SIPP & Pension guidance - IM Private Clients

[LeoSayer]

leef44 said:

Car bon said:

leef44 said:

I have a question about the 25% tax free lump sum on taking the pension. I had built up an AVC to make up the lump sum payment when I took my work pension which are handled together (both have to be taken at the same time). The AVC went towards the 25% tax free lump sum and I did not take any commutation from my final salary scheme (defined benefit scheme).

I didn't get the whole 25% tax free but got over 20% tax free. My pension provider says I won't get the rest tax free. They say that it is close enough and so my monthly pension will be paid without any tax free portion.

Is this normal practice for defined benefit schemes? This is news to me. I thought all schemes get 25% tax free portion such that if you get the whole 25% tax free as a lump sum then you are entitled to get the balance in the monthly pension.

They told me to contact HMRC who they responded with a letter confirming that I am entitled to 25% tax free and the pension provider should administer this at source (HMRC does not do this via PAYE code adjustment, probably because it is an annual variable).

Not mine. They 'valued' the DB scheme at 20x annual payments - added that to the stand alone scheme - then I got 25% of the total, but all taken from the stand alone scheme. That's why none of the DB pension is tax free as I've already had it.

This is what I expected but since my standalone scheme is the only lump sum element. This made up 23% of the pension (when taking 20x annual payment for the DB scheme). I then expected the remaining 2% to be administered as tax free element of the DB scheme.

Pension provider says no, that's it, the rest you get as all taxed because that's how we do things in our scheme. They then say that this is normal practice for DB schemes. This is the bit that's new to me and I was wondering if someone can confirm that this is the case and that 25% tax free element is only specific to DC schemes.

Even HMRC has confirmed that I should be entitled to 25% tax free.

Normal practice for DB schemes is that you can choose to take no commutation (pension commencement lump sum / PCLS) or take some commutation in exchange for loss of annual pension eg. £20k annual pension and £0 commutation or £15k annual pension and £75k PCLS tax free.

Some DB schemes allow you to receive the PCLS from a linked AVC/DC pot without loss of annual DB pension. For example, if you had a £350k AVC then you could take £75k from it as a tax free tax free and keep the £20k annual DB pension. The remaining £275k would then be subject to normal drawdown rules where you can take 25% of that (ie. £68,750) tax free and the remainder as taxable income.

The latter sounds like what you have from how you have described it.

[Car bon]

LeoSayer said:

Normal practice for DB schemes is that you can choose to take no commutation (pension commencement lump sum / PCLS) or take some commutation in exchange for loss of annual pension eg. £20k annual pension and £0 commutation or £15k annual pension and £75k PCLS tax free.

Some DB schemes allow you to receive the PCLS from a linked AVC/DC pot without loss of annual DB pension. For example, if you had a £350k AVC then you could take £75k from it as a tax free tax free and keep the £20k annual DB pension. The remaining £275k would then be subject to normal drawdown rules where you can take 25% of that (ie. £68,750) tax free and the remainder as taxable income.

The latter sounds like what you have from how you have described it.

Could well be that I'm mis-remembering how mine worked - maybe I also had that......

[leef44]

In my case, the numbers are closer to this but used round numbers here:

£16k pension works out as (20 x ) £320k capital value. Separately have £80k AVC. The two have to be taken together as a total value of £400k.

So this would mean £100k (25%) is tax free. I take the £80k AVC as part of the tax free portion. I then take the annual £16k pension. Because the £80k only works out as 20% of the total then I was expecting to get the remaining 5% as a tax free element from the £16k pension.

That is, I thought the pension would be administered as £800 tax free element (remaining 5%) and £15,200 taxable income. HMRC agrees but pension provider just administers it as £16,000 taxable income as says tough, I had the chance to take a commutation to make it up to 25% lump sum.

I would have taken 25% lump sum had I'd known that was the case but I was not told before.

[LeoSayer]

That's not how it works.

Forget the 20x multiple, that's only used to calculate the value of a DB pension for lifetime allowance tax purposes. It's not relevant to the calculation of tax free cash.

Also, forget 25% tax free element, that's only used to calculate the maximum tax free cash you can take from a DC/SIPP or other pension pots, not DB schemes. The maximum PCLS you can take is not 25% of anything instead it is set in the DB scheme rules.

What you have here is as I said on my earlier post 2nd paragraph, the ability to receive DB PCLS tax free without reduction in annual pension.

Look at it this way. If the DB and AVC weren't linked in this way then you would be limited to the following choices:

Take full DB pension of £16k per year
Take 25% of your AVC (£18,750) as tax free lump sum and the rest as taxable income

Or

Take reduced DB pension of (say) £12k per year and £75k per year PCLS tax free.
Take 25% of your AVC (£18,750) as tax free lump sum and the rest as taxable income

Both of which are worse than what you have been offered.

[Car bon]

I went back and checked mine - it matches what LeoSayer says above.

[leef44]

LeoSayer said:

That's not how it works.

Forget the 20x multiple, that's only used to calculate the value of a DB pension for lifetime allowance tax purposes. It's not relevant to the calculation of tax free cash.

Also, forget 25% tax free element, that's only used to calculate the maximum tax free cash you can take from a DC/SIPP or other pension pots, not DB schemes. The maximum PCLS you can take is not 25% of anything instead it is set in the DB scheme rules.

What you have here is as I said on my earlier post 2nd paragraph, the ability to receive DB PCLS tax free without reduction in annual pension.

Look at it this way. If the DB and AVC weren't linked in this way then you would be limited to the following choices:

Take full DB pension of £16k per year
Take 25% of your AVC (£18,750) as tax free lump sum and the rest as taxable income

Or

Take reduced DB pension of (say) £12k per year and £75k per year PCLS tax free.
Take 25% of your AVC (£18,750) as tax free lump sum and the rest as taxable income

Both of which are worse than what you have been offered.

Thank you LeoSayer for your input. Are you an authority on this subject i.e. can I take it that this is the way DB schemes work in general?

If so then I am ok with the outcome from my pension provider. I just wish I knew these facts beforehand. I thought I was very knowledgeable on this subject but this fact was new to me (DB schemes do not necessarily follow 25% tax rule).

Your explanation is more or less what the provider said to me but I needed to hear it from a third party source to believe it.

[LeoSayer]

I'm not a financial advisor and don't work in pensions so I'm no authority - I just spend way too much time on this subject for my own financial planning.

Not all DB schemes have a DB/AVC link like yours but in my experience this is how DB schemes generally work.

Reading material here:
https://techzone.abrdn.com/public/pensions/Tech-gu...

[pete_esp]

Hi IM team! Happy new year to you all and I hope 2024 is a great year for you all!

I have a question about dividends in my IM pot, what are “accumulation dividends “ and how do they differ from dividends and is the difference important?

[AdamIM]

pete_esp said:

Hi IM team! Happy new year to you all and I hope 2024 is a great year for you all!

I have a question about dividends in my IM pot, what are “accumulation dividends “ and how do they differ from dividends and is the difference important?

Hi Pete,

There is a difference. Dividends vs Acc Dividends.
Dividends are cash payments into the account.

Accumulation dividends are where the distribution is more share units as opposed to cash.

From your point of view, holding value at receipt is the same and there may be different tax treatments.

I hope that helps.

Adam

[pete_esp]

Thanks Adam!

[leef44]

LeoSayer said:

I'm not a financial advisor and don't work in pensions so I'm no authority - I just spend way too much time on this subject for my own financial planning.

Not all DB schemes have a DB/AVC link like yours but in my experience this is how DB schemes generally work.

Reading material here:
https://techzone.abrdn.com/public/pensions/Tech-gu...

[550Anniv]

Hi Guys, After seeing this tread, I wonder if I could ask a question and get the collectives thoughts.
I have a current pension I pay in and so does my employer, and I am happy to let that “do its thing” so to speak.
But, I have four other pensions I have had with other jobs. These are totally dormant and I just sitting there. The total value of these is £42k
I also have a Standard Life pension that is a “with Profits” scheme that I have been told not to touch.
My question thus. Is it worth taking the dormant pensions and putting them into the Standard Life policy? Or merge them together and go with Vanguard for example.
To give you a bit more info, I am 53 years old, which ever way this goes, I plan to pay extra per month into the policy, and one more point… Fees. The Standard Life policy fee is 1%
Thank you for your thoughts.

[pingu393]

Under what circumstances can a pension provider change the beneficiary?


I'm just reading some stuff and it seems the pension provider is not legally bound by your request...

https://www.aviva.co.uk/retirement/retired-life/ad...

[Car bon]

pingu393 said:

Under what circumstances can a pension provider change the beneficiary?

I'm just reading some stuff and it seems the pension provider is not legally bound by your request...

https://www.aviva.co.uk/retirement/retired-life/ad...

I managed it - may father left me a share of his remaining SIPP. My wife had only a very small pension whereas I had pretty good ones.

I asked the administrators to change the beneficiary to my wife - and they agreed. That meant that she was able to take without paying tax, as she withdraws under her tax free allowance. I'd have paid tax on it.

The 'not legally bound' bit is part of the reason a pension is excluded from your estate.

[pingu393]

Car bon said:

pingu393 said:

Under what circumstances can a pension provider change the beneficiary?

I'm just reading some stuff and it seems the pension provider is not legally bound by your request...

https://www.aviva.co.uk/retirement/retired-life/ad...

I managed it - may father left me a share of his remaining SIPP. My wife had only a very small pension whereas I had pretty good ones.

I asked the administrators to change the beneficiary to my wife - and they agreed. That meant that she was able to take without paying tax, as she withdraws under her tax free allowance. I'd have paid tax on it.

The 'not legally bound' bit is part of the reason a pension is excluded from your estate.

That's you, the beneficiary, requesting the change. Can the administrators make the change on their own?

[supersport]

On death they will ask for any other relatives and or dependents.

They can then take that along with the expression of wishes and the will into consideration before deciding how to pay out.

I was very surprised by that but have seen it happen.

[AdamIM]

supersport said:

On death they will ask for any other relatives and or dependents.

They can then take that along with the expression of wishes and the will into consideration before deciding how to pay out.

I was very surprised by that but have seen it happen.

The wording above is simply covering situations where someone dies intestate or their instruction to the administrator contradicts a Will.

[pingu393]

AdamIM said:

supersport said:

On death they will ask for any other relatives and or dependents.

They can then take that along with the expression of wishes and the will into consideration before deciding how to pay out.

I was very surprised by that but have seen it happen.

The wording above is simply covering situations where someone dies intestate or their instruction to the administrator contradicts a Will.

btw, these are not just random questions, but are relevant to an ongoing situation...

Many moons ago, the deceased told his sister that she was the named beneficiary to his pension. She just thought it was another of his tall tales. She has now received a letter from the pension administrators asking for information about other possible beneficiaries. She has told them the whole story over the phone.

The deceased died intestate, but not before telling a solicitor that he may have children in an other city that he doesn't know about. He told the solicitor whilst administering his late mother's estate (she had a will and left everything to him).

The solicitor now seems to be running the estate dry with investigative fees looking for these children (who probably don't exist).

This is why we want to know if the administrator of a pension can go against the stated wishes of the deceased. If they can, then the pension may go into deceased's estate and be eaten up by the solicitor's investigative fees.

[pingu393]

pingu393 said:

AdamIM said:

supersport said:

On death they will ask for any other relatives and or dependents.

They can then take that along with the expression of wishes and the will into consideration before deciding how to pay out.

I was very surprised by that but have seen it happen.

The wording above is simply covering situations where someone dies intestate or their instruction to the administrator contradicts a Will.

btw, these are not just random questions, but are relevant to an ongoing situation...

Many moons ago, the deceased told his sister that she was the named beneficiary to his pension. She just thought it was another of his tall tales. She has now received a letter from the pension administrators asking for information about other possible beneficiaries. She has told them the whole story over the phone.

The deceased died intestate, but not before telling a solicitor that he may have children in an other city that he doesn't know about. He told the solicitor whilst administering his late mother's estate (she had a will and left everything to him).

The solicitor now seems to be running the estate dry with investigative fees looking for these children (who probably don't exist).

This is why we want to know if the administrator of a pension can go against the stated wishes of the deceased. If they can, then the pension may go into deceased's estate and be eaten up by the solicitor's investigative fees.

I've just been told that it's a "death in service benefit". Is that part of a pension, or part of an estate?

[edit] Google tells me that it is treated in the same way as a pension, i.e. not part of the estate.

Edited by pingu393 on Saturday 27th January 15:20

[AdamIM]

Representatives have to take all reasonable steps to locate beneficiaries in such cases. This can include advertising, instructing geneoalogists etc. What is reasonable will depend on the facts of the case.