Pension Tax Free Lump Sum Query

[noTAGlove]

I've done a bit of googling on this one, but can't find a simple answer, so though I'd ask the pension wise on here.

I know you are allowed to take 25% of your pension pot as a tax free lump sum.

I'll keep the numbers easy, rather than actual. Let's say you had £100k in a DC scheme and £300k in a DB scheme (total pension pot £400k). Could you take all of the 25% (£100k) from DC scheme tax free, and then take the £300k in the DB scheme as regular pension income.

Or do you have to take 25% from both the DC and DB scheme?

Thanks in advance.

[MartynJC (UK)]

I can answer that one - since I’ve just been through same situation in practice.

Assuming they are separate schemes - you can draw on them independently. You can take up to 25% tax free from either scheme. Main thing with the DB scheme is that taking the tax free allowance will trigger the pension to start - so you will then only be able to put in 4K per annum still into your DC.

You can take the tax free amount 25% - from DC but the remaining will move to a draw down account - check with your provider - but you do not need to drawn down until you want to - at which point the 4K limit applies.

as with any financial advise - best to speak to a financial advisor.

short answer to your question is - yes - draw on your DC (100k) so £20K tax free and use your DB (300K) all for a pension. If they are different schemes

In my case I pumped all I could into my D.C. scheme using backdated allowances to avoid excess tax on input - I’ve then taken 25% tax free straight out again - from my DC scheme. Then next tax year will take the tax free amount from my DB schema which will trigger the DB pension to start next year (or I may defer another year if we don’t need the cash straight away).

I want to minimise my income by living on capital release from my investments and pension plans + DB pension income.

[craig1912]

You haven’t got a pot of £300k in a DB pension as DB pensions don’t have pots.

You can take 25% from the DC pension and then commute some of your pension from the DB scheme in exchange for tax free cash. The commutation rate varies from scheme to scheme.

[MartynJC (UK)]

You can take tax free lump sum (tax free) from a DB scheme and this reduces the remaining pension payable of the pension.

You can ask your DB provider for a quote - which will show how much you can take tax free - this may be at retirement age (projected) or you could take immediately if older than 55. Need to get a quote form the scheme for exact amounts. No need to commute - though that is another option. (at least true for my scheme).

for the OP question. - you can take tax free from your DC and leave alone your DB if you want.

[craig1912]

Yep - that’s what I said . You can take tax free cash from a DB scheme but, it’s not 25% as there is nothing to get 25% of.

It is calculated by commuting some of your pension payable. The ratio of which varies but could be something like 12-1 which means for every £1 of pension given up you get £12 of cash tax free.

You can take early retirement with a DB scheme but there is a penalty for each year early - your projected pension could be, for example 5% less for each year early and you can’t take tax free cash and defer the pension. Both have to be taken at the same time (for the DB scheme).

[noTAGlove]

short answer to your question is - yes - draw on your DC (100k) so £20K tax free and use your DB (300K) all for a pension. If they are different schemes

Sorry to come back to this late, but as I work in the O&G industry, yesterday's events may crystallise my need to get my pension house in full order. And I'm a tiny bit confused by the response.

So DC valued at 100k. DB valued at 300K. Total valuation 400k. I can take 25% tax free, i.e. 100k. I want to take all the tax free element (£100k) as a lump sum from the DC pension at 55, and close that pension.

I don't want to commute anything from my DB scheme and use that pot to pay me income for the rest of my life.

Am I right in understanding the responses and this is OK, and I don't have to take 25% from the DC and 25% (as a commutation) from the DB?

[David_D]

Are the DB and DC arrangements part of the same scheme (eg basic benefit accrual with an AVC money purchase “pot” alongside)?

if not, I suspect the answer is no. If your DC arrangement is separate, is there the option to ‘transfer in’ to your employer scheme?

Pretty sure that’s right but obviously check!

Sorry to come back to this late, but as I work in the O&G industry, yesterday's events may crystallise my need to get my pension house in full order. And I'm a tiny bit confused by the response.

So DC valued at 100k. DB valued at 300K. Total valuation 400k. I can take 25% tax free, i.e. 100k. I want to take all the tax free element (£100k) as a lump sum from the DC pension at 55, and close that pension.

I don't want to commute anything from my DB scheme and use that pot to pay me income for the rest of my life.

Am I right in understanding the responses and this is OK, and I don't have to take 25% from the DC and 25% (as a commutation) from the DB?

[noTAGlove]

Are the DB and DC arrangements part of the same scheme (eg basic benefit accrual with an AVC money purchase “pot” alongside)?

if not, I suspect the answer is no. If your DC arrangement is separate, is there the option to ‘transfer in’ to your employer scheme?

Pretty sure that’s right but obviously check!

No, they are completely different schemes.

Why would I not be allowed to take all the tax free allowance from the DC scheme only?

[Mr Pointy]

Sorry to come back to this late, but as I work in the O&G industry, yesterday's events may crystallise my need to get my pension house in full order. And I'm a tiny bit confused by the response.

So DC valued at 100k. DB valued at 300K. Total valuation 400k. I can take 25% tax free, i.e. 100k. I want to take all the tax free element (£100k) as a lump sum from the DC pension at 55, and close that pension.

I don't want to commute anything from my DB scheme and use that pot to pay me income for the rest of my life.

Am I right in understanding the responses and this is OK, and I don't have to take 25% from the DC and 25% (as a commutation) from the DB?

I'm no expert but that doesn't sound right. You'd be using the 'tax free' element of the DB pension to withdraw all of your DC pension tax free. I don't think you can mix them like that.

You need to get proper advice but you might try posting on the PH Finance thread & see if it gets picked up by some of the more expert posters on there.
https://www.pistonheads.com/gassing/forum.asp?h=0&f=206

[noTAGlove]

I'm no expert but that doesn't sound right. You'd be using the 'tax free' element of the DB pension to withdraw all of your DC pension tax free. I don't think you can mix them like that.

I see it as selectively using my tax free element of my overall pension valuation.

But, what matters is what HMRC thinks. I thought it would be a simple question, but I can find nothing on Google.

[David_D]

No, they are completely different schemes.

Why would I not be allowed to take all the tax free allowance from the DC scheme only?

I can't remember the source of the rules but basically, if I recall, you can take up to 25% of the benefits of 'a scheme' as tax free cash. So, unless the savings are part of the same scheme, you have to look at each of them separately.

Definitely worth asking about transfer in options on your DB scheme although I believe options may be much more limited these days.

[craig1912]

Refer to my post further up. your DB scheme doesn’t have a value of 300k- that is your CETV. You can take 25% of your DC scheme. If you want to take tax free cash from your DB scheme that is entirely separate and works on a commutation basis where you would also need to take the pension.

[Skyman]

Refer to my thread further up. your DB scheme doesn’t have a value of 300k- that is your CETV. You can take 25% of your DC scheme. If you want to take tax free cash from your DB scheme that is entirely separate and works on a commutation basis where you would also need to take the pension.

Exactly.

[Omegamanic]

I see it as selectively using my tax free element of my overall pension valuation.

But, what matters is what HMRC thinks. I thought it would be a simple question, but I can find nothing on Google.

You are bound by the scheme rules, for each of the pensions individually. The rules will not be written to allow you to take an allowance from another scheme - how on earth would this be workable or policed. I can not agree a pension payout based on some allowances from a scheme that I have no control over either as pension administrator or pension trustee.

There may be other issues to look at as well. For example on some pension scheme rules you will not be entitled to 25% tax free depending on whether you soley contributed to the pension, or whether an employer was the sole or joint contributor; or if you had the pension in an other jurisdiction which may not recognise the tax free amount in relation to income - I have dealt with various cases where income tax has ultimately been payable when someone had taken a supposedly "tax free " allowance. So it is impossible to give a clear answer to your question without reviewing the schemes you have in place; except that it would be highly unlikely that you could mix and match your overall allowances between completely separate pensions - even though in some instances the overall result may have the same outcome. You may well benefit from some individual advice before deciding on a course of action.

[noTAGlove]

You are bound by the scheme rules, for each of the pensions individually. The rules will not be written to allow you to take an allowance from another scheme - how on earth would this be workable or policed. I can not agree a pension payout based on some allowances from a scheme that I have no control over either as pension administrator or pension trustee.

There may be other issues to look at as well. For example on some pension scheme rules you will not be entitled to 25% tax free depending on whether you soley contributed to the pension, or whether an employer was the sole or joint contributor; or if you had the pension in an other jurisdiction which may not recognise the tax free amount in relation to income - I have dealt with various cases where income tax has ultimately been payable when someone had taken a supposedly "tax free " allowance. So it is impossible to give a clear answer to your question without reviewing the schemes you have in place; except that it would be highly unlikely that you could mix and match your overall allowances between completely separate pensions - even though in some instances the overall result may have the same outcome. You may well benefit from some individual advice before deciding on a course of action.

Thanks for this. Since there is all this complex crystallisation stuff that HMRC happily deals with, I thought it would be easy to from HMRC (via your NI number) to know when you’ve taken a 25% lump sum from one pension. But obviously not.

Interesting that you say for some pensions you can’t take 25% tax free. I wasn’t aware of that.

I have are my non-contributory DB pension with my employer, and a low fee private stakeholder pension with Aviva that I solely contribute to.

I know the DB scheme allows me to commute some of my pension for a lump sum, but assumed I can also take a 25% tax free lump sum from my Aviva pension. Any idea if this may not be the case?

[David_D]

but assumed I can also take a 25% tax free lump sum from my Aviva pension. Any idea if this may not be the case?

I would be very surprised indeed if you were not able to.

As I said before, it's at least worth asking your employer scheme if you can transfer in your Aviva savings into the DC/money purchase part of their scheme.

[craig1912]

I would be very surprised indeed if you were not able to.

As I said before, it's at least worth asking your employer scheme if you can transfer in your Aviva savings into the DC/money purchase part of their scheme.

I’m not sure he’s said he has a DC/money purchase part of the scheme?

no TA

Aviva Stakeholder details here

https://www.aviva.co.uk/adviser/docu...w/sp01001c.pdf

yes you can take 25% of it as TFC. The document gives the full set of options.

As has been said the DB has its own set of rules which in most cases allows commutation of pension to take TFC.

[Skyman]

I can answer that one short answer to your question is - yes - draw on your DC (100k) so £20K tax free and use your DB (300K) all for a pension. If they are different schemes

Ah, no.

[Omegamanic]

Thanks for this. Since there is all this complex crystallisation stuff that HMRC happily deals with, I thought it would be easy to from HMRC (via your NI number) to know when you’ve taken a 25% lump sum from one pension. But obviously not.

Interesting that you say for some pensions you can’t take 25% tax free. I wasn’t aware of that.

I have are my non-contributory DB pension with my employer, and a low fee private stakeholder pension with Aviva that I solely contribute to.

I know the DB scheme allows me to commute some of my pension for a lump sum, but assumed I can also take a 25% tax free lump sum from my Aviva pension. Any idea if this may not be the case?

It might be easier for HMRC, once they have received all the information - but you would be asking different pension providers to release funds to you on your request - they can’t be responsible for the scheme rules of other providers or how and when they have been applied. Otherwise we would no doubt see some huge abuses.

It really comes down to scheme rules, and tax rules. Provided you were uk res/tax res and your pensions have always been funded as such, they will likely be qualifying inre the tax free element. However, as an example, if you had a uk pension and then moved to the Isle of Man, then a self funded pension would likely have issues, even though the pension provider would release the 25% to you on request (at the right age etc.), with paperwork stating the “tax free” sum. Once you filled out your income tax return, you’d most likely get the nice surprise of having to pay tax on that income. Whereas, if it was an employer funded pension, the it would likely be considered a qualifying pension at least inre the tax free element.

If you have worked overseas, and contributed this income, or transferred your pension from another jurisdiction, it could also affect how your tax position might differ from others.

[hogthrob]

I looked into taking a lump sum out of my DC pension (I am still working and paying into that pension). If I did take a lump sum, that would change things such that from then on ( I believe it puts the pension into drawdown 'mode'?), I could only pay £4k per year into it. It will obviously depend on your individual circumstances, but this might also apply to you.

[David_D]

I’m not sure he’s said he has a DC/money purchase part of the scheme?

no TA

A lot of DB schemes historically had a DC section. I moved some 'free standing AVC' savings into an employer DB scheme once (as a DC savings pot) so it is a thing but obviously pension schemes are spectacularly different - and rules change over time.

[craig1912]

I looked into taking a lump sum out of my DC pension (I am still working and paying into that pension). If I did take a lump sum, that would change things such that from then on ( I believe it puts the pension into drawdown 'mode'?), I could only pay £4k per year into it. It will obviously depend on your individual circumstances, but this might also apply to you.

Yep that’s correct

https://www.pensionsadvisoryservice....nual-allowance

[craig1912]

A lot of DB schemes historically had a DC section. I moved some 'free standing AVC' savings into an employer DB scheme once (as a DC savings pot) so it is a thing but obviously pension schemes are spectacularly different - and rules change over time.

Yep they had a DC section generally just for AVC’s and they could be then treated as a DC pot or but additional years and months of service.

[badger1]

Yep that’s correct

https://www.pensionsadvisoryservice....nual-allowance

Craig,

Not quite. Accessing the tax free lump sum doesn’t trigger the £4K annual allowance accessing your pension income flexibly does.

States that further down the link you attached but just wanted to clarify!!

[MartynJC (UK)]

Ah, no.

...could you take all of the 25% (£100k) from DC scheme tax free, and then take the £300k in the DB scheme as regular pension income.

Or do you have to take 25% from both the DC and DB scheme?

Thanks in advance.

if you look at what the OP is asking he wants to take 25% tax free from DC scheme and use the DB scheme as a separate scheme for a regular (annuity) pension income. So, yes he can.

[Omegamanic]

if you look at what the OP is asking he wants to take 25% tax free from DC scheme and use the DB scheme as a separate scheme for a regular (annuity) pension income. So, yes he can.

Absolutely correct. He could. But then he would have, as you stated £20,000, but he wanted the full £100,000 ish from the exercise.

[RustyBin5]

Yep that’s correct

https://www.pensionsadvisoryservice....nual-allowance

Not quite correct. If he buys a normal lifetime annuity or takes no income but places the fund after tax free cash into flexi income drawdown then the MPAA is NOT triggered.

Lots of conflicting info on the thread and the OP really ought to sit down with an adviser so he has confidence in what he’s being told.

He can get 25% from his DC scheme and his DB scheme will pay an amount that he will have to ask the scheme to calculate and quote.

[craig1912]

Not quite correct. If he buys a normal lifetime annuity or takes no income but places the fund after tax free cash into flexi income drawdown then the MPAA is NOT triggered.

Lots of conflicting info on the thread and the OP really ought to sit down with an adviser so he has confidence in what he’s being told.

He can get 25% from his DC scheme and his DB scheme will pay an amount that he will have to ask the scheme to calculate and quote.

It might be not quite correct but I was trying to keep things simple. There isn’t any conflicting advice as I’m saying what you are saying in bold.
For completeness and not to distract from the OP’s question any further, MPAA detailed stuff is:

As a basic guide, the main situations when you’ll trigger the MPAA are:

If you take your entire pension pot as a lump sum or start to take ad-hoc lump sums from your pension pot
If you put your pension pot money into a flexi-access drawdown scheme and start to take an income
If you buy an investment-linked or flexible annuity where your income could go down
If you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap
The MPAA won’t normally be triggered if:

You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases
You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it
You cash in small pension pots valued at less than £10,000
The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

[Skyman]

Absolutely correct. He could. But then he would have, as you stated £20,000, but he wanted the full £100,000 ish from the exercise.

Indeed.

[RustyBin5]

It might be not quite correct but I was trying to keep things simple. There isn’t any conflicting advice as I’m saying what you are saying in bold.
For completeness and not to distract from the OP’s question any further, MPAA detailed stuff is:

As a basic guide, the main situations when you’ll trigger the MPAA are:

If you take your entire pension pot as a lump sum or start to take ad-hoc lump sums from your pension pot
If you put your pension pot money into a flexi-access drawdown scheme and start to take an income
If you buy an investment-linked or flexible annuity where your income could go down
If you have a pre-April 2015 capped drawdown plan and start to take payments that exceed the cap
The MPAA won’t normally be triggered if:

You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases
You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it
You cash in small pension pots valued at less than £10,000
The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

I said conflicting advice on the thread and there is. Some are even saying 25% of the DB which is just wrong. What you say above is correct and pasted from moneyadvice.org and is a very good reference tool. I wasn’t having a go at you personally, I just think he should take professional advice as his knowledge is sketchy at best it seems. I certainly don’t think a pension novice should rely on a watch forum for the answers as some of the inaccuracies in the replies demonstrate.

[RustyBin5]

Absolutely correct. He could. But then he would have, as you stated £20,000, but he wanted the full £100,000 ish from the exercise.

£25,000

[Omegamanic]

£25,000

Sorry, yes 25k :)

[hogthrob]

I said conflicting advice on the thread and there is. Some are even saying 25% of the DB which is just wrong. What you say above is correct and pasted from moneyadvice.org and is a very good reference tool. I wasn’t having a go at you personally, I just think he should take professional advice as his knowledge is sketchy at best it seems. I certainly don’t think a pension novice should rely on a watch forum for the answers as some of the inaccuracies in the replies demonstrate.

If nothing else, he has learned that pensions are complicated, and you need professional advice regarding them. Pensions are like unwanted erections - the more you think about them, the harder they get.

[MartynJC (UK)]

Absolutely correct. He could. But then he would have, as you stated £20,000, but he wanted the full £100,000 ish from the exercise.

Agreed. (£25K). So I’ll change my simple answer to - no!

As it’s not a simple answer. He would need to get a quote from his DB scheme provider (you can usually get one quote every twelve months) for maximum tax free amount available - if any which, if available, depends on how many years away from pensionable age and other factors - different providers are different.

I will be drawing on my DB come April 6th, so this is all close to home.

I’m watching my DC pot going down the pan day by day . . . But that is covered on another G&D thread!

all the best.

Martyn.

[craig1912]

I said conflicting advice on the thread and there is. Some are even saying 25% of the DB which is just wrong. What you say above is correct and pasted from moneyadvice.org and is a very good reference tool. I wasn’t having a go at you personally, I just think he should take professional advice as his knowledge is sketchy at best it seems. I certainly don’t think a pension novice should rely on a watch forum for the answers as some of the inaccuracies in the replies demonstrate.

Fair enough no problem.
I agree he should get advice- problem is how to get it. Perhaps the first port of call should be

https://www.pensionwise.gov.uk/en/ap...RoCmOMQAvD_BwE

[Omegamanic]

Fair enough no problem.
I agree he should get advice- problem is how to get it. Perhaps the first port of call should be

https://www.pensionwise.gov.uk/en/ap...RoCmOMQAvD_BwE

A good starting point.

[RustyBin5]

Fair enough no problem.
I agree he should get advice- problem is how to get it. Perhaps the first port of call should be

https://www.pensionwise.gov.uk/en/ap...RoCmOMQAvD_BwE

Absolutely