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  • FIRST POST
    • BobUpandown
    • By BobUpandown 12th Apr 18, 11:31 PM
    • 4Posts
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    BobUpandown
    Income tax on DB pension
    • #1
    • 12th Apr 18, 11:31 PM
    Income tax on DB pension 12th Apr 18 at 11:31 PM
    I have a deferred DB pension and a DC pension fund to which I'm still contributing. I'm currently still working. Both pensions will allow me to take a 25% tax free lump sum. In the case of the DB pension this will reduce the amount of annual pension I receive to 75% of the amount I'd otherwise receive.

    If I take the 25% lump sum from my DC pension then everything else I take as pension will be taxed at my nominal tax rate. However, if I don't take any lump sum then 25% of each payment I receive will be tax free. For example, if my DC fund was 100k and want to take 10k out each year I could take 25k lump sum and then each 10k I withdraw will be taxed at 20% - so I'll receive 8k. Whereas if I don't take any lump sum and took out 10k I would be taxed only on 7.5k and hence would receive a total of 8.5k.

    For simplicity, I've ignored personal tax allowance.

    Now, here's the thing I'm unclear on. Am I taxed any differently on the DB pension, depending on whether or not I take a lump sum? Using the same figures as above, and assume my DB will pay me 10k per year if I don't take a lump sum from it. Will I be taxed on the whole 10k (i.e I'd receive 8k after tax) or would my pension provider (and HMRC) recognise that I've not taken any lump sum and hence tax me only on 75% of my DB pension (i.e. I'd receive 8.5k after tax)? If I'm taxed on the whole amount of DB pension, regardless, then there seems to be little point in me NOT taking a lump sum from my DB pension (if the reduced pension is assumed to be 75% of what I would otherwise receive) as it would mean I'm paying more tax. This ignores the potential long-term benefit of receiving a higher index-linked DB pension for life.

    Thanks
Page 1
    • Dox
    • By Dox 12th Apr 18, 11:33 PM
    • 547 Posts
    • 331 Thanks
    Dox
    • #2
    • 12th Apr 18, 11:33 PM
    • #2
    • 12th Apr 18, 11:33 PM
    If you don't take a tax free lump sum at the time you first draw your DB benefits, you are taxed on the whole DB pension at your marginal rate.
    • kidmugsy
    • By kidmugsy 13th Apr 18, 12:51 AM
    • 10,580 Posts
    • 7,242 Thanks
    kidmugsy
    • #3
    • 13th Apr 18, 12:51 AM
    • #3
    • 13th Apr 18, 12:51 AM
    ... a 25% tax free lump sum. In the case of the DB pension this will reduce the amount of annual pension I receive to 75% of the amount I'd otherwise receive.
    Originally posted by BobUpandown
    Are you quite sure? That would be rather unusual.
    Free the dunston one next time too.
    • Dazed and confused
    • By Dazed and confused 13th Apr 18, 9:03 AM
    • 2,572 Posts
    • 1,237 Thanks
    Dazed and confused
    • #4
    • 13th Apr 18, 9:03 AM
    • #4
    • 13th Apr 18, 9:03 AM
    kidmugsy

    I agree 25% TFLS is unusual for a DB scheme, the whole point is that there isn't a "pot" to take 25% from, normally it might 3 times the annual pension like the Teachers pension scheme does.

    you are taxed on the whole DB pension at your marginal rate.

    This isn't true. Extra income could easily take you from rate to another, particularly in Scotland, so you might pay some at say 20% and some at 21% or in rest of UK it might be some at 20% and some at 40%
    • Silvertabby
    • By Silvertabby 13th Apr 18, 9:45 AM
    • 2,752 Posts
    • 3,940 Thanks
    Silvertabby
    • #5
    • 13th Apr 18, 9:45 AM
    • #5
    • 13th Apr 18, 9:45 AM
    It's usually possible to take 25% of the 'notional' value of DB benefits by commutation. However, it's highly unlikely that 75% would be left as a pension - that would be one very generous commutation rate!

    Example using commutation rate of 1:12 (which is the not-particularly-generous rate used throughout the public sector pension schemes):

    Annual pension = 10K

    Notional value for LTA and commutation purposes - 20 x 10K = 200K.

    25% of 200K = 50K - but this before factoring in the 1:12 commutation rate.

    That calculation gives us a lump sum of 42857.14 plus a pension of 6,428.57.

    20 x 6,428.57 plus 1 x 42,857.17 = 171,428.57 = new notional value.

    200K - 171,428.57 = 28,571.43 = cost of commutation.
    Last edited by Silvertabby; 13-04-2018 at 9:58 AM.
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