Pension PCLS

[chip*]

Hi,

I have a (simple!) query I hope someone can assist with as I didn't find the answer via googling.

I currently have a DB pension and a private SIPP pension. Come retirement day, if I request to withdraw the 25% PCLS cash amount from the DB scheme, will this automatically trigger the 25% PCLS withdrawal on my SIPP pension too, or are they mutually exclusive of each other?


Thanks
Tom

[Ozzie Osmond]

The DB and SIPP are dealt with separately. In fact any number of multiple pensions are dealt with completely separately.

Bear in mind also that if/when you put some/all of your SIPP into "drawdown", you get the 25% tax free opportunity on each tranche that you move into drawdown. You don't have to do it all at once.

By the way, if you paid any AVCs into the DB scheme they can be used towards the 25% tax free, preserving your main DB pension at a higher level. Why is this attractive? You (1) still get a tax free sum, and (2) leave the main pension payment risk with your former employer.

[sidicks]

chip* said:

Hi,

I have a (simple!) query I hope someone can assist with as I didn't find the answer via googling.

I currently have a DB pension and a private SIPP pension. Come retirement day, if I request to withdraw the 25% PCLS cash amount from the DB scheme, will this automatically trigger the 25% PCLS withdrawal on my SIPP pension too, or are they mutually exclusive of each other?
Thanks
Tom

Commutation factors I.e. The amount of pension given up for a particular cash lump sum are normally not very generous - if if you took the cash and tried to replace the lower pension by buying an annuity, you'd typically face a large shortfall.

Typically most people take the 25% TFC regardless of the economics of the situation, because they have a desire / need for up front cash - and there's nothing wrong with doing that.

I think therefore, depending how much cash you need (and the relative sizes of your DC and DB pots) you'd be better off maximising TFC from the SIPP and keeping as much of the DB benefit in pension, as far as possible.

[Ozzie Osmond]

Yes, I recognise what you're saying and that DB pension is very valuable in itself. However, many people like to pocket the "tax free cash" simply because it's cash in hand as opposed to a bet on their own life expectancy.

For some (lucky) people taking the cash lump sum can pull them out of 40% tax on their monthly pension and into tax free cash instead. However, this will depend entirely on personal circumstances - i.e. size of DB pension and amount of other income available in retirement.

Just to repeat Sidicks point, DB pension is very valuable so make sure you get the numbers crunched properly. Taking the tax free cash shouldn't be just a knee-jerk reaction. Professional advice recommended.

[Defcon5]

sidicks said:

Commutation factors I.e. The amount of pension given up for a particular cash lump sum are normally not very generous - if if you took the cash and tried to replace the lower pension by buying an annuity, you'd typically face a large shortfall.

On my DB schem, you get £12 up front for every £1 you give up. So essentially if you live longer than 12 years you have technically lost out, but I would stil take the max as I think I could make much more use (and more enjoyment) at 65 than and extra 25% a month when I'm 80 odd.

[Jockman]

Defcon5 said:

sidicks said:

Commutation factors I.e. The amount of pension given up for a particular cash lump sum are normally not very generous - if if you took the cash and tried to replace the lower pension by buying an annuity, you'd typically face a large shortfall.

On my DB schem, you get £12 up front for every £1 you give up. So essentially if you live longer than 12 years you have technically lost out, but I would stil take the max as I think I could make much more use (and more enjoyment) at 65 than and extra 25% a month when I'm 80 odd.

Will you be offered a levelling option as standard?

[Defcon5]

Jockman said:

Will you be offered a levelling option as standard?

Sorry I have no idea what that means, I just remember what it said on my last statement as I was daydreaming for a week about which supercar to buy

[chip*]

sidicks said:

Commutation factors I.e. The amount of pension given up for a particular cash lump sum are normally not very generous - if if you took the cash and tried to replace the lower pension by buying an annuity, you'd typically face a large shortfall.

Typically most people take the 25% TFC regardless of the economics of the situation, because they have a desire / need for up front cash - and there's nothing wrong with doing that.

I think therefore, depending how much cash you need (and the relative sizes of your DC and DB pots) you'd be better off maximising TFC from the SIPP and keeping as much of the DB benefit in pension, as far as possible.

Some excellent points made above. To add more context to my initial post, I have accrued a decent non-contributory DB pension from my previous employer. Since the DB pension was zero cost to me, my initial thinking is to access the 25% TFC and enjoy the retirement years (plenty of holidays, driving trips, golf/MTB breaks, always fancied a classic Merc too!) with my wife while we are still alive and healthy! Admittedly, this is a high level retirement plan for now (hence clarifying how to access my pensions), but I will definitely factor in your suggestions come my retirement day.

Thanks
Tom

[Jockman]

Defcon5 said:

Jockman said:

Will you be offered a levelling option as standard?

Sorry I have no idea what that means, I just remember what it said on my last statement as I was daydreaming for a week about which supercar to buy

The last DB quote I looked at had 4 options.

The first 2 are obviously with or without lump sum.

The other 2 were as above but with a levelling option which meant enhanced payments until state pension age then a drop thereafter to match exactly the state pension. Thus your income would remain constant but the scheme would no longer be funding all of it.

Quite an attractive option in some ways

[Ozzie Osmond]

Defcon5 said:

On my DB scheme, you get £12 up front for every £1 you give up.

• If you want to go out and "buy" pension it's not unusual for the cost to be around £30 for every £1 of annuity income.
• If you "sell" pension in your DB scheme they are only offering you £12 for each £1 of pension.
• OK, the £12 is tax free so a 40% taxpayer might say to himself, "The £12 tax free is actually worth £20 to me",
• But if the pensioner is only a 20% taxpayer the £12 tax free is only worth £15 !
• Neither value compares favourably with the £30 figure we had at the outset.

[sidicks]

Ozzie Osmond said:

• If you want to go out and "buy" pension it's not unusual for the cost to be around [b]£30 for every £1 of annuity income.[/b]
• If you "sell" pension in your DB scheme they are only offering you £12 for each £1 of pension.
• OK, the £12 is tax free so a 40% taxpayer might say to himself, "The £12 tax free is actually worth £20 to me",
• But if the pensioner is only a 20% taxpayer the £12 tax free is only worth £15 !
• Neither value compares favourably with the £30 figure we had at the outset.

£30 cash buys an inflation-linked pension of £1
It's more like £20 for a flat pension.

[Ginge R]

Tom,

Is your defined benefit pension private, or a public sector one?

Don't underestimate your longevity!

Pensions are no longer lifetime products, a personal pension has estate planning potential.

12:1 factors are going to come under increasing pressure.

[Ozzie Osmond]

sidicks said:

£30 cash buys an inflation-linked pension of £1. It's more like £20 for a flat pension.

Yes, although I doubt his DB scheme is paying flat pension. There's usually some indexation and a spouse's pension.

At the end of the day so long as the numbers are understood people can make informed decisions.

[chip*]

Ginge R said:

Tom,

Is your defined benefit pension private, or a public sector one?

Don't underestimate your longevity!

Pensions are no longer lifetime products, a personal pension has estate planning potential.

12:1 factors are going to come under increasing pressure.

Hi Al,

DB = private pension with a Swiss bank. [probably a blur given your multiple client visits, but you kindly came over for a pension assessment last year and offered lots of useful advice to me].

You rightly mention "estate planning" which is one of a few reasons for raiding the 25% TFC from my DB pension, as I had one eye on the inheritance opportunity with our personal SIPP pensions. Luckily we are in a fortunate financial position for our retirement days, but I would still need to weigh up the benefits/numbers to see which best suit our retirement days.

Tom

[Ozzie Osmond]

chip* said:

DB = private pension with a Swiss bank.
You rightly mention "estate planning" which is one of a few reasons for raiding the 25% TFC from my DB pension, as I had one eye on the inheritance opportunity with our personal SIPP pensions. Luckily we are in a fortunate financial position for our retirement days, but I would still need to weigh up the benefits/numbers to see which best suit our retirement days.

Then, with respect, I suggest you pay an IFA!!!!!

[Ginge R]

chip* said:

Hi Al,

DB = private pension with a Swiss bank. [probably a blur given your multiple client visits, but you kindly came over for a pension assessment last year and offered lots of useful advice to me].

You rightly mention "estate planning" which is one of a few reasons for raiding the 25% TFC from my DB pension, as I had one eye on the inheritance opportunity with our personal SIPP pensions. Luckily we are in a fortunate financial position for our retirement days, but I would still need to weigh up the benefits/numbers to see which best suit our retirement days.

Tom

Tom,

It has been a hard day in the hammock, I do remember, yes.. . I hope you found it useful, and it's always nice to drop in for a PH cuppa. As I remember, I suggested you check out the trustee reports/position and the funding valuations?! Events since, have shown how frail our DB system is. The first thing I'd suggest is get a transfer value. For most people, leaving a DB pension is sacrilege but that default position is not as cast iron as it was before. Still got the Porsche?

[sidicks]

Ozzie Osmond said:

Yes, although I doubt his DB scheme is paying flat pension. There's usually some indexation and a spouse's pension.

At the end of the day so long as the numbers are understood people can make informed decisions.

For public sector schemes, yes, not for most private sector schemes.

[Ozzie Osmond]

sidicks said:

For public sector schemes, yes, not for most private sector schemes.

With the greatest respect, I don't think you are correct on this occasion. My understanding is that statutory indexation applies in DB schemes for pension earned after April 1997, both during deferment and during retirement.

"Each year, your scheme must increase your pension (above your GMP) as follows:
•any pension built up after 6 April 1997 is increased in line with the consumer prices index (CPI) or 5%, whichever is lower
•any pension built up after 6 April 2005 is increased in line with the consumer prices index (CPI) or 2.5%, whichever is lower."

[sidicks]

Ozzie Osmond said:

With the greatest respect, I don't think you are correct on this occasion. My understanding is that statutory indexation applies in DB schemes for pension earned after April 1997, both during deferment and during retirement.

"Each year, your scheme must increase your pension (above your GMP) as follows:
•any pension built up after 6 April 1997 is increased in line with the consumer prices index (CPI) or 5%, whichever is lower
•any pension built up after 6 April 2005 is increased in line with the consumer prices index (CPI) or 2.5%, whichever is lower."

Both these refer to increase to deferred pensions, I.e. pre-retirement, as far as I recall, but this isn't really my area of expertise!
Can you provide the link to the source of the text above?

Edited by sidicks on Sunday 3rd July 23:29

[Ozzie Osmond]

Pensions Advisory Service

http://www.pensionsadvisoryservice.org.uk/about-pe...