Uncrystallised DB pension reduced in value

Jeffmusicals

https://forums.moneysavingexpert.com/discussion/comment/82011591#Comment_82011591

thanks. It’s a shame they won’t give clearer guidelines. But I can prove that the money was used to clear mortgage etc. There would be a very clear paper trail, no?

Marcon

But I can prove that the money was used to clear mortgage etc. There would be a very clear paper trail, no?

Forgive me, but as I"ve already said, nobody here can give you definitive confirmation that what you intend to do won't be caught under the recycling rules. The mere fact you've got a paper trail showing £x pension lump sum, closely followed by £y payments to clear debts, doesn't come close to giving you that definitive answer. This is why:

So I would use £50k of the lump sum to clear my mortgage and £15k to clear all other debts which would save me £1300 per month. It would then be my intention to increase my DC contributions to around £40k through salary sacrifice to dramatically reduce my tax bill to bring me my effective earnings to around 90k.

The lump sum is basically what facilitates your plans to pay less tax - and that's where/why recycling enters the frame, I'm afraid.

Jeffmusicals

https://forums.moneysavingexpert.com/discussion/comment/82011609#Comment_82011609

ok thank you, that is clear. I need to find another way to achieve my goals, hence my request for advice here.

Everyone has been so helpful, I really appreciate it.

Marcon

Something which probably would be useful would be to ask for a projection of the pension you would receive at the scheme's Normal Retirement Age. If NRA is indeed 65, and you are 60 now, the reduction factor applied could be 5% per year - so the figure you've been quoted for taking your pension now could be reduced by 25%. That sounds draconian, although in reality it is likely to be based on the intention of 'cost neutrality' (ie by the time a member dies, they'll have received the same amount of pension whatever age the member retires). Even so, it tends to feel pretty 'ouch'.

If you delay taking your DB pension, it will increase for two reasons:

• the early retirement reduction will diminish as you get closer to NRA; and
• pensions in deferment (from the time you leave active membership to the time you access your benefits) revalue at a rate at least equal to statutory requirements.

Knowing what the projected number might look like could help you order your thoughts. The scheme won't be able to give you a definite number because the rate of inflation between now and then is, for obvious reasons, unknown.

Jeffmusicals

https://forums.moneysavingexpert.com/discussion/comment/82011580#Comment_82011580

Me again! I’ve read more on the recycling and it looks like my previous plans to pay my final three annual bonuses into my pension would cause me to breach the rules. They are normally around £20pa but I have always taken them as income as I then used the money to contribute to living costs throughout the year. Presumably however, I could pay half of them in (roughly), providing I don’t exceed the 30% of the lump sum as they are likely to exceed 30% of my normal contribution. Hopefully I’ve understood it! Can I just ask if the contribution is calculated on both mine and my employers contributions or just my own ? Thanks

GrumpyDil

The contribution limit of 60k is based on both employer and employer contributions.

That said lump sum recycling is based on recycling pcls money so annual bonuses are not caught by those rules anyway.

Andy_L

So I would use £50k of the lump sum to clear my mortgage and £15k to clear all other debts which would save me £1300 per month. 

How does the interest on your mortgage compare to the return you'd get on the lump sum if you saved it or invested it

Marcon

OP - I've just looked at some of your previous threads and hope I'm about to offer a couple of thoughts which might be worth thinking about.

Pension recycling only applies where you increase your pension contributions to your own pension as a consequence of taking a tax free lump sum. So far so unhelpful - but…

You're married. There is no tax on gifts between spouses. So if you contributed to your wife's pension/gave her the cash to do so… That's not going to help you with the salary sacrifice/reduce your own tax ambitions, but maybe it's worth adding to the stack of things to ponder? You're going to get into quite complicated financial territory, so I really wouldn't recommend relying/acting on anything or anyone posting on an open forum, however knowledgeable they sound. I'm adding the information in case you weren't aware of it.

I also noted your thread from 2020 about transferring out of your DB scheme, and why - plus your comment above:

Re the DB to DC option a few years ago, no-one would give the advice I needed to allow the DB scheme to transfer my CETV ) £550k at the time). I doubt that has changed..

Very few advisers hold the necessary FCA 'permissions' to advise on DB transfers, but they existed then and some still exist now, although they are an endangered species thanks to the ridiculous strictures imposed by the regulatory structure. If you still have a yen to buy the house in France, there's nothing to stop you investigating further.

Before you ask for a current Cash Equivalent Transfer Value from your scheme (CETVs are only guaranteed for 3 months from the date of calculation - you have to accept within that period if you wish to proceed), make sure that you've:

• got an adviser lined up to give the advice (the DB scheme can't pay out without confirmation that you've received advice). The advice process isn't quick and it isn't cheap; and
• set up a stakeholder pension. The problem with transferring from a DB scheme, especially if you have a CETV north of £30K (the point at which advice is mandatory), is finding a receiving scheme to accept the transfer without a positive recommendation from the adviser. A stakeholder pension has to accept any transfer from a UK registered pension scheme. So far as I know - but you need to check to be absolutely sure - Aviva are still open to new direct business (and will still allow the customer to arrange their own transfer in) with a minimum payment of £20 (you pay in £16, basic rate tax relief tops it up to £20): https://static.aviva.io/content/dam/document-library/adviser/pensions/sp01006.pdf

xylophone

The lump sum is basically what facilitates your plans to pay less tax -
and that's where/why recycling enters the frame, I'm afraid.

But is this the case?

He is offered a £90,000 lump sum and a monthly pension of around £1100 a month.

He can offer a paper trail to prove that he has used £65,000 to pay off his debts.

The balance of £25,000 could be used for ISAs for himself and spouse (if any) or to gift to his spouse who could use it as she wished.

Alternatively, is it possible to take only as much lump sum as is required to pay off debts, with the balance used to increase the monthly pension?

This pension income could be regarded as a replacement for part of his salaried income. He could thus quite legitimately use more of his salary to make pension contributions?

His personal cost of living would be further eased by relief from his debts?

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810

ClashCityRocker1

https://forums.moneysavingexpert.com/discussion/comment/82012065#Comment_82012065

recycling only applies for tax free lump sums from pension schemes, not for bonuses (?)