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  • FIRST POST
    • dannynolan
    • By dannynolan 15th Feb 18, 11:44 AM
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    dannynolan
    About to take a DB pension...
    • #1
    • 15th Feb 18, 11:44 AM
    About to take a DB pension... 15th Feb 18 at 11:44 AM
    I have FP 16 protection but am 40k or so over the 1,250,000 limit. I am a deferred pensioner and don't want to transfer out.

    1. Is there anything I could do before crystallising the pension to reduce the 55% hit on anything over the 1.25k.

    2. Is there any benefit in NOT crystallising the pension now?

    3. I don't particularly need a large cash sum at present, do people have views generally on how much if any of the 25% tax-free lump-sum to take? Commutation is about 19X

    4. I have seen a suggestion that I could take the additional amount over the 1,250,000 and allocate it to my partner as a dependant pension.

    Thanks
    Last edited by dannynolan; 15-02-2018 at 12:45 PM.
Page 1
    • Drp8713
    • By Drp8713 15th Feb 18, 12:27 PM
    • 787 Posts
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    Drp8713
    • #2
    • 15th Feb 18, 12:27 PM
    • #2
    • 15th Feb 18, 12:27 PM
    Cant you just commute a lump sum big enough to get you under the protected LTA?

    The lump sum is calculated at face value for LTA purposes whereas the pension is valued at 20x.
    • Silvertabby
    • By Silvertabby 15th Feb 18, 1:02 PM
    • 2,722 Posts
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    Silvertabby
    • #3
    • 15th Feb 18, 1:02 PM
    • #3
    • 15th Feb 18, 1:02 PM
    4. I have seen a suggestion that I could take the additional amount over the 1,250,000 and allocate it to my partner as a dependant pension.
    Only as part of a divorce settlement.

    Drp is right - if you don't want to pay tax on the excess, then your only option would be to take a tax free lump sum/reduced pension. The figures you are looking for would be 1 x lump sum plus 20 x reduced pension. If that sum comes out as under the LTA then job done.

    A commutation rate of 1:19 isn't too bad - it's certainly a lot better than the 1:12 offered by the public sector pension schemes.
    • dannynolan
    • By dannynolan 15th Feb 18, 1:40 PM
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    dannynolan
    • #4
    • 15th Feb 18, 1:40 PM
    • #4
    • 15th Feb 18, 1:40 PM
    Only as part of a divorce settlement.

    Drp is right - if you don't want to pay tax on the excess, then your only option would be to take a tax free lump sum/reduced pension. The figures you are looking for would be 1 x lump sum plus 20 x reduced pension. If that sum comes out as under the LTA then job done.

    A commutation rate of 1:19 isn't too bad - it's certainly a lot better than the 1:12 offered by the public sector pension schemes.
    Originally posted by Silvertabby
    I'm confused... my early retirement statement has given me four options.

    62,500 pa with excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)

    46,875 pa + 312,500 lump sum and excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)

    So even if I draw down the max 312,500 I will still be subject to tax on the excess over the LTA.
    • GunJack
    • By GunJack 15th Feb 18, 2:03 PM
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    GunJack
    • #5
    • 15th Feb 18, 2:03 PM
    • #5
    • 15th Feb 18, 2:03 PM
    Both of those two sums (using 20x pension) come to 1,250,000 exactly....where's the excess come into it, or am I missing something?? e.g. is it due a cost of living rise? is it a DB or DC pension?
    Last edited by GunJack; 15-02-2018 at 2:05 PM.
    ......Gettin' There, Wherever There is......
    • dannynolan
    • By dannynolan 15th Feb 18, 2:13 PM
    • 983 Posts
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    dannynolan
    • #6
    • 15th Feb 18, 2:13 PM
    • #6
    • 15th Feb 18, 2:13 PM
    Both of those two sums (using 20x pension) come to 1,250,000 exactly....where's the excess come into it, or am I missing something?? e.g. is it due a cost of living rise? is it a DB or DC pension?
    Originally posted by GunJack
    It's a DB pension, yes there is an excess of about 40,000 over the 1,250,000. And this is the bit that wil lbe taxed at 55% if taken as a lump sum or as income. (the income being hit by an initial 25% then a 40% marginal rate = 55%)
    • kidmugsy
    • By kidmugsy 15th Feb 18, 2:23 PM
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    kidmugsy
    • #7
    • 15th Feb 18, 2:23 PM
    • #7
    • 15th Feb 18, 2:23 PM
    Does your scheme allow you to do an "Allocation" whereby you give up a bit of pension so that your widow will eventually get a bigger one than she would otherwise receive? Worth checking: a good solution if available.
    Free the dunston one next time too.
    • Silvertabby
    • By Silvertabby 15th Feb 18, 2:23 PM
    • 2,722 Posts
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    Silvertabby
    • #8
    • 15th Feb 18, 2:23 PM
    • #8
    • 15th Feb 18, 2:23 PM
    62,500 pa with excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)
    62,500 (pension only) x 20 = 1,250,00 plus the excess (40K ?) being taxed as.....

    46,875 pa + 312,500 lump sum and excess LTA taxed at 55% if taken as lump sum and 25% if taken as income (then HMRC's 40%)
    Ditto as my above - pension and lump sum has been limited to LTA, with other options for excess. Depending on the calculation factors for 1:19, the residual will be less than 40K due to the element of pension being given up.

    ADD

    Just goes to prove my point re how generous 1:19 is. 1.25m in the LGPS (1:12) would result in 25% tax free cash of 267,857.16 and a reduced pension of 40,178.57.

    So, 20 x pension plus 1 x lump sum =

    803,571.40 + 267,857.16 = 1,071,428.50 = 178,571.50 pension benefits given up.
    Last edited by Silvertabby; 15-02-2018 at 2:34 PM.
    • GunJack
    • By GunJack 15th Feb 18, 2:35 PM
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    GunJack
    • #9
    • 15th Feb 18, 2:35 PM
    • #9
    • 15th Feb 18, 2:35 PM
    Think if it was me I'd just take the excess as a lump sum, pay the tax and be done with it....with 320-ish k and almost 49k p.a. don't think I'd be worried about a one-off 20-oddk tax bill
    ......Gettin' There, Wherever There is......
    • The_Doc
    • By The_Doc 15th Feb 18, 3:19 PM
    • 80 Posts
    • 58 Thanks
    The_Doc
    My understanding is as follows:

    Your deferred pension is 64500. This gives you a value of 1,290,000 to be compared to the LTA (20*64500=1290000). That leaves an excess of 40 over the LTA. If you take it all as income, then the LTA charge would be 25%*40K = 10K.

    To pay this, it is possible to get the DB scheme to pay it via commutation. So a charge of 10K gives a pension reduction of 10K/19 = 526.32

    So your annual pension would then be 64500-526.32 = 63,973.68 with the scheme paying the charge.
    • Happier Me
    • By Happier Me 15th Feb 18, 5:32 PM
    • 425 Posts
    • 923 Thanks
    Happier Me
    Don't you need to consider your income needs in retirement in all this too? What is your number - the amount you need to live on each year? Converting some of your pension will give you a 25% tax free lump sum whereas taking it all as an annual pension means paying tax on the extra pension effectively at 40%?

    Apologies if I'm missing the obvious!
    • The_Doc
    • By The_Doc 15th Feb 18, 5:37 PM
    • 80 Posts
    • 58 Thanks
    The_Doc
    One reason people may not want to take the PCLS is that they don't need the cash at that point in time. Taking the PCLS and not spending it leaves it in your estate and you end up paying IHT at 40% instead. I reckon wealth taxes are more likely to increase in the future than income taxes.
    • dannynolan
    • By dannynolan 15th Feb 18, 6:39 PM
    • 983 Posts
    • 429 Thanks
    dannynolan
    My understanding is as follows:

    Your deferred pension is 64500. This gives you a value of 1,290,000 to be compared to the LTA (20*64500=1290000). That leaves an excess of 40 over the LTA. If you take it all as income, then the LTA charge would be 25%*40K = 10K.

    To pay this, it is possible to get the DB scheme to pay it via commutation. So a charge of 10K gives a pension reduction of 10K/19 = 526.32

    So your annual pension would then be 64500-526.32 = 63,973.68 with the scheme paying the charge.
    Originally posted by The_Doc
    I'm still a bit confused. The excess LTA whether I take it as income or lump sum comes to me NET of 55% (lump sum) or NET of 25% if I take it as taxable income. It is not the physical paying of the tax I'm trying to avoid but the tax liability itself. I can't see that taking a lump sum/ commuting means I avoid the liability.

    Or am I missing something.
    • The_Doc
    • By The_Doc 15th Feb 18, 8:27 PM
    • 80 Posts
    • 58 Thanks
    The_Doc
    55% lump sum is effectively the same as 25% + 75%*40%. So if you are a high rate tax payer, then its the same. If you are are basic rate tax payer, its cheaper to take it is income 25%+75%*20%=40%.

    As you will be HRT, there will be no difference.

    Taking a PCLS has a minor impact but I don't think you can avoid it entirely.

    No PCLS, Pension LTA value = 64500*20=1290000, so 40000 liable to charge
    With max PCLS, Pension LTA value = 48052.6*20+312500=1273553, so 23533 liable to charge

    The above numbers are based on pension of 64500 with commutation rate of exactly 19 using the formulae below.

    PCLS = min (0.25*64500*20, 64500/(3/20+1/comm rate).
    Residual pension = 64500 - PCLS/comm rate

    I don't see a way to avoid the liability completely. Have you included any actual reduction as you mention in post #4 that this is an early retirement?
    • dannynolan
    • By dannynolan 6th Mar 18, 12:12 PM
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    • 429 Thanks
    dannynolan
    Doc, thanks for your reply - apologies for not replying sooner but I was flat on my back with a chest infection.

    Yes I have included a reduction for early retirement. I am pulling figures off the Pension adminstrator's quote for me.
    • kidmugsy
    • By kidmugsy 6th Mar 18, 2:47 PM
    • 10,513 Posts
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    kidmugsy
    46,875 pa + 312,500 lump sum.
    Originally posted by dannynolan
    What a neat way to avoid a large annual 40% income tax hit - until your State Retirement Pension begins, anyway.

    What would you do with the lump sum? Buy an island? I suppose you could gift it into a Discretionary Trust with a list of beneficiaries to include widow, children, grandchildren, ... Then be careful to survive seven years and, bingo!, no inheritance tax to pay on it.
    Free the dunston one next time too.
    • kidmugsy
    • By kidmugsy 6th Mar 18, 2:49 PM
    • 10,513 Posts
    • 7,209 Thanks
    kidmugsy
    To pay this, it is possible to get the DB scheme to pay it via commutation. So a charge of 10K gives a pension reduction of 10K/19 = 526.32
    Originally posted by The_Doc
    Is that what is known as "scheme pays"? What is the advantage of dealing with it in that way?
    Free the dunston one next time too.
    • The_Doc
    • By The_Doc 7th Mar 18, 10:09 PM
    • 80 Posts
    • 58 Thanks
    The_Doc
    Getting the scheme to pay allows the commutation rate to be used to convert some of the pension into a lump sum to pay the tax. If you have a good commutation rate, then this can work in your favour.

    Also, if you do not have any DC funds, then getting the scheme to pay (out of pre-tax income) is much superior than paying it of out existing savings.

    Or you may simply not want to crystallise your DC funds, so scheme pays is again a good option.
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