DB Lump Sum - Future Planning

daparojo

I am currently 53 and plan to retire at around 57-58 if my financial plans are met, as this will fall in with the retirement of my slightly older wife. I am fortunate to know what I need based on current spending patterns, and have the luxury of having a DB pension. With that in question, and based on the knowns of today. I can take my DB pension at 65, but can take it earlier with around 4.4% reduction, compound for each year I take it early. Now, if I was to add what I would receive say at 58 with reduction, and then the added State Pension at 67, it would take me into the higher band of income tax - based on today. Therefore, would it be wise to take a small lump sum, tax free - which I can, and save that in an ISA, Premium Bonds etc, to take my total DB + State Pension just below the higher tax earnings. Your thoughts would be appreciated.

QrizB

There's other information missing before anyone can give a useful reply.

How are you currently planning to bridge from retirement at 57/58 to your normal DB age of 65?

How would taking your DB early affect those plans?

Cobbler_tone

It is a broad question with so many determining factors.

I am taking my DB (NRA's of 60/65) at 58 with a bridging pension. This smooths my income for life and keeps everything tax efficient. In terms of the lump sum, depends on your wants and needs. I'm going down to the middle to have cash for some bits I want to buy, whilst ensuing my pension is at the level I want. You can map out the impact of taking it early but reductions are not designed to be punitive. Most importantly, what price can you put on many extra years of not working, if that is your motivation?

The key aspect is having the capital/income to bridge from retirement (whenever that is) to SPA, unless the state pension is just extra money you don't need.

Albermarle

 it would take me into the higher band of income tax - based on today. 

Despite the current freeze, I doubt that the higher rate tax band will be the same in 14 years as today. In any case you only pay higher rate tax above the threshold.

On the other hand, your DB pension ( whether in payment or not) will presumably increase each year, as will the State Pension, currently benefitting from the Triple Lock.

As it is all so far in the future, I would be basing my decision more on how much income I need between now and the SP starting . Plus the commutation rate of the DB pension ( the ratio between the lump sum and the reduction in pension income if you take it).

As often said on these forums, do not make decisions primarily based on avoiding tax.

daveyjp

Betting on income tax rates 10+ years in advance is a game not many would win. Some DBs are inflation linked, it only takes a couple of years at the 10% we experienced recently and that can trigger a move to a higher band,

Are you able to retire but defer your DB for a couple of years?

kempiejon

If the objective is to avoid paying higher rate tax after state pension age the SP can be deferred for a ~5.8% uplift. That is all along way off mind. Do you really want to retire early and are prepared to sacrifice or is it a nice plan and work is OK.

All funds in a pension are subject to prevailing tax treatments, taking the max lump sum removes that from the prospect of income tax (usually). It's a route I've considered with a lump sum/known income, commutation rates put me off with DB; max lump and all income taxable vrs annual UFPLS is another quandary for defined contribution plans. Which one could access at 55 so there's a couple of years to leverage that tax advantage.

You've thought about ISA and PBs but there are some other tax treatments for lump sums. Gilts are free of capital gains, dividends are taxed at a lower rate than income and like savings interest and capital gains have annual allowances.

daparojo

I have a small DC scheme that will give me the difference between the SP + reduced DB at 58, and that will take me though to 67 when I can claim SP. This amount plus my wife's pension is more than enough for our needs. I cannot see the point of working longer, when there will be no need to. I want to enjoy and execute my plans whilst we are both healthy, rather than work 'just that extra year…'. I do understand that the tax bands will move, hence why I am basing my calculations on today - my DB will uplift around 2.5% each year as will my wife's.

If I did take my DB at 58, it would be around 84 before I would be worse off.

QrizB

Therefore, would it be wise to take a small lump sum, tax free

It sounds as though your thinking of giving up - commutating - some of your DB pension at age 58 with the aim of keeping your pension income below HR tax once your SP comes into payment.

These questions often turn on the commutation rate, ie. how much lump sum you get for each £1 of DB that you give up. Do you know this value?

Is your DB a public service pension, LGPS or Alpha or TPS or similar? These have a pretty poor commutation rate and most people would be better off taking the pension.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81975716#Comment_81975716

If I did take my DB at 58, it would be around 84 before I would be worse off.

That is not surprising, as the reductions for taking it early are calculated that you ( and the scheme) will break even, if you live to an average age, which for a male in his 50's, is about 84.

daparojo

https://forums.moneysavingexpert.com/discussion/comment/81975743#Comment_81975743

My pension is with a private company. The commutation factor is 17.5.

xylophone

Be careful about assumptions.

I have a relative who after a number of years on state and occupational pensions finds that increases on both have taken him into the 40% band.