as it’s the most valuable pension.  Yes I’m fully paid up for the state pension; I’ve checked online.

ali_bear

Possibly it will work out better if you borrow the money on your mortgage, and use your lump sums to pay it off later. 

MarlowMallard

Whiterose23 said:

If I didn’t touch the pensions then I would end up with around £53k tax free lump sum from the two DB pensions at age 65, and a monthly income of around £600 from the DB pensions and whatever I choose to draw down from the DC pension, which would have grown to around £70k give or take. 

If I take the lump sums from both DB pensions now (5.5 years early), this would equate to £35k tax free cash plus around £450 a month for life (which I could re-invest?), but I’m trying to work out the best way to get the cash I need without losing too much from my pensions if I can.

Compare A taking pensions now vs B at 65.  Both stuff everything into ISA which just matches index-linking. 

At 65, A has £35k plus (66 months * 450 * 0.8 after tax) = £58.7k  in today's money. 
At 65,  B has £53k,  but thereafter he gains at 0.8*150 pcm on A , after tax, so £1440 per year. 

So B will overtake A at age 69-ish, and he's gaining £1440 per year after that.   
So, an extra £1440 per year from 69 to death is probably a lot better than saving a couple of k in tax (which you'll probably pay anyway later).   

Looks pretty clear that you should take the money from the DC and pay a bit of tax (if necessary, split it over 2 tax years so you don't tip into 40% tax). 

Whiterose23

ali_bear said:

Possibly it will work out better if you borrow the money on your mortgage, and use your lump sums to pay it off later. 

Yes another option! I don’t know which is best.

ali_bear

Whiterose23 said:

ali_bear said:

Possibly it will work out better if you borrow the money on your mortgage, and use your lump sums to pay it off later. 

Yes another option! I don’t know which is best.

Generally in this forum it is not recommended to pay off a mortgage early. Simply because the growth of pension savings is on average greater than the interest rates on mortgages. BUT someone would have to do the sums to work out which is likely to be best. It does depend on what happens with the economy and interest rates.

If you went the additional borrowing on mortgage route, you can still at any stage in the future crystalize one or more of your pensions to use the lump sum to pay it off, partly or in full. This is flexibility. 

Triumph13

MarlowMallard said:

Whiterose23 said:

If I didn’t touch the pensions then I would end up with around £53k tax free lump sum from the two DB pensions at age 65, and a monthly income of around £600 from the DB pensions and whatever I choose to draw down from the DC pension, which would have grown to around £70k give or take. 

If I take the lump sums from both DB pensions now (5.5 years early), this would equate to £35k tax free cash plus around £450 a month for life (which I could re-invest?), but I’m trying to work out the best way to get the cash I need without losing too much from my pensions if I can.

Compare A taking pensions now vs B at 65.  Both stuff everything into ISA which just matches index-linking. 

At 65, A has £35k plus (66 months * 450 * 0.8 after tax) = £58.7k  in today's money. 
At 65,  B has £53k,  but thereafter he gains at 0.8*150 pcm on A , after tax, so £1440 per year. 

So B will overtake A at age 69-ish, and he's gaining £1440 per year after that.   
So, an extra £1440 per year from 69 to death is probably a lot better than saving a couple of k in tax (which you'll probably pay anyway later).   

Looks pretty clear that you should take the money from the DC and pay a bit of tax (if necessary, split it over 2 tax years so you don't tip into 40% tax). 

That looks pretty clear to me.  You have £12k of headroom this year between your salary and the 40% tax threshold (unless you're in Scotland of course!) so that would give you £9.6k on top of your TFLS.  I would also very much recommend you stop overpaying the mortgage until you have rebuilt a decent emergency fund.  You can always use the DB lump sums to repay that at 65.

Whiterose23

MarlowMallard said:

Whiterose23 said:

If I didn’t touch the pensions then I would end up with around £53k tax free lump sum from the two DB pensions at age 65, and a monthly income of around £600 from the DB pensions and whatever I choose to draw down from the DC pension, which would have grown to around £70k give or take. 

If I take the lump sums from both DB pensions now (5.5 years early), this would equate to £35k tax free cash plus around £450 a month for life (which I could re-invest?), but I’m trying to work out the best way to get the cash I need without losing too much from my pensions if I can.

Compare A taking pensions now vs B at 65.  Both stuff everything into ISA which just matches index-linking. 

At 65, A has £35k plus (66 months * 450 * 0.8 after tax) = £58.7k  in today's money. 
At 65,  B has £53k,  but thereafter he gains at 0.8*150 pcm on A , after tax, so £1440 per year. 

So B will overtake A at age 69-ish, and he's gaining £1440 per year after that.   
So, an extra £1440 per year from 69 to death is probably a lot better than saving a couple of k in tax (which you'll probably pay anyway later).   

Looks pretty clear that you should take the money from the DC and pay a bit of tax (if necessary, split it over 2 tax years so you don't tip into 40% tax). 

Thank you - I did do a rough working out along these lines, which is why I thought it might be best to leave the DBs alone and just raid the DC pension.

Whiterose23

Triumph13 said:

MarlowMallard said:

Whiterose23 said:

If I didn’t touch the pensions then I would end up with around £53k tax free lump sum from the two DB pensions at age 65, and a monthly income of around £600 from the DB pensions and whatever I choose to draw down from the DC pension, which would have grown to around £70k give or take. 

If I take the lump sums from both DB pensions now (5.5 years early), this would equate to £35k tax free cash plus around £450 a month for life (which I could re-invest?), but I’m trying to work out the best way to get the cash I need without losing too much from my pensions if I can.

Compare A taking pensions now vs B at 65.  Both stuff everything into ISA which just matches index-linking. 

At 65, A has £35k plus (66 months * 450 * 0.8 after tax) = £58.7k  in today's money. 
At 65,  B has £53k,  but thereafter he gains at 0.8*150 pcm on A , after tax, so £1440 per year. 

So B will overtake A at age 69-ish, and he's gaining £1440 per year after that.   
So, an extra £1440 per year from 69 to death is probably a lot better than saving a couple of k in tax (which you'll probably pay anyway later).   

Looks pretty clear that you should take the money from the DC and pay a bit of tax (if necessary, split it over 2 tax years so you don't tip into 40% tax). 

That looks pretty clear to me.  You have £12k of headroom this year between your salary and the 40% tax threshold (unless you're in Scotland of course!) so that would give you £9.6k on top of your TFLS.  I would also very much recommend you stop overpaying the mortgage until you have rebuilt a decent emergency fund.  You can always use the DB lump sums to repay that at 65.

So to clarify … if I took more than the tax-free sum from my DC pension, is that extra then only taxed if it takes me over the threshold when added to my wages? Or am I getting mixed up? Sorry not great at these things…

Triumph13

Whiterose23 said:

Triumph13 said:

MarlowMallard said:

Whiterose23 said:

If I didn’t touch the pensions then I would end up with around £53k tax free lump sum from the two DB pensions at age 65, and a monthly income of around £600 from the DB pensions and whatever I choose to draw down from the DC pension, which would have grown to around £70k give or take. 

If I take the lump sums from both DB pensions now (5.5 years early), this would equate to £35k tax free cash plus around £450 a month for life (which I could re-invest?), but I’m trying to work out the best way to get the cash I need without losing too much from my pensions if I can.

Compare A taking pensions now vs B at 65.  Both stuff everything into ISA which just matches index-linking. 

At 65, A has £35k plus (66 months * 450 * 0.8 after tax) = £58.7k  in today's money. 
At 65,  B has £53k,  but thereafter he gains at 0.8*150 pcm on A , after tax, so £1440 per year. 

So B will overtake A at age 69-ish, and he's gaining £1440 per year after that.   
So, an extra £1440 per year from 69 to death is probably a lot better than saving a couple of k in tax (which you'll probably pay anyway later).   

Looks pretty clear that you should take the money from the DC and pay a bit of tax (if necessary, split it over 2 tax years so you don't tip into 40% tax). 

That looks pretty clear to me.  You have £12k of headroom this year between your salary and the 40% tax threshold (unless you're in Scotland of course!) so that would give you £9.6k on top of your TFLS.  I would also very much recommend you stop overpaying the mortgage until you have rebuilt a decent emergency fund.  You can always use the DB lump sums to repay that at 65.

So to clarify … if I took more than the tax-free sum from my DC pension, is that extra then only taxed if it takes me over the threshold when added to my wages? Or am I getting mixed up? Sorry not great at these things…

Anything you take beyond the tax free lump sum is taxable.  You are going to have to pay tax on almost all of it eventually, whenever you take it, as you won't have long between stopping work and starting you state pension. Plus your DBs will take most of your PA in that short period anyway.

The object of the exercise is to make sure you only pay 20% tax, not 40%.  That's why I did the sums above to show how much you could get out this tax year at 20%.

Secret2ndAccount

The 40% tax threshold is 50k
You are paying into your DC (you personally, not your employer) 2k (I'm guessing)
That increases the 40% threshold for you to 52k
You earn 38k.   So you have 14k before you get to 40% tax.
Take the 15k tax free lump sum from the DC. That is 100% outside of tax and doesn't count at all for tax
Take 14k from the taxable part of the DC. 38k (income) + 14k (pension) = 52k which is your limit before 40% tax
So you pay 20% tax on the 14k. That's 3k tax, leaving 11k.
Now you have 15k + 11k = 26k for moving costs.
Take any more out of the pension before April and it will be taxed at 40%. So if you need 3k more, you will have to take 5k out of the pension.
If you wait until after April 6th, then you will be able to take another 14k out at 20% tax, assuming you don't have a pay rise. Or, if you needed 3k you would only have to take out 3,750 instead of the 5k above

I haven't seen a full financial questionnaire from you, but the above numbers are good for a typical person in England.

When you make your first pension withdrawals the tax might be calculated incorrectly. You can get in touch with HMRC to sort it, or wait until the end of the tax year when they will eventually sort it for you.
Apart from the tax free lump sums, all future pension including State Pension will be treated as income, and taxed accordingly, but no National Insurance.
If you retire at State Pension age, the SP roughly uses up your tax free allowance, so you are going to pay 20% tax on some of your pension income sooner or later