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Do I take a DB Pension early after FIRE?

Pheidippides
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Do I take a DB Pension early after FIRE?

#282638

Postby Pheidippides » February 6th, 2020, 9:15 am

Just had a rather pleasant surprise.

I had a letter from the Life Company that have taken over a locked-up DB Pension.

Previously, I had thought that this pension would be releasing £8,800 pa in 5 years time (at 60). However, the letter I received shows that this has been growing by inflation unbeknownst to me for the last ten years or so.

I have three options:

Option 1 : Take pension at 60 (Fair value ~ £11,325 spot, if you adjust for commutation factor)

Option 2: Take pension early - £9,740 pa from now (commutation quoted at ~13.5%)

Option 3 : Surrender value £460K (~47x early, ~40x fair value)


Option 3 is out as I am bang-on the LTA right now (using DC + 20x HMRC) and so I am wondering how to play this...

I am now a non-earner (HRT taxpayer until Jul-19) and WAS planning to start taking £50K pa out of my DC pensions from April. I am now seriously considering accepting this early offer.

My fag-packet calculation was saying that I get an extra £48,700 now (5 x £9,740) but I will be losing £39,625 if I live to 85 (25 x (11,325 - 9,740)

Have I got these numbers right? - It looks as though my break-even death is 91.....

Regards

Tet

PS - Survivor benefits are the same from either choice

ursaminortaur
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Re: Do I take a DB Pension early after FIRE?

#282710

Postby ursaminortaur » February 6th, 2020, 11:55 am

Pheidippides wrote:Just had a rather pleasant surprise.

I had a letter from the Life Company that have taken over a locked-up DB Pension.

Previously, I had thought that this pension would be releasing £8,800 pa in 5 years time (at 60). However, the letter I received shows that this has been growing by inflation unbeknownst to me for the last ten years or so.

I have three options:

Option 1 : Take pension at 60 (Fair value ~ £11,325 spot, if you adjust for commutation factor)

Option 2: Take pension early - £9,740 pa from now (commutation quoted at ~13.5%)

Option 3 : Surrender value £460K (~47x early, ~40x fair value)


Option 3 is out as I am bang-on the LTA right now (using DC + 20x HMRC) and so I am wondering how to play this...

I am now a non-earner (HRT taxpayer until Jul-19) and WAS planning to start taking £50K pa out of my DC pensions from April. I am now seriously considering accepting this early offer.

My fag-packet calculation was saying that I get an extra £48,700 now (5 x £9,740) but I will be losing £39,625 if I live to 85 (25 x (11,325 - 9,740)

Have I got these numbers right? - It looks as though my break-even death is 91.....

Regards

Tet

PS - Survivor benefits are the same from either choice


Could you clarify the :- I am bang-on the LTA right now (using DC + 20x HMRC)

Is the HMRC in the above another public sector DB pension or are you counting the state pension ?
Just to be clear the state pension is not tested against the LTA and hence should not be included in any LTA calculations.

https://thepeoplespension.co.uk/help/knowledgebase/does-my-state-pension-count-towards-my-lifetime-allowance/

https://www.saga.co.uk/magazine/money/retirement/pensions/2016/pensions-lifetime-allowance

If you have more than one personal pension, the combined value is used – but your state pension entitlement does not count towards the LTA.

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Re: Do I take a DB Pension early after FIRE?

#282716

Postby Alaric » February 6th, 2020, 12:05 pm

Pheidippides wrote:Have I got these numbers right? - It looks as though my break-even death is 91.....


Another approach would be to just look at the next five years. You will need to make an assumption about the returns on the SIPP since your option is to use the DB pension to draw less from the SIPP. If you take the DB early, you are relying on the SIPP to make up the income difference.

Pheidippides
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Re: Do I take a DB Pension early after FIRE?

#282749

Postby Pheidippides » February 6th, 2020, 2:40 pm

ursaminortaur wrote:Could you clarify the :- I am bang-on the LTA right now (using DC + 20x HMRC)

Is the HMRC in the above another public sector DB pension or are you counting the state pension ?
Just to be clear the state pension is not tested against the LTA and hence should not be included in any LTA calculations.

https://thepeoplespension.co.uk/help/knowledgebase/does-my-state-pension-count-towards-my-lifetime-allowance/

https://www.saga.co.uk/magazine/money/retirement/pensions/2016/pensions-lifetime-allowance

If you have more than one personal pension, the combined value is used – but your state pension entitlement does not count towards the LTA.


I have ignored the SP completely.

My LTA is calculated as follows:

DC 1 - £220K (20.8% LTA)
DC 2 - £278K (26.3% LTA)
DC 3 - £278K -(26.3% LTA) (This is after taking 25% TFLS) - assessed at 8.9% of LTA)

DB Pension (subject of thread) is £9,740 pa = £194,800 = 18.5% of LTA. This is NOT a LG or CS pension. It was a company DB pension obligation that was sold to an insurance co)

Regards

Pheid

Pheidippides
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Re: Do I take a DB Pension early after FIRE?

#282752

Postby Pheidippides » February 6th, 2020, 2:53 pm

Alaric wrote:
Pheidippides wrote:Have I got these numbers right? - It looks as though my break-even death is 91.....


Another approach would be to just look at the next five years. You will need to make an assumption about the returns on the SIPP since your option is to use the DB pension to draw less from the SIPP. If you take the DB early, you are relying on the SIPP to make up the income difference.


I was looking at the DB pension stand-alone. I have crunched all my forward cashflow numbers based on all my assets, inside and outside the SIPP. I had planned for £8,800 pa from 2025, I can now get £11,325 from that date (plus infl adj upticks), or I can take £9,740 from now (actually April, but I am eligible now)

I know (think) I have enough money, but I am aware that taking my pension will trigger an LTA test, even though taking my TFLS's will not

Regards

Pheid

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Re: Do I take a DB Pension early after FIRE?

#282754

Postby DrBunsenHoneydew » February 6th, 2020, 3:05 pm

Pheidippides wrote: ... I am aware that taking my pension will trigger an LTA test, even though taking my TFLS's will not

You can't take a TFLS from any pension scheme without LTA being tested.
You can only take TFLS on a benefit crystallisation event, which is the trigger.

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Re: Do I take a DB Pension early after FIRE?

#282755

Postby ffacoffipawb64 » February 6th, 2020, 3:09 pm

You are pretty much 100% LTA now based on those percentages.

I would take the DB early as it is a lower percentage of LTA than it is likely to be at NRD.

Also I would crystallise all 3 DC pensions now. They are likely to grow faster than LTA meaning that you are more likely to pay an LTA charge if you delay crystallisation.

I retired last year at 55 with a full state pension accrual due from age 67.

Your figures are similar to mine though my DB pension is lower as I took the PCLS (in retrospect I have enough cash so should have taken £2k more taxable pension instead of approx £50k tax free cash).

So I now have a DB of £7,500 pa (tax code BR) plus taking £18,000 pa (tax code 1375M) from crystallised funds of £600k.

With child benefit and no mortgage, this is enough for us. Quids in from SPA then!

I have exactly 10% (deliberately made it spot on) left for a DB of £4k payable from 60. I wont take the PCLS from that.

I have enough uncrystallised funds left to use up the balance to 100% LTA in the same tax year.

The rest (maybe another 10% LTA as I am at about 110% LTA overall) will remain uncrystallised until 75. Maybe LTA will be gone by then.

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Re: Do I take a DB Pension early after FIRE?

#282764

Postby Pheidippides » February 6th, 2020, 3:57 pm

ffacoffipawb64 wrote:You are pretty much 100% LTA now based on those percentages.


I am actually planning to exceed it as my 2019 earnings are in excess of 100K and so it is actually better to take a charge than pay those insane marginal rates

ffacoffipawb64 wrote:I would take the DB early as it is a lower percentage of LTA than it is likely to be at NRD.


This is true if I defer as there is no commutation

ffacoffipawb64 wrote:Also I would crystallise all 3 DC pensions now. They are likely to grow faster than LTA meaning that you are more likely to pay an LTA charge if you delay crystallisation.

I think that I agree - though I am more worried about the TFLS being removed!


ffacoffipawb64 wrote:I retired last year at 55 with a full state pension accrual due from age 67.

Your figures are similar to mine though my DB pension is lower as I took the PCLS (in retrospect I have enough cash so should have taken £2k more taxable pension instead of approx £50k tax free cash).


Scarily similar, I've been offered a 8,300 pension in exchange for a lump sum of 55.5K

ffacoffipawb64 wrote:So I now have a DB of £7,500 pa (tax code BR) plus taking £18,000 pa (tax code 1375M) from crystallised funds of £600k.

With child benefit and no mortgage, this is enough for us. Quids in from SPA then!

I have exactly 10% (deliberately made it spot on) left for a DB of £4k payable from 60. I wont take the PCLS from that.


Is there any reason not to take an income up to just below the HRT level? You'll never be able to take it tax-free. Does it not make more sense to extract the most you can and then push any surplus into ISA's?. Thus the cap gain and income is completely tax-free

Regards

Pheid

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Re: Do I take a DB Pension early after FIRE?

#282770

Postby ffacoffipawb64 » February 6th, 2020, 4:18 pm

Pheidippides wrote:
ffacoffipawb64 wrote:You are pretty much 100% LTA now based on those percentages.


I am actually planning to exceed it as my 2019 earnings are in excess of 100K and so it is actually better to take a charge than pay those insane marginal rates

ffacoffipawb64 wrote:I would take the DB early as it is a lower percentage of LTA than it is likely to be at NRD.


This is true if I defer as there is no commutation

ffacoffipawb64 wrote:Also I would crystallise all 3 DC pensions now. They are likely to grow faster than LTA meaning that you are more likely to pay an LTA charge if you delay crystallisation.

I think that I agree - though I am more worried about the TFLS being removed!


ffacoffipawb64 wrote:I retired last year at 55 with a full state pension accrual due from age 67.

Your figures are similar to mine though my DB pension is lower as I took the PCLS (in retrospect I have enough cash so should have taken £2k more taxable pension instead of approx £50k tax free cash).


Scarily similar, I've been offered a 8,300 pension in exchange for a lump sum of 55.5K

ffacoffipawb64 wrote:So I now have a DB of £7,500 pa (tax code BR) plus taking £18,000 pa (tax code 1375M) from crystallised funds of £600k.

With child benefit and no mortgage, this is enough for us. Quids in from SPA then!

I have exactly 10% (deliberately made it spot on) left for a DB of £4k payable from 60. I wont take the PCLS from that.


Is there any reason not to take an income up to just below the HRT level? You'll never be able to take it tax-free. Does it not make more sense to extract the most you can and then push any surplus into ISA's?. Thus the cap gain and income is completely tax-free

Regards

Pheid


Food for thought, just need to make sure I have enough pension to see me out and hence the 3% safe withdrawal rate!

Took full PCLS from SIPP (paid off mortgage and got new kitchen and leccy car) as also paranoid about the labour party capping or abolishing it. However we may not see a labour government for many years so less of an issue than it was last summer.

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Re: Do I take a DB Pension early after FIRE?

#282790

Postby ursaminortaur » February 6th, 2020, 5:42 pm

Pheidippides wrote:
ursaminortaur wrote:Could you clarify the :- I am bang-on the LTA right now (using DC + 20x HMRC)

Is the HMRC in the above another public sector DB pension or are you counting the state pension ?
Just to be clear the state pension is not tested against the LTA and hence should not be included in any LTA calculations.

https://thepeoplespension.co.uk/help/knowledgebase/does-my-state-pension-count-towards-my-lifetime-allowance/

https://www.saga.co.uk/magazine/money/retirement/pensions/2016/pensions-lifetime-allowance

If you have more than one personal pension, the combined value is used – but your state pension entitlement does not count towards the LTA.


I have ignored the SP completely.

My LTA is calculated as follows:

DC 1 - £220K (20.8% LTA)
DC 2 - £278K (26.3% LTA)
DC 3 - £278K -(26.3% LTA) (This is after taking 25% TFLS) - assessed at 8.9% of LTA)

DB Pension (subject of thread) is £9,740 pa = £194,800 = 18.5% of LTA. This is NOT a LG or CS pension. It was a company DB pension obligation that was sold to an insurance co)

Regards

Pheid


OK - just threw me as to what 20x HMRC meant and a public sector DB pension (ie paid by the government) or the state pension (paid by the government) were the only things I could come up with for what you might have meant.

Anyway I see that others have provided some answers given the new figures you have provided.

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Re: Do I take a DB Pension early after FIRE?

#282841

Postby TUK020 » February 6th, 2020, 10:08 pm

Other factor to consider = inheritance

If you want to leave money to someone other than your spouse (e.g. kids), it would be better to use the DB scheme earlier, and take correspondingly less from the DC pot, the remainder of which you can leave to kids outside of the rest of your estate when you die.

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Re: Do I take a DB Pension early after FIRE?

#282883

Postby ffacoffipawb64 » February 7th, 2020, 8:05 am

ursaminortaur wrote:
Pheidippides wrote:
ursaminortaur wrote:Could you clarify the :- I am bang-on the LTA right now (using DC + 20x HMRC)

Is the HMRC in the above another public sector DB pension or are you counting the state pension ?
Just to be clear the state pension is not tested against the LTA and hence should not be included in any LTA calculations.

https://thepeoplespension.co.uk/help/knowledgebase/does-my-state-pension-count-towards-my-lifetime-allowance/

https://www.saga.co.uk/magazine/money/retirement/pensions/2016/pensions-lifetime-allowance

If you have more than one personal pension, the combined value is used – but your state pension entitlement does not count towards the LTA.


I have ignored the SP completely.

My LTA is calculated as follows:

DC 1 - £220K (20.8% LTA)
DC 2 - £278K (26.3% LTA)
DC 3 - £278K -(26.3% LTA) (This is after taking 25% TFLS) - assessed at 8.9% of LTA)

DB Pension (subject of thread) is £9,740 pa = £194,800 = 18.5% of LTA. This is NOT a LG or CS pension. It was a company DB pension obligation that was sold to an insurance co)

Regards

Pheid


OK - just threw me as to what 20x HMRC meant and a public sector DB pension (ie paid by the government) or the state pension (paid by the government) were the only things I could come up with for what you might have meant.

Anyway I see that others have provided some answers given the new figures you have provided.


State pension is not included in any LTA calculation.

Also you can create three small pots of £10k and take them without using any LTA. I have taken one such pot and will take one in each of the next two tax years. Hargreaves Lansdown will create a small pot (ahem) for you from an existing SIPP to facilitate this

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Re: Do I take a DB Pension early after FIRE?

#282888

Postby Pheidippides » February 7th, 2020, 8:22 am

ffacoffipawb64 wrote:Also you can create three small pots of £10k and take them without using any LTA. I have taken one such pot and will take one in each of the next two tax years. Hargreaves Lansdown will create a small pot (ahem) for you from an existing SIPP to facilitate this


Bu##er! - I may have missed a trick here. I had a two small pension investments at Royal London (£7K and £6K). I transferred these into AJ Bell to simplify things. Could I really have used the small pots loophole?

Can you really create a micro pot, or a series thereof to reduce the LTA excess charge? - is this legal?

Regards

Pheid

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Re: Do I take a DB Pension early after FIRE?

#282891

Postby ffacoffipawb64 » February 7th, 2020, 8:37 am

Pheidippides wrote:
ffacoffipawb64 wrote:Also you can create three small pots of £10k and take them without using any LTA. I have taken one such pot and will take one in each of the next two tax years. Hargreaves Lansdown will create a small pot (ahem) for you from an existing SIPP to facilitate this


Bu##er! - I may have missed a trick here. I had a two small pension investments at Royal London (£7K and £6K). I transferred these into AJ Bell to simplify things. Could I really have used the small pots loophole?

Can you really create a micro pot, or a series thereof to reduce the LTA excess charge? - is this legal?

Regards

Pheid


Hargreaves Lansdown let me do it, so I guess it must be.

It converts a possible £2,500 LTA charge into a £2,500 PCLS so max gain is £7,500. Every little helps.

I have a SIPP with AJ Bell Youinvest and they refused to do it. Hence my last employer DC scheme went to Hargreaves Lansdown. Will put all in the former when I have taken my third small pot in April 2021.

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Re: Do I take a DB Pension early after FIRE?

#283014

Postby ffacoffipawb64 » February 7th, 2020, 3:25 pm

Artificial small pot form for Hargreaves Lansdown ...

https://www.hl.co.uk/__data/assets/pdf_ ... llpots.pdf

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Re: Do I take a DB Pension early after FIRE?

#283019

Postby swill453 » February 7th, 2020, 3:49 pm

ffacoffipawb64 wrote:Artificial small pot form for Hargreaves Lansdown ...

https://www.hl.co.uk/__data/assets/pdf_ ... llpots.pdf

That seems to be a form to cash in a small pot, not to create an artificial one.

Scott.

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Re: Do I take a DB Pension early after FIRE?

#283020

Postby ffacoffipawb64 » February 7th, 2020, 3:57 pm

swill453 wrote:
ffacoffipawb64 wrote:Artificial small pot form for Hargreaves Lansdown ...

https://www.hl.co.uk/__data/assets/pdf_ ... llpots.pdf

That seems to be a form to cash in a small pot, not to create an artificial one.

Scott.


They created a small one for me, as an "arrangement" within my SIPP

See the heading ...

Use this form to withdraw a lump sum worth £10,000 or less from your SIPP (or an arrangement within your SIPP).

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Re: Do I take a DB Pension early after FIRE?

#283023

Postby ffacoffipawb64 » February 7th, 2020, 4:25 pm

ffacoffipawb64 wrote:
swill453 wrote:
ffacoffipawb64 wrote:Artificial small pot form for Hargreaves Lansdown ...

https://www.hl.co.uk/__data/assets/pdf_ ... llpots.pdf

That seems to be a form to cash in a small pot, not to create an artificial one.

Scott.


They created a small one for me, as an "arrangement" within my SIPP

See the heading ...

Use this form to withdraw a lump sum worth £10,000 or less from your SIPP (or an arrangement within your SIPP).


Just to show ...

04/07/2019 Transfer Small Fund Tax Payment n/a n/a -1,500.00
04/07/2019 FPD Payment to Client Bank A/C:******/******95 n/a n/a -8,500.00

The £8,500 is PCLS of £2,500 plus £6,000 (£7,500 less 20% tax).

The SIPP is still live. Transaction report confirms zero LTA usage plus the fact that MPAA has not been invoked as it is a small pot.

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Re: Do I take a DB Pension early after FIRE?

#283025

Postby genou » February 7th, 2020, 4:34 pm

ffacoffipawb64 wrote:
swill453 wrote:
ffacoffipawb64 wrote:Artificial small pot form for Hargreaves Lansdown ...

https://www.hl.co.uk/__data/assets/pdf_ ... llpots.pdf

That seems to be a form to cash in a small pot, not to create an artificial one.

Scott.


They created a small one for me, as an "arrangement" within my SIPP

See the heading ...

Use this form to withdraw a lump sum worth £10,000 or less from your SIPP (or an arrangement within your SIPP).


I am surprised at HL being so aggressive, and interested that AJBell won't touch it. It appears to be one of those things that if enough people do it, HMRC are eventually going to act. Could all come to a sticky end.

https://www.ftadviser.com/pensions/2018 ... le/?page=1

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Re: Do I take a DB Pension early after FIRE?

#283032

Postby ffacoffipawb64 » February 7th, 2020, 4:53 pm

genou wrote:
ffacoffipawb64 wrote:
swill453 wrote:That seems to be a form to cash in a small pot, not to create an artificial one.

Scott.


They created a small one for me, as an "arrangement" within my SIPP

See the heading ...

Use this form to withdraw a lump sum worth £10,000 or less from your SIPP (or an arrangement within your SIPP).


I am surprised at HL being so aggressive, and interested that AJBell won't touch it. It appears to be one of those things that if enough people do it, HMRC are eventually going to act. Could all come to a sticky end.

https://www.ftadviser.com/pensions/2018 ... le/?page=1


As long as it lasts for me to take the other two on 06/04/2020 and 06/04/2021 i dont mind. May make sense to do both remaining small pots this April just to get them out of the way.


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