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Take TFLS from DB pension.... or not....

Including Financial Independence and Retiring Early (FIRE)
mickeypops
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Take TFLS from DB pension.... or not....

#108005

Postby mickeypops » January 4th, 2018, 8:24 pm

Here's a question I'd like the forums opinion on. Mrs MP and me are retiring at the end of April. We will both have income from DB pensions, and from SIPPs in drawdown, and later on the state pension.

My company's DB has offered a tax free lump sum of £94,195, in return for reducing my DB annual amount by £5,457 - a commutation rate of about 17.2%. Now, I don't think this is particulary generous and my initial reaction was to reject it.

However, I've come to realise that when I collect my state pension in 2.5 years time, the combined income from my DB, the state pension, and the natural yield from my SIPP IT portfolio (which I intend to harvest) will mean that most, if not all, of that £5,457 extra DB will push me into higher rate tac. At 40%, this will reduce its value to £3,274.

On the other hand, if I take the £94,195 in cash, I can transfer it to my wife, invest it in an unsheltered investment account and pay just 7.5% on the dividends. Higher rate tax will not be an issue for her. At a blended yield of about 4.5% that I'm getting from my ITs, we will net £3,921 to start - and of course we can bed and ISA the £94K over the next few years to eliminate the tax altogether.

Of course, there's the loss of guarenteed amount, which is a factor. Also a factor though is the injection of the £95K capital which can be used in later years or inherited by the kids / grandkils.

I'd appreciate any comments / suggestions from the members herein.

Many thanks

Mickeypops

Alaric
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Re: Take TFLS from DB pension.... or not....

#108007

Postby Alaric » January 4th, 2018, 8:39 pm

mickeypops wrote: Now, I don't think this is particulary generous and my initial reaction was to reject it.


I think you are right to look at the after tax return. You might even find a use for it as a cash sum, either now or the near future.

swill453
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Re: Take TFLS from DB pension.... or not....

#108009

Postby swill453 » January 4th, 2018, 8:41 pm

mickeypops wrote:and of course we can bed and ISA the £94K over the next few years to eliminate the tax altogether.

Assuming you're not otherwise using your ISA allowances, between you you could shelter £80,000+ in less than a year.

Scott.

mickeypops
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Re: Take TFLS from DB pension.... or not....

#108011

Postby mickeypops » January 4th, 2018, 8:49 pm

Thanks Scott. Our ISA allowances are already spoken for, this tax year and the next.

MP

swill453
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Re: Take TFLS from DB pension.... or not....

#108013

Postby swill453 » January 4th, 2018, 8:56 pm

One option might be to defer your state pension and ensure your income stays within the basic rate. Then I believe you can take it as a lump sum later at your highest tax rate, ie it won't push you into a higher bracket.

I know the terms of deferment aren't as good as they used to be, but might be worth considering.

Scott.

mickeypops
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Re: Take TFLS from DB pension.... or not....

#108015

Postby mickeypops » January 4th, 2018, 9:02 pm

swill453 wrote:One option might be to defer your state pension and ensure your income stays within the basic rate. Then I believe you can take it as a lump sum later at your highest tax rate, ie it won't push you into a higher bracket.

I know the terms of deferment aren't as good as they used to be, but might be worth considering.

Scott.


Thanks, i’ll Look into it.

MP

funduffer
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Re: Take TFLS from DB pension.... or not....

#111897

Postby funduffer » January 19th, 2018, 2:10 pm

mickeypops wrote:Here's a question I'd like the forums opinion on. Mrs MP and me are retiring at the end of April. We will both have income from DB pensions, and from SIPPs in drawdown, and later on the state pension.

My company's DB has offered a tax free lump sum of £94,195, in return for reducing my DB annual amount by £5,457 - a commutation rate of about 17.2%. Now, I don't think this is particulary generous and my initial reaction was to reject it.

However, I've come to realise that when I collect my state pension in 2.5 years time, the combined income from my DB, the state pension, and the natural yield from my SIPP IT portfolio (which I intend to harvest) will mean that most, if not all, of that £5,457 extra DB will push me into higher rate tac. At 40%, this will reduce its value to £3,274.

On the other hand, if I take the £94,195 in cash, I can transfer it to my wife, invest it in an unsheltered investment account and pay just 7.5% on the dividends. Higher rate tax will not be an issue for her. At a blended yield of about 4.5% that I'm getting from my ITs, we will net £3,921 to start - and of course we can bed and ISA the £94K over the next few years to eliminate the tax altogether.

Of course, there's the loss of guarenteed amount, which is a factor. Also a factor though is the injection of the £95K capital which can be used in later years or inherited by the kids / grandkils.

I'd appreciate any comments / suggestions from the members herein.

Many thanks

Mickeypops


Mickey,

When I retired, I took a chunk of my TLFS from my DB pension with a similar commutation rate as yourself for exactly the reasons you outline - I.e. I would be a HRtax player when I receive my state pension.

Now I was 58 at retirement so I have had several years to stash this away in an ISA and generate income from a variety of HYP shares and ITs.

I am 62 now, so have another 4 years to my state pension, and it looks like I took just the right amount of TFLS to come in just under the HRT band. My TFLS will be generating tax free income by then.

I think it is an important issue you have raised.

FD

mickeypops
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Re: Take TFLS from DB pension.... or not....

#112908

Postby mickeypops » January 23rd, 2018, 10:50 pm

That’s very positive FD. Thanks for your insight.

MP

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Re: Take TFLS from DB pension.... or not....

#113579

Postby Haylingchris » January 26th, 2018, 9:17 pm

Hi MP

I took an early retirement package about a year ago and also initially thought the TFLS reduced the annual payments by more than seemed appropriate. But one factor which does balance it out a bit is that the "spouse's element" (in my case 50% of my annual payment) was not reduced by taking the TFLS.

I took the maximum TFLS that I could and kept the rest in the company scheme.

Chris

Kantwebefriends
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Re: Take TFLS from DB pension.... or not....

#128326

Postby Kantwebefriends » March 27th, 2018, 2:48 pm

swill453 wrote:One option might be to defer your state pension. ... Then I believe you can take it as a lump sum later


'fraid not. It was true of the old-style state pension but not of the new one.

OP: what if you took the larger DB pension, and the state pension, but just let your dividends accumulate in your SIPP? Would you be a higher rate taxpayer then? Leaving money in the SIPP is a device for leaving money free of Inheritance Tax. And if you are enough of a gentleman to die before 75, your widow can get the lot tax-free.

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Re: Take TFLS from DB pension.... or not....

#128479

Postby ursaminortaur » March 28th, 2018, 1:16 am

Kantwebefriends wrote: Leaving money in the SIPP is a device for leaving money free of Inheritance Tax. And if you are enough of a gentleman to die before 75, your widow can get the lot tax-free.


The pension being outside of IHT is more for leaving money to beneficiaries other than your widow/widower since IHT doesn't apply to transfers between married couples or between civil partners anyway.

https://www.which.co.uk/money/tax/inheritance-tax/guides/inheritance-tax-for-married-couples-and-civil-partners

Transfers between married couples and civil partners are not subject to inheritance tax (IHT), so if the first partner to die leaves their entire estate to the other there is a strong chance that none of their nil-rate band has been used.

Jabd2001
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Re: Take TFLS from DB pension.... or not....

#128487

Postby Jabd2001 » March 28th, 2018, 7:36 am

But any unspent pension remains outside IHT for subsequent beneficiaries...

hiriskpaul
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Re: Take TFLS from DB pension.... or not....

#128681

Postby hiriskpaul » March 28th, 2018, 6:51 pm

I think you are being short-changed with the offer and I would be in the take less from your SIPP camp, assuming you do not need the income. However, I might reconsider if reducing your income from the SIPP means that you are likely to run into LTA problems at 75.

mickeypops
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Re: Take TFLS from DB pension.... or not....

#129248

Postby mickeypops » April 1st, 2018, 8:10 am

Thanks for the replies guys. Mrs MP and me retire in four weeks time. My plan has been to replicate (approximately) our net income, after allowing for not saving a significant amount each month.

We will have income from three sources to achieve this - DB pensions from current and ex-employers, income from our SIPPs, Isas and non-sheltered investment accounts, and the state pension (with a separate cash pile to replicate this until it arrives.)

Our investments in SIPPs, Isas etc. are mostly dividend generating ITs and I intend to harvest the dividends and leave the capital untouched for as long as possible, if not forever,

It may very well be the case that we don’t need all this income, especially in a year or two when the initial burst of holidaying has waned. If this is the case we will probably not take out all of the dividends from our SIPPs, as they are more highly taxed than other investment income.

I agree that the TFLS on offer is not overly generous.


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