DB Scheme and Minimising Future 40% Tax - What makes most sense?

BennyBrownBoy

Hi All,

Have finally decided (99.99%) to retire in June 26 at age 62 and now considering options.

I'm very fortunate to have 2 DB pensions which based on my most recent forecasts from the provider pay as follows at age 62:

1) £38.2K full pension or £27.8K and £185.3K tax free cash

2) £9K full pension or £7.2K and £32.7K tax free cash (not including some AVC cash)

In addition I have a DC of £477K currently (will be around £510K at point of retirement), AVC of £17K attached to DB Pension 2) and ISAs of around £135K.

My wife, also 62, in 2026 is already in receipt of £23K DB pension.

We are working on around £5.5K monthly net income requirement which I believe is "do-able" given our mix of assets. Comments welcomed?

We will both get full state pension at 67.

Question:

I had never intended to take any tax free cash from my DB pensions as I don't really have a need for it - I always intended to take around £60K tax free from DC initially for some home improvements  and holidays in the short term and believed there is enough cash in remainder of tax free portion of DC/ISAs.

However, having put figures into various AI tools (out of curiosity only), there was a suggestion that taking the tax free cash from the DB schemes might be "sensible" to mitigate for 40% tax for me when my state pension kicks in in 5 years.

Have to be honest, I hadn't considered this and don't really know how to assess whether this makes financial sense?

I'd like to keep my tax bill as low as possible, but appreciate probably can't avoid 40% in retirement at some point, however don't really need the £218K cash right now and would not be sure what to do with it to get the best return.

It did occur to me that I could take max tax free cash from DC and balance tax free cash from the DB schemes up to the £268K LSA limit to minimise the potential for 40% tax for longer? i.e. not take the full amount of tax free cash from DB, rather, a lower amount.

Accepting, first-world problem, I would appreciate thoughts on what factors I should consider in order to make a decision/ask an IFA if and when that becomes necessary - full DB pensions or reduced with the tax free cash? 

My preference is DIY but I feel I'm straying into territory that might benefit from advice.

Thanks in advance to the kind members on here who have been very helpful over the years to improve my learning!

Brie

Check what the terms are for all the DBs if one of you dies.  Does wife's continue to pay to you?  Would yours payout to wife?  That might change how you want to deal with payouts.  

If you don't take TFLS from your DBs can you pay some of that income into your DC to get the tax benefit there?

GunJack

First thing I would do is examine why you need 5.5k a month income, that's a lot.

If you're still servicing a mortgage will your tfls combined from all your pensions be enough to clear it and so you need less monthly income?

Having an hour or so to examine your current and future situation may be a worthwhile exercise...

DRS1

You may want to check how the AVC with DB 2 can be used.  Is it limited to 25% tax free and the rest as additional pension?  Or can all of it be taken tax free if you take less of the DB as tax free cash?

If you take the DB pensions at 62 does that mean you have an early retirement reduction factor?  Or is 62 the NRA for both DB pensions?  If either of them have an NRA of 60 have you looked at whether you should have taken that pension already?

The commutation factors for the DB pensions don't seem bad but aren't the best.  You don't mention any health issues but if you don't expect to live long after retiring then take the maximum tax free cash.  Any widow's pension should be checked but it usually doesn't take the reduction for taking tax free cash into account.

nakie999

BennyBrownBoy said:

Hi All,

Have finally decided (99.99%) to retire in June 26 at age 62 and now considering options.

I'm very fortunate to have 2 DB pensions which based on my most recent forecasts from the provider pay as follows at age 62:

1) £38.2K full pension or £27.8K and £185.3K tax free cash

2) £9K full pension or £7.2K and £32.7K tax free cash (not including some AVC cash)

In addition I have a DC of £477K currently (will be around £510K at point of retirement), AVC of £17K attached to DB Pension 2) and ISAs of around £135K.

My wife, also 62, in 2026 is already in receipt of £23K DB pension.

We are working on around £5.5K monthly net income requirement which I believe is "do-able" given our mix of assets. Comments welcomed?

We will both get full state pension at 67.

Question:

I had never intended to take any tax free cash from my DB pensions as I don't really have a need for it - I always intended to take around £60K tax free from DC initially for some home improvements  and holidays in the short term and believed there is enough cash in remainder of tax free portion of DC/ISAs.

However, having put figures into various AI tools (out of curiosity only), there was a suggestion that taking the tax free cash from the DB schemes might be "sensible" to mitigate for 40% tax for me when my state pension kicks in in 5 years.

Have to be honest, I hadn't considered this and don't really know how to assess whether this makes financial sense?

I'd like to keep my tax bill as low as possible, but appreciate probably can't avoid 40% in retirement at some point, however don't really need the £218K cash right now and would not be sure what to do with it to get the best return.

It did occur to me that I could take max tax free cash from DC and balance tax free cash from the DB schemes up to the £268K LSA limit to minimise the potential for 40% tax for longer? i.e. not take the full amount of tax free cash from DB, rather, a lower amount.

Accepting, first-world problem, I would appreciate thoughts on what factors I should consider in order to make a decision/ask an IFA if and when that becomes necessary - full DB pensions or reduced with the tax free cash? 

My preference is DIY but I feel I'm straying into territory that might benefit from advice.

Thanks in advance to the kind members on here who have been very helpful over the years to improve my learning!

The key trade off is certainty versus flexibility. DB pensions give you guaranteed, inflation linked income, so reducing them for tax free cash permanently lowers secure income for life. Taking tax free cash early can help manage future marginal tax rates, but only makes sense if you actually deploy that cash efficiently, for example ISA sheltering or spending before state pension starts.

Things to weigh up are your projected taxable income once both state pensions start, whether you expect to breach higher rate bands for long periods, how much guaranteed income you want locked in, and whether unused cash would just sit earning less than the DB pension uplift. Also factor survivor benefits and inflation protection, which often get overlooked.

Given the sums and interaction with state pension and LTA history, this is a point where a one off paid IFA check can add value, even if you stay DIY long term.

Phossy

BennyBrownBoy said:

Hi All,

Have finally decided (99.99%) to retire in June 26 at age 62 and now considering options.

I'm very fortunate to have 2 DB pensions which based on my most recent forecasts from the provider pay as follows at age 62:

1) £38.2K full pension or £27.8K and £185.3K tax free cash

2) £9K full pension or £7.2K and £32.7K tax free cash (not including some AVC cash)

In addition I have a DC of £477K currently (will be around £510K at point of retirement), AVC of £17K attached to DB Pension 2) and ISAs of around £135K.

My wife, also 62, in 2026 is already in receipt of £23K DB pension.

We are working on around £5.5K monthly net income requirement which I believe is "do-able" given our mix of assets. Comments welcomed?

We will both get full state pension at 67.

Question:

I had never intended to take any tax free cash from my DB pensions as I don't really have a need for it - I always intended to take around £60K tax free from DC initially for some home improvements  and holidays in the short term and believed there is enough cash in remainder of tax free portion of DC/ISAs.

However, having put figures into various AI tools (out of curiosity only), there was a suggestion that taking the tax free cash from the DB schemes might be "sensible" to mitigate for 40% tax for me when my state pension kicks in in 5 years.

Have to be honest, I hadn't considered this and don't really know how to assess whether this makes financial sense?

I'd like to keep my tax bill as low as possible, but appreciate probably can't avoid 40% in retirement at some point, however don't really need the £218K cash right now and would not be sure what to do with it to get the best return.

It did occur to me that I could take max tax free cash from DC and balance tax free cash from the DB schemes up to the £268K LSA limit to minimise the potential for 40% tax for longer? i.e. not take the full amount of tax free cash from DB, rather, a lower amount.

Accepting, first-world problem, I would appreciate thoughts on what factors I should consider in order to make a decision/ask an IFA if and when that becomes necessary - full DB pensions or reduced with the tax free cash? 

My preference is DIY but I feel I'm straying into territory that might benefit from advice.

Thanks in advance to the kind members on here who have been very helpful over the years to improve my learning!

By my calcs (all based on todays's money), if you take the TFLS form your DB's, then at 67 your net income between the two of you will be  £5958/month. You will then have your DB, AVC, ISA and two lump sums  (~£880k)  to cover any requirements you have over the  £4285 / moth net income you'll have between you from 62 to 67. You are well set up and can afford to take on some very expensive hobbies...

I expect, but you will need to check, that your dependants pensions are not impacted by any lump sum you take. 

PropertyGuru_Wannabe

I agree with all the replies above and think you have no issues with the £5,500 a month requirement.  
No one can answer your question without knowing whether you wish to leave funds to your children or what you will do with the money if you take the maximum tax free lump sums.  As others would say, don't let the tax tail wag the dog.  If your DB pensions are inflation linked and uncapped, it would seem silly to lose some of those by taking the lump sums but if you know exactly what to do with the money, then it would not be unreasonable at all.  One option in favour of taking the lump sums would be to pay into your wife's personal pension under the maximum allowed if she is still working.

Therefore as others have said, an IFA would be the best course of action to fact check your background rather than people who care less about you.  But with the money you have accumulated, you are already in a good position.

kermchem

Yes, a first world problem. Your numbers are a little more generous than mine, but I am in a not totally different position and I have been trying to work out what choices to make. In my case I expect to retire this Spring as a borderline 40% tax payer, wife as a mid-band 20% tax payer, and I see little chance that my future pension income is going to fall below 40% tax rate. 

I suggest that you think about minimising IHT as well as income tax. Plan for your beneficiaries, and plan for what happens if one of you dies first leaving the other, potentially for a 20-year widow(er)hood.

You have more geneous pensions than your wife. What does her income look like if you go first? 

As has already been said, it is likely that your DB pensions have a survivor pension that is a %age of the standard pension, so does not depend on lump sum. 

My pan is to take the lump sums and invest/save in wife's name, paying 20% tax as it transfers 40K per year to ISAs - preferable to paying 40% tax on the pension income.

Your DB pension is going to increase by inflation until SP age, when you can add a triple lock-increased SP. 

The 40% tax threshold is frozen until at least April 2028, and I cannot see a future government doing any better than increasing it by future inflation (?)

Make gifts that will avoid IHT in 7 years under current rules.

The DC pension is not going to escape 40% tax, either as income tax, or IHT.

My own assumptions are that no future government is going to change 40% threshold, 40% rate, IHT threshold, IHT on pensions, or triple lock - or at least changes will not be in your (or my) favour.

kempiejon

@BennyBrownBoy  DB Scheme and Minimising Future 40% Tax - What makes most sense?

As said the sensible thing is not let the tax tail do the wagging but it looks optional to me as full DBs1 & 2 totals are still below the threshold and it's the looming state pension that causes the higher rate of income tax to be paid so don't claim it straightaway. There's a welcome triple locked increase I think if you delay. Check details ~5% a year rings a bell.
Taking full DBs more linked and spousal income looks the win.

Taking flexible lumps from the DC to soak up the balance of any allowance and then ISAs can deliver more tax free income for a while.
40% dodged until you want to pay it by claiming SP

bjorn_toby_wilde

kermchem said:

Your DB pension is going to increase by inflation until SP age

It may do…

A public sector pension will, but many (most?) private sector pensions will have capped inflation increases (often 2.5%) so periods of high inflation make a dent. Also these capped increases may only apply to part of the pension as there was no right to a statutory increase on pension accrued before April 1997.

One of my early DB pensions is particularly mean, which is why I took the decision to take the maximum lump sum from it and moved it into ISAs and other investments.

kempiejon

bjorn_toby_wilde said:

kermchem said:

Your DB pension is going to increase by inflation until SP age

It may do…

A public sector pension will, but many (most?) private sector pensions will have capped inflation increases (often 2.5%) so periods of high inflation make a dent. Also these capped increases may only apply to part of the pension as there was no right to a statutory increase on pension accrued before April 1997.

One of my early DB pensions is particularly mean, which is why I took the decision to take the maximum lump sum from it and moved it into ISAs and other investments.

Aye, too optimistic a statement. DBs may get some increases, if I recall part of mine capped some uncapped.