Tax efficiency with a combination of DB & DC pensions and a SIPP

mmuibs

First post - thanks in advance for views/feedback.

Is the following assumption correct?:

If my income from all pensions is going to be large enough that I will always pay tax then taking a tax free PCLS from my DB pensions is the only way to get some tax efficiency from that part of my pensions?

I’ve just stopped full time employment, but have not yet started taking any income from my pensions and I’m trying to plan the most tax efficient way of doing this. I have 2 DC pensions and a SIPP totalling just about £900k plus a couple of DB pensions that will together pay approx £24k a year. I’ll be 65 in December and will get a full state pension in Sept 2027. 

I’ve worked out various projections and my original thinking was to take the full income option from the DB pensions and then top up via drawdown from the DCs/SIPP without taking any upfront PCLS from either the DB or DCs/SIPP.

I’m now thinking that I should take some tax free cash (at least approx. £43k to get me theoretically up to the £268k max) from my DB pensions before I start taking income so that I at least lock in something. I am aware that my uncrystalised part of the DCs/SIPP will (hopefully!) continue to grow and that I would in theory over time be likely to achieve the full £268k tax free (assuming this doesn’t change in the coming budget(s) - if it does then I’m reasonably confident that it won’t be an overnight change and I can take more tax free cash from my DCs/SIPP at that point if there is a planned reduction.

The commutation factors are around 16 which isn’t great but aren’t awful either.

Sorry a bit long winded but hopefully it makes sense.

Thanks 

El_Torro

Just because the lump sum from your DB pension is tax free that doesn't necessarily make taking it the best option. A commutation factor of 16 isn't terrible, though if you are currently in good health you might be better off with the guaranteed higher income every month, even if some tax is paid. 

Since you have £900k in your DC pensions you might hit the £268,750 limit, if you take it flexibly over a lot of years. Regardless of whether you hit the limit or not I wouldn't view it as a wasted opportunity if you don't. 

Do you need the lump sum for something specific? Both your DB and DC lump sums. If you don't need it then that's all the more reason not to take it from your DB pension.

In your position my goal would be to try to avoid being a 40% tax payer in retirement. This may or may not be feasible, depending on how much you plan to spend.

Marcon

Sounds a bit as if the tax tail is wagging the dog...

Cobbler_tone

 

In your position my goal would be to try to avoid being a 40% tax payer in retirement. This may or may not be feasible, depending on how much you plan to spend.

Exactly. I struggle to see how it can be avoided. Unless they leaving a decent chunk behind for the greater good.
I think the OP will be OK whatever they do.
You can only be so wealthy without paying higher rate taxes. 

PattiTelongo

Maybe if you were 55 taking those numbers you could avoid it but at 65 I’d say little or no chance of avoiding 40%. You’ve got big numbers so you may as well go for it and live the high life for you and your loved ones. 

DRS1

If you were confident you would never get the maximum TFLS out of just the DC pensions/SIPP then it may make sense to take some from the DB pensions.

Maybe if you did then you might think about changing the investments in the DC pensions/SIPP?  Reduce the risk/volatility?  Maybe that is something you don't want to contemplate?

But it sounds as if you could hit the maximum TFLS just from the DC pensions/SIPP in a few years time.  Of course it might increase!

I do wonder how you compare taking TFLS from a DB pension with taking it from a DC pension.  With a factor of 16:1 taking £43k lump sum from the DB pension will cost about £2690 pa.  What would £43k in the DC pension buy you?  Maybe feed the figure into an annuity quoter to see.

Does it make much difference to you if you get £24k pa or £21.3k pa from the DB scheme?  Don't forget pension increases.  Have you worked out a basic level of income you need to get in retirement?

You are in a good position having some DB pension.  It allows you more freedom to play with the DC pensions/SIPP.

scoobyjones1

Wow, that's quite a retirement pot!
I guess I would minimise risk, build up a cash ISA, 20k per year, if you haven't already. Take an annuity with some of it and use up some tax free cash before you start the state pension.
The markets are very high right now so I would probably cash in some of any stock investments you may have...take the stress out of retirement, simplify your affairs as much as possible, make a few gifts to family if you have that option. Make sure you have an up to date will and enjoy life!

tetrarch

I slightly disagree.

I would always advocate for taking out the maximum TFLS from any SIPP as early as practicable.

Firstly because of regulatory uncertainty - you don't know how long any government of any hue being able to resist closure of the TFLS "loophole" where they get no revenue

Secondly, because investment growth within a SIPP becomes taxable whereas investment growth in an ISA is completely tax-free

Some of this will depend on your marital status and the treatment of Pensions/ISA's were you to pre-decease your other half

Dependent on your retirement budget, with your numbers you are not going to be able to avoid 40% tax somewhere along the line - which is, in the round, maybe a nice problem to have
Regards

Tet 

mmuibs

Thanks for the feedback, and yes I know we are lucky to be in a good position and hopefully don’t really have too much to worry about

A couple of comments:

We don’t in theory need the lump sum for anything specific - however there is a scenario where we might need it in the next couple of years - it’s a long story but in short we’ve just moved house and we had to take a small mortgage as we haven’t as yet sold the original house - the theory being when we sell we’ll pay off the mortgage and use some of the additional funds to renovate/extend the new house. I was hoping that we would sell and complete before April so that I can put a fair chunk of the proceeds back into ISAs (we used most of our available cash from flexible ISAs to buy the new house) but that isn’t likely to happen so I can put the PCLS into an ISA - one further option that I have contemplated is that I take a bigger total PCLS from my DB &/or DCs/SIPP and put that into the ISAs rather than lose the accumulated allowances - but that does as one poster commented definitely feel like the tax tail wagging the dog!

I don’t think I can avoid 40% tax - but my aim will be to minimise it if is possible.

Good idea on what does £43k get in an annuity - I’ll check this out.

Also some good comments on de-risking and simplifying - I have a fair amount in bonds & money market funds and I’ve reduced my exposure to the US so when/if the bubble bursts it will hopefully not be too painful. However I probably need a further review this again.

Thanks again

poseidon1

Marcon said:

Sounds a bit as if the tax tail is wagging the dog...

As usual.

Always astounds me this obsession with sticking within the 20% band in retirement come hell or high water. A peculiar but pervasive mindset in my opinion.

DRS1

poseidon1 said:

Marcon said:

Sounds a bit as if the tax tail is wagging the dog...

As usual.

Always astounds me this obsession with sticking within the 20% band in retirement come hell or high water. A peculiar but pervasive mindset in my opinion.

But it is the holy grail of retirement planning - contribute while you pay 40% tax (for the 40% tax relief) and receive your pension while paying 20% tax.