My Pension Confusion- Part 1 of a series

[AleisterCrowley]

I have an admission to make. Although I'm financially (semi)literate, I've got a bit of a blind spot when it comes to pensions.
I'm trying to get mine sorted and I'm finding it somewhat confusing

Basic background -
I've been in the same job for nearly 28 years - the name above the door/ownership has changed a few times (as happens) but I've got a service record with 27.8 years on it (or close enough)
I'm 55 and three quarters.... Possibly retiring at 57, or next year if I win the Lottery
I was in the Final Salary (DB) pension scheme for a while until it was closed
I then moved into the DC scheme , which I've been paying into ever since
The DC scheme was with a company I'll call 'Skittish Windows' and the fund performance was appalling: it grossly under-performed the index. This year it's moved to L&G so hopefully a bit better, but it means I don't have a huge amount in there.

The DB scheme is worth £10.2k pa at 60
The DC scheme has about £200k in it

So first question -
I understand that I can take out 25% tax free at 55
How is this calculated across the DB/DC schemes?

[mc2fool]

The DB scheme is worth £10.2k pa at 60
The DC scheme has about £200k in it

So first question -
I understand that I can take out 25% tax free at 55
How is this calculated across the DB/DC schemes?

Well, firstly, 55 is the legal minimum that any scheme can let you access it at but your schemes may have higher minimums, so do ask to check.

The answer to your question is, it isn't, the two are treated separately and drawing the 25% tax free cash from one has no effect on the other.

25% of the DC scheme is simple of course. For the DB scheme you need to contact them and ask how much you'd get and the effect on your pension if you took the 25% on dd-mmm-yyyy. Be aware that most schemes will do the calculation for you once a year for free and will charge you for any further ones in the next 12 months, so ask about that first!

[AleisterCrowley]

Ah so if 25% of the DB one worked out at £87k (random guess) and the 25% of the DC is £50k I couldn't take £137k out of the DC pension ?
The DB one is with LCP and they have a good website with lots of sliders to do 'scenario planning'

[mark88man]

Not a pensions professional but an amateur with a gift for the big picture but inadequate attention to detail.

I think technically the DB scheme doesn't give you a 25% lump sum, the scheme lets you commute a certain amount of income into cash typically about 25%, or the scheme comes with a lump sum which tends to be about 25%, but doesn't have to be.

Taking the DB or the lump sum is completely independent from anything you do with the DC excepting the acronyms LTA and MPAA.

* LTA this is Life time allowance currently just over £1m calculated by the amount in your DC + the amount in your lump sum + 20 x your DB income at the point you take it. So your figures suggest your pension in well within this so NOTHING to worry about and no link
* MPAA is the Money purchase annual allowance. Your annual allowance (AA) is the amount of taxable income in this year you can get relief on - currently £40K, with the ability to carry forward from 3 years - but the taxable income has to be in this year. if you only take tax free lump sum (also called PCLS Pension commencement lump sum) you do not trigger MPAA. If you do trigger MPAA then you allowance is £4K per year taken from the point you trigger it. Doing anything with your DB will not trigger MPAA. Taking all your DC and buying an annuity will not trigger it - taking even 01p of taxable income will trigger it

what happens when you crystallise (technically Benefits Crystallisation Event) some or all money from your fund )at which point any LTA checks are done) varies slightly in implementation across providers, but broadly 25% tax free is paid to you and 75% is put in drawdown for your later withdrawal at your marginal rate. Some people do it monthly others do a single annual lump sum to avoid costs. You can't transfer money from crystallised to uncrystallised - effectively they are 2 separate schemes

If you have no plans of building your pension by more than £4000 a year (remember you are allowed £3600 gross per year even with no taxable income) then you might not care about triggering it. Then UFPLS (uncrystallised funds pension lump sum) - if your DC scheme provides it, allows you to take a the 25% and 75% in a single lump allowing for the tax free element to grow (presumably) but triggering MPAA

I hope an expert comes along and corrects any errors, but the high level picture is straight - there are reams and reams of material from HMRC and on this site and others if you search for the terms. Be prepared for some long phone calls as reputable providers have to take a lot of care - and will suggest you seek pensionwise or IFA

[baldchap]

Have you not asked how much they would give you to opt out and move the funds to a SIPP?
Or is that not something you would be interested in?

[AleisterCrowley]

Thanks mark88man
@baldchap - is the transfer value below what you mean ? (£427k)

Logged in to Lane Clarke Peacock DB site and current status is;

Standard retirement
A pension of £10,716 per year
Retiring xx xxx 2025 at age 60
A lump sum of £53,910 at retirement
Or take a transfer value of £427,240

If I retire as planned (worst case)
A pension of £9,951 per year
Retiring xx xx 2023 at age 58
A lump sum of £53,910 at retirement
Or take a transfer value of £427,240

The lower pension rate I get - as they are paying for longer (probably)

I've no idea where the lump sum comes from
I was paying AVCs but they ended up in a separate pot in the DC pension (confusingly about £50k) - so how would LCP even know about these, as they are sat with Scottish Widows/L&G ??
They say
" You have an estimated fund value of £53,910 resulting from Additional Voluntary Contributions (AVCs) that you have paid to the Plan during your membership.

For the purpose of this illustration we have assumed that you would like to take at least this AVC fund as a lump sum. This AVC fund represents 85% of the maximum lump sum you could opt for under HM Revenue and Customs’ rules.

If I move the slider to 100% from 85% the lump sum goes up of course - to £63,314 but (in the retire at 58 case) the pension drops to £9,534
Why is the lump sum affecting the pension if it's a separate AVC pot? [edit- I assume I am effectively eating into the DB pot if I go above £53,910?]

[mark88man]

It's wrong to think of the DB as a pot. The DB is an obligation on the scheme to pay you your income + whatever increases the scheme allows (typically CPI, sometimes a minimum eg 3%, often uncapped). This has a value, the CETV to be precise. Your valuation seems reasonable, even a touch on the high side. However, transferring it requires about £5K of advice and some effort, and many people prefer the guaranteed income that a DB gives you as you might be drawing for 30+ years

The Pensions board on this site (or MSE, or ...) will have numerous threads going through the logic. In your case assuming full or nearly state pension (9K pa + 11K DB + a pot of £200K from which you could expect safely to withdraw 3.5% or another £7K - you should expect a steady state income of £27K. Your variables though are how much extra you will need to draw up the DC/AVC to last from now until when you take your DB pension and hen, later, when you take your state pension. Another variable is whether you want to leave anything by the way of legacy, if not then your equation that gets you to SPA or beyond with a safety margin, but not too much left over

Some AVCs are separate pots. Some AVC can be used to fund the tax free kumos sum allowing you more income. I don't know about them so hope someone else can answer that

[ursaminortaur]

It's wrong to think of the DB as a pot. The DB is an obligation on the scheme to pay you your income + whatever increases the scheme allows (typically CPI, sometimes a minimum eg 3%, often uncapped). This has a value, the CETV to be precise. Your valuation seems reasonable, even a touch on the high side. However, transferring it requires about £5K of advice and some effort, and many people prefer the guaranteed income that a DB gives you as you might be drawing for 30+ years

The Pensions board on this site (or MSE, or ...) will have numerous threads going through the logic. In your case assuming full or nearly state pension (9K pa + 11K DB + a pot of £200K from which you could expect safely to withdraw 3.5% or another £7K - you should expect a steady state income of £27K. Your variables though are how much extra you will need to draw up the DC/AVC to last from now until when you take your DB pension and hen, later, when you take your state pension. Another variable is whether you want to leave anything by the way of legacy, if not then your equation that gets you to SPA or beyond with a safety margin, but not too much left over

Some AVCs are separate pots. Some AVC can be used to fund the tax free kumos sum allowing you more income. I don't know about them so hope someone else can answer that

It depends upon the scheme rules with some allowing you to treat the DB + AVC as one large "virtual pension pot" whereas in other schemes they are linked but separate. If they are treated as linked but separate then you could only take 25% of the AVC as a tax free PCLS and separately take 25% of (20 x DB annual pension)*. However if the scheme treats them as one large virtual scheme you would be able to take 25% of (20 x DB annual pension + the AVC)* and could preferentially take as much as possible from the AVC.

The reason why you would want to do that is that to take a lump sum from the DB pension you have to convert some of your annual pension to cash in a process known as commutation. The commutation rate (amount of tax free lump sum you get for each £1 of annual pension given up) for DB schemes is unfortunately usually pretty awful (for public sector schemes it is set at 12 whereas a fair value would be at least twice that - most private sector DB schemes have commutation rates slightly better than the public sector but still not good). Hence it is better if possible to take the tax free PCLS from the AVC rather than using commutation. Indeed commutation is often so bad that you would be better off not taking any PCLS from the DB (or just taking the amount contained in the AVC if the scheme rules allow you to take the whole AVC as the PCLS) - this of course depends upon your individual circumstances eg if you suffer from a life limiting disease then it would be better to take the PCLS even if the commutation rate is pretty rubbish.

* Just to complicate things older DB schemes often came with a guaranteed tax free lump sum in addition to the annual pension - this was often covered by a formula such as the lump sum being 3 x the annual pension. So the calculations should actually be
25% of (20 x DB annual pension + guaranteed lump sum) and 25% of (20 x DB annual pension + guaranteed lump sum + the AVC) respectively. This generally makes little difference to the arguments above - just reducing the amount that you would need to commute to take the full 25% PCLS. Although in a few extremely rare cases the formula used could result in a guaranteed PCLS of more than the 25% which is normally allowed - the A-day legislation in 2006 allowed anyone in those fortunate circumstances to still take that full guaranteed PCLS tax free.

[AleisterCrowley]

My head is spinning already
I thought the DB one would be simple - I get to 60 and get c£10k a year (index linked, 5% cap pa)
This reference to the AVCs is confusing me. I'm going to have a word with LCP when I get my strength back...

[baldchap]

Thanks mark88man
@baldchap - is the transfer value below what you mean ? (£427k)

Yes, Transfer value was the term I was looking for, but it was eluding me

Some points to consider;
-Do you think you could do better then 11k a year managing a 427k pot?
-What happens to the pension if you pass? In a SIPP it would all pass to your NoK (tax free if under 74), not what the pension company decides.
-Your SIPP is accessible from 55

[swill453]

Do you know how much you'll need to live on after you retire? It helps massively in the planning process.

You should at least be able to tell how much your annual spend is now, then subtract unneeded stuff like work clothes, entertaining, commuting etc., and add in estimates depending on how you're planning to spend your time in retirement.

If you don't have expensive plans (as a single bloke I believe) then if, for example, you think you could get by on about £20K a year, you could work the numbers so you could probably retire right now, or quite soon.

(This assumes full state pension, it's vital you make sure of that.)

Scott.

[AleisterCrowley]

Full state pension at 67
No dependants/partner
No desire to leave a legacy (current death in service payments would go to mother and sister)
But... I'm a renter, so when I retire back home I want to buy a house with cash (unlikely I'd get a mortgage)
I've got non-pension savings for this but over 60% in equities which provides a dividend income (currently >£6k pa). Getting some of the money out of the DC pot would be preferable
Back home is cheaper housing compared with West Berkshire.
I reckon with no housing costs I could live on £15k pa easily

[scrumpyjack]

Have you not asked how much they would give you to opt out and move the funds to a SIPP?
Or is that not something you would be interested in?

AFAIAA, though I am not an expert in the subject, it is becoming virtually impossible to move a DB scheme out to a SIPP because you have to get it reviewed and IFAs are either unwilling to do the reviews because their insurers forbid it, or the result of the review is almost always that you should remain in the DB scheme. Among the exceptions may be if your life expectancy is impaired or if you can prove you have no need financially for the DB pension and want to pass it on untouched to your heirs. Nanny basically won't let you do it!

[swill453]

Full state pension at 67
No dependants/partner
No desire to leave a legacy (current death in service payments would go to mother and sister)
But... I'm a renter, so when I retire back home I want to buy a house with cash (unlikely I'd get a mortgage)
I've got non-pension savings for this but over 60% in equities which provides a dividend income (currently >£6k pa). Getting some of the money out of the DC pot would be preferable
Back home is cheaper housing compared with West Berkshire.
I reckon with no housing costs I could live on £15k pa easily

If I understand you right that you've got enough in cash and equities right now to buy your forever retirement home, and with that budget - I'd be running out the door tomorrow morning and off into the sunset...

But that's just me.

Scott.

[mc2fool]

Logged in to Lane Clarke Peacock DB site and current status is;

Standard retirement
A pension of £10,716 per year
Retiring xx xxx 2025 at age 60
A lump sum of £53,910 at retirement
Or take a transfer value of £427,240

If I retire as planned (worst case)
A pension of £9,951 per year
Retiring xx xx 2023 at age 58
A lump sum of £53,910 at retirement
Or take a transfer value of £427,240

Doesn't it also tell you how much of a pension you'd get if you didn't take the lump sum?

BTW, ask if the transfer value figure is guaranteed or just an estimate. My ex-DB scheme had a similar sort of online system where you could stick in retirement dates and it'd give you similar to the above, but when I went to actually transfer out the transfer value was some 19% higher than had been shown on their website just before. (Yippee! )

When I queried how come the website showed a lower number I was told that the website figure was "provisional" and when the transfer request went in the actuaries "worked it out properly" (!). The transfer out figure was also guaranteed for 3 months.

[AleisterCrowley]

Full state pension at 67
No dependants/partner
No desire to leave a legacy (current death in service payments would go to mother and sister)
But... I'm a renter, so when I retire back home I want to buy a house with cash (unlikely I'd get a mortgage)
I've got non-pension savings for this but over 60% in equities which provides a dividend income (currently >£6k pa). Getting some of the money out of the DC pot would be preferable
Back home is cheaper housing compared with West Berkshire.
I reckon with no housing costs I could live on £15k pa easily

If I understand you right that you've got enough in cash and equities right now to buy your forever retirement home, and with that budget - I'd be running out the door tomorrow morning and off into the sunset...

But that's just me.

Scott.

yeh but, yeh but - once I've bought the mansion I've got to have enough cash left over to bridge the gap(s) between 'retirement' and DB pension at 60, state pittance at 67. I have a horrible feeling state pension age is on wheels, and they'll tug the rope and move it out a year for every year I get older.

I have a spreadsheet...of course. But so many variables/decision points- It seems safer to carry on for now. I'm overpaying my pension to avoid higher rate tax so it's going up by c £1,700 per month (including employer contribution)

[baldchap]

Have you not asked how much they would give you to opt out and move the funds to a SIPP?
Or is that not something you would be interested in?

AFAIAA, though I am not an expert in the subject, it is becoming virtually impossible to move a DB scheme out to a SIPP because you have to get it reviewed and IFAs are either unwilling to do the reviews because their insurers forbid it, or the result of the review is almost always that you should remain in the DB scheme. Among the exceptions may be if your life expectancy is impaired or if you can prove you have no need financially for the DB pension and want to pass it on untouched to your heirs. Nanny basically won't let you do it!

You are correct , and I have seen people struggle.
I think it is a case of employing the correct IFA. Accept their advice, say that you are a big boy/girl, and disregard it.
Nanny State indeed, and it stinks.

[swill453]

yeh but, yeh but - once I've bought the mansion I've got to have enough cash left over to bridge the gap(s) between 'retirement' and DB pension at 60, state pittance at 67. I have a horrible feeling state pension age is on wheels, and they'll tug the rope and move it out a year for every year I get older.)

It's not a pittance, it pays only a little less than your DB pension, which you've told us has an equivalent value of over £400,000.

And the worst proposal on the books is that the state pension age might increase to 68 around 2037, rather than 2044 as baked into law just now, so no need to be paranoid.

Scott.

[mark88man]

There are two types of people - those who think making 400K return £12K a doddle, and those who think if you have what you need why take the risk. do you really want to be managing a substantial element of your income when you can get nearly as much for no effort. especially if you are not planning a significant legacy. These are as divided as any two groups of people, and no convincing of the merits of others arguments is possible

There is a school of thought that says use the DC (in a very cautious, low equity / high cash/cash-like approach) to make sure you can get through from retirement to DB to SPA and then when you get there put the rest into an annuity (better rates at 68 than at 58), and then never worry about it again.

[ursaminortaur]

Have you not asked how much they would give you to opt out and move the funds to a SIPP?
Or is that not something you would be interested in?

AFAIAA, though I am not an expert in the subject, it is becoming virtually impossible to move a DB scheme out to a SIPP because you have to get it reviewed and IFAs are either unwilling to do the reviews because their insurers forbid it, or the result of the review is almost always that you should remain in the DB scheme. Among the exceptions may be if your life expectancy is impaired or if you can prove you have no need financially for the DB pension and want to pass it on untouched to your heirs. Nanny basically won't let you do it!

You are correct , and I have seen people struggle.
I think it is a case of employing the correct IFA. Accept their advice, say that you are a big boy/girl, and disregard it.
Nanny State indeed, and it stinks.

Yes, you have to get the advice but are perfectly entitled to ignore it - at which point you become what is known as an insistent client.
However you then hit another problem. In recent years fewer and fewer SIPP providers (or other DC pension providers for that matter) are prepared to accept transfers from insistent clients. Hence your choice of who to transfer to maybe very limited - though of course after the transfer has completed you could then transfer again to another provider. I believe A J Bell still accept such transfers from insistent clients.