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

ukdw

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

38.2-27.8 =10.4 loss for 185.3.
Gross multiplier 185.3 / 10.4 =17.8 not that good.
But then if you factor in 40% tax it becomes 185.3 / (10.4 * 0.6) =29.696  net
thats a bit better.
Personally I would consider taking anything above a 25x net multiplier
 (which is equivalent to the 4% safe withdrawal rate if the PCLS is properly invested in an ISA).


£9K full pension or £7.2K and £32.7K tax free cash

9-7.2 =1.8.   32.7 / (1.8 * 0.6) =30.278 net
Again personally  if likely to be a 40% tax payer - I would probably take this PCLS too.

PattiTelongo

My position is not to dissimilar to yours however for that very reason I’m going at 55 and running my DC hard until my DB kicks in at 60. I can’t see how you avoid 40% tax as you should have gone a bit earlier and you’ll have a very nice retirement. I’d be booking some very nice holidays and turning left on planes with that lot. 

ali_bear

Or indeed buy a nice sailing yacht. 

As ukdw points out the usually poor commutation rates on PCLS start to look better when you factor in the 40% tax you would otherwise be paying on the extra income. 

Some say that actual regular living costs in retirement are not large, at least not once you've paid off any mortgage. And having ready money gives you flexibility in what you decide to do. 

GunJack

"don't let the tax tail wag the dog" is such a great phrase. And it's so true, I never get why people with loads of pension income get so hung up on it. Every increase over the 40pct band gives you a 60pct takehome gain, what's not to like?

Of course, you could go and live in a 2nd or 3rd world country to make it stretch further but personally I'd rather pay a bit more tax and stay in the civilised world 🙂

BennyBrownBoy

ali_bear said:

Or indeed buy a nice sailing yacht. 

As ukdw points out the usually poor commutation rates on PCLS start to look better when you factor in the 40% tax you would otherwise be paying on the extra income. 

Some say that actual regular living costs in retirement are not large, at least not once you've paid off any mortgage. And having ready money gives you flexibility in what you decide to do. 

Thanks to everyone for comments so far - given me food for thought.

To answer a couple of questions asked:

DB 1 rises at RPI max 3.0% on 43% of the pension and at RPI max 5.0% on remaining 57% of pension once in payment.

DB2 rises at RPI max 2.5% on all of pension once in payment.

DB1 provides 55% survivor benefits to my wife, DB2 provides 50% survivor benefits.

Wife no longer working.

AVC linked to DB2 can be taken tax free when starting DB2 at full amount - if I take reduced DB2 the tax free cash is £32.7K plus the £17K AVC.

No mortgage or debts.

Reasonable health.

I was curious about ukdw comments on commutation rates when factoring in 40% tax - you mentioned that you would consider the PCLS at anything about 25x - can I ask why this is the case?

I would remain under 40% threshold for 5 years i.e. before state pension kicks in - I'm trying to understand what sort of return I would need to see on the PCLS cash in order to make it worth while - any thoughts anyone? Obviously I can't place in ISAs in one go and presumably would pay tax on some of the interest generated before moving to ISAs?

Maybe says something about my risk profile, but I would be nervous about generating enough with the PCLS cash to make it more favourable than the full pensions - my gut says I would need expert help for that and not DIY - do the rates at which my DB pensions increase in payment make anyone think any differently?

Out of interest I did a financial risk profile assessment on line and came out at "Balanced/Moderate".

Thanks again for anything anyone can add, for things I should consider/ask and IFA.

ukdw

BennyBrownBoy said:

I was curious about ukdw comments on commutation rates when factoring in 40% tax - you mentioned that you would consider the PCLS at anything about 25x - can I ask why this is the case?

A general rule of thumb for DC pensions, or lump sums that are properly invested in low cost equity funds and bonds the theory says you should be able to drawdown around 4% or 1/25th of the starting amount, and then increase that amount by inflation each year (with no 2.5% or 5% limit).   This hopefully last at least 30 years, and the pension / lump sum might actually be larger than we you started.

Some people prefer to start at a lower or higher withdrawal percentage, and vary the amount depending on market conditions.

So when assessing DB PCLS commutation rates I tend to compare them with 25x - and if lower I tend to think stick with the DB pension and don't take a lump sum, but if higher then take the lump sum.

I used the same principle when I decided to transfer out my whole DB pension - which at the time a few years ago had a 34x multiplier.

DT2001

I have recently watched James Shaker’s latest YouTube video and he says inflation is important in retirement. Bearing this in mind I would be asking the IFA how to protect against this as your DBs are capped (mine at 65 changed to almost all being GMP and as a result roughly 50% doesn’t increase and the other half at CPI max 3%). Personally I have discounted its value in my plan fairly rapidly as a worst case scenario but it isn’t a high percentage of my income. In your case I would consider using the TFLS to diversify your source of income especially as has been mentioned you have leeway between requirements and potential income at SPA (when £25k p.a. is protected by the triple lock).

You are in a very good position and can afford to cover potential hurdles 

kempiejon

BennyBrownBoy said:

Hi All,

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

In the next 6 months will you pay tax on your wages? Paying it all into a SIPP could mitigate that, even if running down other savings even ISA for 6 months. Perhaps enabling the tax paid since April too, depending on allowances and income and so on. And if you're at 40% going in perhaps leverage that for the first few years at 20% withdrawal.

kermchem

GunJack said:

"don't let the tax tail wag the dog" is such a great phrase. And it's so true, I never get why people with loads of pension income get so hung up on it. Every increase over the 40pct band gives you a 60pct takehome gain, what's not to like?

Of course, you could go and live in a 2nd or 3rd world country to make it stretch further but personally I'd rather pay a bit more tax and stay in the civilised world 🙂

Why do I seek to avoid paying 40% tax in retirement?

I spent the early years of my working life paying basic rate tax, and receiving tax relief on contributions to my employer's (then) final salary pension and my FSAVC. Promotions, increments, kids, fiscal drag, Higher Rate Child benefit charge, employer's move from FS to DB, move my FSAVC to SIPP, and then my pension contibutions received tax relief at 40%, in some years effectively 58% (HRCBC).

Contibute to pensions with 40% or more tax relief, and then withdraw with tax at 20% make sense, but I received 20% tax relief for many years and paying 40% on the way out is not attractive.

How do I persuade my kids that they should contribute to a pension when they are young, paying 20% tax, and they see me paying 40% in retirement?

kermchem

Question for OP to ask his IFA.

What is the best plan for that £510K of DC pension?