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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

Haylingchris
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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


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