Donate to Remove ads

Got a credit card? use our Credit Card & Finance Calculators

Thanks to johnstevens77,Bhoddhisatva,scotia,Anonymous,Cornytiv34, for Donating to support the site

25% tax free on DB pension

TUK020
Lemon Quarter
Posts: 2039
Joined: November 5th, 2016, 7:41 am
Has thanked: 762 times
Been thanked: 1175 times

25% tax free on DB pension

#220803

Postby TUK020 » May 11th, 2019, 8:49 am

Rather basic question:
If I don't wish to take a lump sum on my DB pension but want max income, how is the 25% tax free applied?

DB - 25% = 0.75 taxed as per normal income, then add back 0.25?

Chrysalis
Lemon Slice
Posts: 736
Joined: November 4th, 2016, 10:58 am
Has thanked: 247 times
Been thanked: 230 times

Re: 25% tax free on DB pension

#220805

Postby Chrysalis » May 11th, 2019, 9:00 am

It’s the ‘pension commencement lump sum’ which is tax free, and if you don’t take it, you don’t have any tax free element I’m afraid. All of the actual pension income is taxable.

richfool
Lemon Quarter
Posts: 3492
Joined: November 19th, 2016, 2:02 pm
Has thanked: 1194 times
Been thanked: 1280 times

Re: 25% tax free on DB pension

#220808

Postby richfool » May 11th, 2019, 9:05 am

TUK020 wrote:Rather basic question:
If I don't wish to take a lump sum on my DB pension but want max income, how is the 25% tax free applied?

DB - 25% = 0.75 taxed as per normal income, then add back 0.25?

My understanding is that it is just not taken out (of the pot) in the first place, and any pension is calculated on the full pot. That's how the options showed when I took my final salary pension.

johnhemming
Lemon Quarter
Posts: 3858
Joined: November 8th, 2016, 7:13 pm
Has thanked: 9 times
Been thanked: 609 times

Re: 25% tax free on DB pension

#220818

Postby johnhemming » May 11th, 2019, 9:29 am

Probably best to take it and put the maximum into things like ISAs over time.

TUK020
Lemon Quarter
Posts: 2039
Joined: November 5th, 2016, 7:41 am
Has thanked: 762 times
Been thanked: 1175 times

Re: 25% tax free on DB pension

#220868

Postby TUK020 » May 11th, 2019, 2:18 pm

Jabd2001 wrote:It’s the ‘pension commencement lump sum’ which is tax free, and if you don’t take it, you don’t have any tax free element I’m afraid. All of the actual pension income is taxable.

So if you take 25% TFLS, how is the DB pension assessed towards the Lifetime Allowance?

ursaminortaur
Lemon Half
Posts: 6942
Joined: November 4th, 2016, 3:26 pm
Has thanked: 447 times
Been thanked: 1717 times

Re: 25% tax free on DB pension

#220874

Postby ursaminortaur » May 11th, 2019, 2:46 pm

johnhemming wrote:Probably best to take it and put the maximum into things like ISAs over time.


It will depend on the DB pension and its rules. Many older DB pensions will come with a certain amount of tax free lump sum which may be less than 25% this is usually calculated by a formula such as being 3 times your pension.

https://www.lgpsmember.org/more/pre-2008.php

For membership built up to 31 March 2008 you receive a pension of 1/80th of your final pay plus an automatic lump sum of 3 times your pension.

If your scheme either doesn't provide for such an automatic lump sum or you want to take the full 25% tax free lump sum then you will have to convert some of your pension entitlement into the additional lump sum thereby reducing your pension. This process is known as commutation. You would exchange £1 pound of annual pension for £x pounds of lump sum. Unfortunately the commutation factor used is often very poor value - for schemes like the LGPS or NHS it is hardwired into the rules as £12 lump sum for each £1 annual pension given up. Hence taking the maximum lump sum from a DB scheme is often not a good idea unless you have a good reason such as needing to pay of debts or if you don't think you will live for very long because of poor health.

https://www.thisismoney.co.uk/money/pensions/article-2319419/Why-lump-sums-dont-add-final-salary-pensions.html

Laith Khalaf, pension investment manager with broker Hargreaves Lansdown, says that at today’s annuity rates it costs a man aged 60 about £41.60 to buy £1 a year of index-linked income with a 50 per cent spouse’s pension – broadly equivalent to the benefits of a good final salary pension.
By age 65, the cost of buying this income has fallen to £35 per £1. By contrast the trade-off from a final salary pension will typically be in the range of £14 to £18 of lump sum for every pound of pension income you sacrifice – at best half the annuity rate.

ursaminortaur
Lemon Half
Posts: 6942
Joined: November 4th, 2016, 3:26 pm
Has thanked: 447 times
Been thanked: 1717 times

Re: 25% tax free on DB pension

#220876

Postby ursaminortaur » May 11th, 2019, 2:54 pm

TUK020 wrote:
Jabd2001 wrote:It’s the ‘pension commencement lump sum’ which is tax free, and if you don’t take it, you don’t have any tax free element I’m afraid. All of the actual pension income is taxable.

So if you take 25% TFLS, how is the DB pension assessed towards the Lifetime Allowance?


The lifetime allowance calculation is

20x annual pension + any tax-free lump sum.

If you commute some annual pension - see my previous post - to give yourself a tax free lump sum then your annual pension will have been reduced in that calculation. Such commutations are generally bad value.

TUK020
Lemon Quarter
Posts: 2039
Joined: November 5th, 2016, 7:41 am
Has thanked: 762 times
Been thanked: 1175 times

Re: 25% tax free on DB pension

#220917

Postby TUK020 » May 11th, 2019, 5:12 pm

Thanks, I had been through this bit before, but suddenly realised that I didn't know if the 25% tax free also applied to the standard pension payment.

So I think the answer is clear - take the TFLS on the SIPP to recycle into ISA, but not on the DB.

BusyBumbleBee
Lemon Slice
Posts: 769
Joined: November 4th, 2016, 7:55 am
Has thanked: 565 times
Been thanked: 288 times

Re: 25% tax free on DB pension

#223667

Postby BusyBumbleBee » May 22nd, 2019, 1:37 pm

TUK020 wrote:Rather basic question: If I don't wish to take a lump sum on my DB pension but want max income, how is the 25% tax free applied?

DB - 25% = 0.75 taxed as per normal income, then add back 0.25?
Have a look at this

https://www.youinvest.co.uk/sites/defau ... awdown.pdf

Among other things it says that you can make lump sum withdrawals, with 25% of each withdrawal being tax free and 75% being taxed as earnings (this is called an Uncrystallised Fund Pension Lump Sum, or UFPLS for short).

What it doesn't tell you is that you can set a regular monthly (or other interval) UFPLS which is effectively the same as drawdown anyway except that 25% of each regular payment is tax free. This seems to me to be the best of all worlds and answers your question about getting max income.

ursaminortaur
Lemon Half
Posts: 6942
Joined: November 4th, 2016, 3:26 pm
Has thanked: 447 times
Been thanked: 1717 times

Re: 25% tax free on DB pension

#223676

Postby ursaminortaur » May 22nd, 2019, 2:08 pm

BusyBumbleBee wrote:
TUK020 wrote:Rather basic question: If I don't wish to take a lump sum on my DB pension but want max income, how is the 25% tax free applied?

DB - 25% = 0.75 taxed as per normal income, then add back 0.25?
Have a look at this

https://www.youinvest.co.uk/sites/defau ... awdown.pdf

Among other things it says that you can make lump sum withdrawals, with 25% of each withdrawal being tax free and 75% being taxed as earnings (this is called an Uncrystallised Fund Pension Lump Sum, or UFPLS for short).

What it doesn't tell you is that you can set a regular monthly (or other interval) UFPLS which is effectively the same as drawdown anyway except that 25% of each regular payment is tax free. This seems to me to be the best of all worlds and answers your question about getting max income.


UFPLS applies to drawdown of a DC pension not to a DB pension. In order to use UFPLS the OP would need to transfer the DB pension. If the transfer value were more than £30,000 this would involve having to pay for advice which in most cases would likely be against making such a transfer.


Return to “Pensions - Practical Problems”

Who is online

Users browsing this forum: No registered users and 7 guests