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Maximum Pension vs Maximum Lump Sum

Ldak
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Maximum Pension vs Maximum Lump Sum

#405867

Postby Ldak » April 21st, 2021, 3:56 pm

Hello All

Been a lurker for some time and getting quite confused seeing the wood for the trees.

Would be glad of some pointers as to how I might decide on the courses available in respect of the below.

SitRep:
Homeowner with no mortgage or debt.
Independent kids.
In receipt of 2 small DB pensions as only income, both taken with obligatory lump sums and both provide less annually than my Personal Tax Allowance.
Have about £30k in a SIPP, not yet taken, invested in trackers with Vanguard.
Have about £60k in a shares ISA, Trading212.
Have a final DB pension to take with a choice of £10k annually with no lump sum (LS) or £7658 annually with £51k LS.The GMP element of which , ca.50%) of which is currently accruing at 6.25% whilst not in payment.
WIfey has about £280k workplace DC pension, £80k SIPP, £60k shares ISA and 1 to 2 years desire to continue working. 8-(

I don't have a need for £50k+ but some might be useful, maybe £10k-£20k for a motor home build.

My confusion is whether to 1) take the DB or SIPP pension first or simultaneously and 2) what the different lines of thought are re maximising the DB LS versus maximising annual pension payments in respect of tax efficiency.

Most grateful for any and all of your help.

GrahamPlatt
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Re: Maximum Pension vs Maximum Lump Sum

#405877

Postby GrahamPlatt » April 21st, 2021, 4:27 pm

I would not take the LS. At £10k-£7658 = £2342, that £51k is yielding 4.6%. And since you say you’re currently under the tax threshold, it seems best to have the annual income to me.

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#405938

Postby Ldak » April 21st, 2021, 8:23 pm

Thanks Graham, sounds ok.

However, the third and final DB pension will mean about £7.5k will then be liable for 20% tax. Does that change the thinking any?

I know I could do the £2880 penssion contib thing.

Any thoughts on taking income from the SIPP to maximise the personal allowance (another £2.5k available) before taking the DB pension as I could reduce the SIPP before being hit with the DB reduction due to taking it before age 65?

Thanks....

GrahamPlatt
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Re: Maximum Pension vs Maximum Lump Sum

#405951

Postby GrahamPlatt » April 21st, 2021, 8:47 pm

It is difficult to say what would be “best”. There’ll always be/have been a better move. e.g. if you had posed this question a year ago, the best advice (unknown at the time) would have been to cash up and go into bitcoin. Extreme example, but you see what I mean.

If 50% of your DB is gaining 6.25% while not in payment, I imagine that means the whole is gaining 3.125%. What’s it paying once you take it? Not much less perhaps. And then, what is your SIPP doing (accepting that last year’s figures may not be representative)? The way I’d (probably) play it is to “crystallise” the worst performer, letting the better one run. And I would not let tax considerations wag the investment’s tail - always better to have to pay a bit more tax because you have more income!

So, this is not advice, just my thinking. Better ideas from more perceptive minds may be along shortly.

AJC5001
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Re: Maximum Pension vs Maximum Lump Sum

#405974

Postby AJC5001 » April 21st, 2021, 9:37 pm

You make no mention of State Pension, for either of you . If you have used up the personal allowance, the State Pension will all be taxable at the Basic rate when you start taking it.


Adrian

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#405976

Postby Ldak » April 21st, 2021, 9:46 pm

Hello Adrian

Thanks for wading in.

Appreciate SP comments but what can you do if the DB pensions conbined overflow the personal allowance? Wife has full SP due, I have 4 years to top up to get full SP.

AJC5001
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Re: Maximum Pension vs Maximum Lump Sum

#405985

Postby AJC5001 » April 21st, 2021, 10:36 pm

Ldak wrote:Hello Adrian

Thanks for wading in.

Appreciate SP comments but what can you do if the DB pensions conbined overflow the personal allowance? Wife has full SP due, I have 4 years to top up to get full SP.


You can't do anything except pay the tax due. Some people are not aware that the State Pension is taxable and get a shock when 20% of it disappears.
Before April 2016 it used to be worthwhile for some to defer the State Pension as it gave a useful increase, but deferring the new State Pension is not so good. https://www.gov.uk/deferring-state-pension

If you have £2500 (ish) personal allowance left, you'll have to decide for yourself which of the DB pension, the SIPP or the State Pension uses up that amount.

Adrian

Kantwebefriends
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Re: Maximum Pension vs Maximum Lump Sum

#405999

Postby Kantwebefriends » April 22nd, 2021, 12:27 am

GrahamPlatt wrote:I would not take the LS. At £10k-£7658 = £2342, that £51k is yielding 4.6%. And since you say you’re currently under the tax threshold, it seems best to have the annual income to me.


Isn't that the wrong way round? 4.6% p.a. is a high price for the poster to pay his pension fund in return for £51k capital.

In your (the poster's) shoes I suspect I'd take enough from the SIPP each year to use the full Personal Allowance: if along with the associated tax-free lump sum that meant I had too much income I'd pop the surplus into an ISA.

Or instead I'd draw £2880 from my ISA and contribute it to the SIPP. Then I'd drawdown about £3600, with £900 being tax free and the other £2700 nicely filling the Personal Allowance. This way the SIPP is not depleted: does that matter to you?

If you know (rather than guess) you are four years shy of a full State Pension do a little part time work and pay the self-employed National Insurance contribution. It's a bargain.

This way the biggest DB pension can be drawn from age 65 and the lump sum decision can be made then.

Kantwebefriends
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Re: Maximum Pension vs Maximum Lump Sum

#406000

Postby Kantwebefriends » April 22nd, 2021, 12:34 am

Ha! On the subject of self-employed NICs:

viewtopic.php?f=17&t=28843

mc2fool
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Re: Maximum Pension vs Maximum Lump Sum

#406004

Postby mc2fool » April 22nd, 2021, 1:22 am

Ldak wrote:Have a final DB pension to take with a choice of £10k annually with no lump sum (LS) or £7658 annually with £51k LS.The GMP element of which , ca.50%) of which is currently accruing at 6.25% whilst not in payment.

Ok, so you left that job some time between 6 April 1997 and 5 April 2002. What would be good to do is to find out how the non-GMP half is being revalued in deferment. Good chance it'll be by national earnings (The Occupational Pensions (Revaluation) Orders) but there's a number of variables and it could be complex.

And then of course to find out how it'll increase once in payment. The best thing is just to ask the scheme administrator. :D

TUK020
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Re: Maximum Pension vs Maximum Lump Sum

#406017

Postby TUK020 » April 22nd, 2021, 8:00 am

Couple of other questions to ask about the DB pension
- inflation protected?
- spouse benefit on death?
Either of these would have significant bearing on decision

GrahamPlatt
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Re: Maximum Pension vs Maximum Lump Sum

#406060

Postby GrahamPlatt » April 22nd, 2021, 10:07 am

Kantwebefriends wrote:
GrahamPlatt wrote:I would not take the LS. At £10k-£7658 = £2342, that £51k is yielding 4.6%. And since you say you’re currently under the tax threshold, it seems best to have the annual income to me.


Isn't that the wrong way round? 4.6% p.a. is a high price for the poster to pay his pension fund in return for £51k capital.


isn’t that what I said?

xxd09
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Re: Maximum Pension vs Maximum Lump Sum

#406092

Postby xxd09 » April 22nd, 2021, 11:14 am

How much do you need to live on in retirement?
That is your key figure and decides all your financial decisions
Your pensions give you a set income-(tax free lump sums if used allow you to delay taking/spending your pension monies)
Savings give you another source of income
£100000 of a 60/40 equities/bond portfolio should give you £3000 pa of income before tax
Is all that enough for you to retire on?
xxd09

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Re: Maximum Pension vs Maximum Lump Sum

#406095

Postby BigB » April 22nd, 2021, 11:30 am

AJC5001 wrote:
Ldak wrote:Hello Adrian

Thanks for wading in.

Appreciate SP comments but what can you do if the DB pensions conbined overflow the personal allowance? Wife has full SP due, I have 4 years to top up to get full SP.


You can't do anything except pay the tax due. Some people are not aware that the State Pension is taxable and get a shock when 20% of it disappears.
Before April 2016 it used to be worthwhile for some to defer the State Pension as it gave a useful increase, but deferring the new State Pension is not so good. https://www.gov.uk/deferring-state-pension

If you have £2500 (ish) personal allowance left, you'll have to decide for yourself which of the DB pension, the SIPP or the State Pension uses up that amount.

Adrian


Is it an option to take the lump sums from pensions and reinvest them into ISAs across your and your wife's allowances. To then be used as an income source. You could transfer your 51k over 2 tax years. Your wife's SIPP lump sum will be 70k+ at some point - that could also be transferred in 2 later years with both your allowances. Increasing tax free ISA income and reducing pension/SIPP income, so maybe better use against your tax free allowances?

B

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#406275

Postby Ldak » April 22nd, 2021, 6:57 pm

AJC5001 wrote:
Ldak wrote:Hello Adrian

Thanks for wading in.

Appreciate SP comments but what can you do if the DB pensions conbined overflow the personal allowance? Wife has full SP due, I have 4 years to top up to get full SP.


You can't do anything except pay the tax due. Some people are not aware that the State Pension is taxable and get a shock when 20% of it disappears.
Before April 2016 it used to be worthwhile for some to defer the State Pension as it gave a useful increase, but deferring the new State Pension is not so good.

If you have £2500 (ish) personal allowance left, you'll have to decide for yourself which of the DB pension, the SIPP or the State Pension uses up that amount.

Adrian


Thanks Adrian. Of the three, the pension I guess, the other three have payments varying option.

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#406283

Postby Ldak » April 22nd, 2021, 7:20 pm

Kantwebefriends wrote:
GrahamPlatt wrote:I would not take the LS. At £10k-£7658 = £2342, that £51k is yielding 4.6%. And since you say you’re currently under the tax threshold, it seems best to have the annual income to me.


Isn't that the wrong way round? 4.6% p.a. is a high price for the poster to pay his pension fund in return for £51k capital.

In your (the poster's) shoes I suspect I'd take enough from the SIPP each year to use the full Personal Allowance: if along with the associated tax-free lump sum that meant I had too much income I'd pop the surplus into an ISA.

Or instead I'd draw £2880 from my ISA and contribute it to the SIPP. Then I'd drawdown about £3600, with £900 being tax free and the other £2700 nicely filling the Personal Allowance. This way the SIPP is not depleted: does that matter to you?

If you know (rather than guess) you are four years shy of a full State Pension do a little part time work and pay the self-employed National Insurance contribution. It's a bargain.

This way the biggest DB pension can be drawn from age 65 and the lump sum decision can be made then.


Thanks Kantwebefriends

The personal allowance balance from the SIPP sounds good, but I've filled this year's ISA allowance, almost, and would need to wait for next years allowance to roll round.

The ISA>2880>SIPP route sounds even better bearing in mind the £2398.56 personal allowance available to use up

Definitely know about the four years NI outstanding, looked it up online, should have mentioned that in the SitRep in the OP.

Definitely thinking I might seek a tiny part time job/trading number to save paying the £780 or so per year to make up.

Really appreciate the input.

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#406284

Postby Ldak » April 22nd, 2021, 7:21 pm

[quote="Kantwebefriends"]Ha! On the subject of self-employed NICs:

Seen the link and thanks...

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#406289

Postby Ldak » April 22nd, 2021, 7:38 pm

mc2fool wrote:
Ldak wrote:Have a final DB pension to take with a choice of £10k annually with no lump sum (LS) or £7658 annually with £51k LS.The GMP element of which , ca.50%) of which is currently accruing at 6.25% whilst not in payment.

Ok, so you left that job some time between 6 April 1997 and 5 April 2002. What would be good to do is to find out how the non-GMP half is being revalued in deferment. Good chance it'll be by national earnings (The Occupational Pensions (Revaluation) Orders) but there's a number of variables and it could be complex.

And then of course to find out how it'll increase once in payment. The best thing is just to ask the scheme administrator. :D


Thanks for the input mc2fool

Normal scheme retirement age is 65, I'm 62.

Before payment...

Your Guaranteed Minimum Pension (GMP)

If you built up pension between 6 April 1978 and 5 April 1997, your pension
includes a Guaranteed Minimum Pension (GMP) (see the panel to the
left for what this means) – unless you are a woman who chose to pay a
reduced rate of National Insurance contributions.

Your GMP will increase for each complete tax year between the date you
left the Scheme and GMP Age (currently 65 for men and 60 for women), in
line with legal requirements. The rate of increase depends on the date you
left the Scheme and the current rates are shown below. If you left:

• after 5 April 1997 but before 6 April 2002 6.25%

The rest of your pension above the GMP

l If you left the Scheme on or after 1 January 1991: your pension will
increase between the date you left the Scheme and your normal
pension age (or the date you start to receive your pension if earlier) in
line with the cost of living up to a maximum of 5% a year.

l If you left the Scheme between 1 January 1986 and 31 December 1990:
any pension you built up from 1 January 1985 will increase in line with
the cost of living up to a maximum of 5% a year.

l If you left before 1 January 1986: your pension will not be increased until
it comes into payment.

l Your pension may have increased by more than the method described
above, because this part of your pension must increase each year by at
least as much as if it was in payment.

These increases apply if you retire on or before your normal pension age. If
you retire late, different increases may apply

After payment...

Your Guaranteed Minimum Pension (GMP)

l Before you reach GMP Age, the whole of your pension will be increased
as described under ‘the rest of your pension above the GMP’ below.

l Once you reach GMP Age (currently 65 for men and 60 for women), any
GMP you are entitled to will come into payment, and then the GMP part
of your pension and the rest of your pension will increase at different
rates. Any GMP you built up from 6 April 1988 will be increased by the
Scheme in line with the cost of living up to a maximum of 3% a year.
The rest of your pension above the GMP

l Your pension will be increased in line with the cost of living up to a
maximum of 5% a year.

l Before your pension starts to be paid, you may be given the option to
exchange your pension increases on your pension that built up before
6 April 1997 in excess of the GMP for a once only uplift to your pension.

If you take this option, that part of your pension will not increase as
described above.

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#406292

Postby Ldak » April 22nd, 2021, 7:43 pm

TUK020 wrote:Couple of other questions to ask about the DB pension
- inflation protected?
- spouse benefit on death?
Either of these would have significant bearing on decision


Hello TUK020

Luckily yes to both questions.

I realise that though the 3 x DB pensions are pretty low by the standards of some peoples good fortune, it means the protections some might provide by buying bonds, the DB's make that provison for me. Pretty secure employers.

My SIPP is only a year old.

Thanks...

Ldak
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Re: Maximum Pension vs Maximum Lump Sum

#406297

Postby Ldak » April 22nd, 2021, 7:59 pm

xxd09 wrote:How much do you need to live on in retirement?
That is your key figure and decides all your financial decisions
Your pensions give you a set income-(tax free lump sums if used allow you to delay taking/spending your pension monies)
Savings give you another source of income
£100000 of a 60/40 equities/bond portfolio should give you £3000 pa of income before tax
Is all that enough for you to retire on?
xxd09


Hello xxd09

That's a very crucial question and, a difficult one. I realise that now.

I am beginning to actually try to put a number on it.

It's a little tricky as my wife wants to work another 2 years max.

I will have very modest needs, done buying 'stuff', want to downsize space to preclude having the same stuff we have now. Might rent out the house for two years and do some slow/cheapish travelling we've never done. Local prices seem to suggest it could provide a sizeable amount to boost the coffers. One car gone.....

My wife, bless, still thinking in terms of what we've spent on holidays etc up til now. Her hairdressing, gifts and holidays suggested budget amounts might need adjusting....

So, currently a moving target but being guesstimated...

Thanks.


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