When to Take Pension Lump sum?

[Randy Winkman]

Hopefully a simple one. For a moderate earner like me who will get a work pension lump sum about the same as my annual salary - is it better to retire and take that lump sum early in the new financial year rather than towards the end of the previous one? I'm just thinking that for tax reasons, it means I wont get a whole annual salary plus a lump sum in one financial year. This is guess work really though.

Cheers.

[shiftspark]

The first 25% is tax free so will not be taxed.

[GT03ROB]

You can take up to 25% of your total pension as a lump sum & tax free. So assuming you are referring to this its irrelevant when you take it.

[Randy Winkman]

Thanks both. No idea what % of my total pension the lump sum represents but I'm sure I can find out.

[Fast and Spurious]

It sounds like a DB scheme in which case you'll be given the choice of a lump sum and a reduced pension, or the full pension. The lump sum is tax-free and is, like everything else, calculated by the actuary. Technically it won't be 25% of anything, there is no pot value.

[flight147z]

Fast and Spurious said:

It sounds like a DB scheme in which case you'll be given the choice of a lump sum and a reduced pension, or the full pension. The lump sum is tax-free and is, like everything else, calculated by the actuary. Technically it won't be 25% of anything, there is no pot value.

Nothing in the original comment suggest DB to me? More likely to be DC

[cliffords]

As stated it's tax free so the timing is not a tax consideration. This applies both for DB or DC schemes . There is a limit to the overall amount , you should take some advice on the overall size of your pension.

For me I would be looking at the fact a labour government is very likely to bring back the lifetime allowance and very likely to reduce it from where it was , so depending on pot size and timming do it soon . Above all take some advice , not from internet forums

Pension Wise is free , Google it .

[Randy Winkman]

Thanks everyone. It's a civil service "gold plated" ( ) defined benefit pension where I get some choice as to how much lump sum I get. Not surprisingly, with an effect on the ongoing monthly pension.

I'd have thought that if the lump sum is tax free, my opening question is probably irrelevant.

[PositronicRay]

Randy Winkman said:

Thanks everyone. It's a civil service "gold plated" ( ) defined benefit pension where I get some choice as to how much lump sum I get. Not surprisingly, with an effect on the ongoing monthly pension.

I'd have thought that if the lump sum is tax free, my opening question is probably irrelevant.

You may want to use this year's ISA allowance.

[Zoon]

Or as an option you can forego a lump sum and just have 25% of your drawdown tax-free every month.
Depends if you need a lump sum for anything.

[Randy Winkman]

Thanks both. I'll look into the ISA.

On how much to draw, I'm thinking about it but from past experience I'm a big believer that one can make a "sensible" choice but to some extent it's in the lap of the gods. By nature I'm a sensible and patient person but once woke up in intensive care 2 days after being critically injured in an accident. A good example of how we can make any sensible plans we like but they might not amount to anything. I would only be slightly exaggerating to say that when it happened, one of my first thoughts was "I nearly did a boring job for 30+ years and didn't even get the pension!".

[sjc]

Apologies for butting in I'm on the OP's thread but is the tax free amount a once only withdrawal,or could you for instance take 10% and then 15% later? And if so,is the 25% based on the balance of the first withdrawal?
Ta.

[Dashnine]

sjc said:

Apologies for butting in I'm on the OP's thread but is the tax free amount a once only withdrawal,or could you for instance take 10% and then 15% later? And if so,is the 25% based on the balance of the first withdrawal?
Ta.

Yes to split lump sums - when you take the 10%, 30% is put into a seperate 'pot' (as it's now 'crystalised') which will be taxed when you take it out. Then when you take the next 15% of the 'uncrystalised' pot, 45% is put into the crystalised pot - making 75% crystalised which will be taxed when you take it, the 25% which you have taken in total being untaxed.

If you are still contibuting to the pot, the further amounts you take may grow, so no, it's not 25% at the time of the first withdrawal, it's 25% of all that you contribute in total.

The downside of taking the lump sum is that if you don't take it, you can take the allowance as a part of your regular pension withdrawals, meaning 25% of your pension is untaxed before the various tax bands (0%, 20%, 40%, etc.) apply - which can help if you may go over one of the bands.

Edited by Dashnine on Friday 19th January 10:16

[darreni]

sjc said:

Apologies for butting in I'm on the OP's thread but is the tax free amount a once only withdrawal,or could you for instance take 10% and then 15% later? And if so,is the 25% based on the balance of the first withdrawal?
Ta.

Unless things have changed in the last couple of years, phased drawdown is not possible with DB schemes.

[Dashnine]

darreni said:

sjc said:

Apologies for butting in I'm on the OP's thread but is the tax free amount a once only withdrawal,or could you for instance take 10% and then 15% later? And if so,is the 25% based on the balance of the first withdrawal?
Ta.

Unless things have changed in the last couple of years, phased drawdown is not possible with DB schemes.

I'd assumed perhaps wrongly, that the question was related to a DC scheme, rather than DB which as per the post above the lump sum is defined by the actuary.

[PistonHead007]

Stop and think before you take a lump sum.

There are several versions of the Civil Service pension. Some of the earlier ones had a level of tax free lump sum as standard, usually 3x initial annual pension. This is fine to take as it's paid on top of the annual pension.

For anything over a standalone lump sum or if you're in a scheme where there isn't any lump sum as standard then to create a tax free lump sum you have to commute some of your annual pension. In other words, you get less annual, escalating taxable income for life in exchange for some tax free lump sum.

The maximum tax free lump sum is 25% but there is a calculation to work it out because you don't have a pot value as such. Your retirement options will illustrate both minimum and maximum lump sum. You can also choose any amount in the middle which will translate to more or less of your annual pension being commuted.

Here's the kicker. The commutation factor is only 12:1 for the Civil Service, like most public sector pensions. That means for every £1 of annual taxable income you give up, you get a one off tax free payment of £12.

Even with the taxation difference that's a pretty bum deal if you're in your early to mid sixties. For example, if the annual increase averages 3% and it's being taxed at 20% then by year 13 you're getting more than £12. Inflation is higher at the moment so the crossover point could be sooner. It's tied to the Consumer Prices Index, uncapped...

Edited by PistonHead007 on Friday 19th January 11:11

[sjc]

Dashnine said:

darreni said:

sjc said:

Apologies for butting in I'm on the OP's thread but is the tax free amount a once only withdrawal,or could you for instance take 10% and then 15% later? And if so,is the 25% based on the balance of the first withdrawal?
Ta.

Unless things have changed in the last couple of years, phased drawdown is not possible with DB schemes.

I'd assumed perhaps wrongly, that the question was related to a DC scheme, rather than DB which as per the post above the lump sum is defined by the actuary.

Yes, mine is a DC private pension scheme, thanks to you both for coming back, and apologies to the OP for me butting in!

[lauda]

PistonHead007 said:

Stop and think before you take a lump sum.

There are several versions of the Civil Service pension. Some of the earlier ones had a level of tax free lump sum as standard, usually 3x initial annual pension. This is fine to take as it's paid on top of the annual pension.

For anything over a standalone lump sum or if you're in a scheme where there isn't any lump sum as standard then to create a tax free lump sum you have to commute some of your annual pension. In other words, you get less annual, escalating taxable income for life in exchange for some tax free lump sum.

The maximum tax free lump sum is 25% but there is a calculation to work it out because you don't have a pot value as such. Your retirement options will illustrate both minimum and maximum lump sum. You can also choose any amount in the middle which will translate to more or less of your annual pension being commuted.

Here's the kicker. The commutation factor is only 12:1 for the Civil Service, like most public sector pensions. That means for every £1 of annual taxable income you give up, you get a one off tax free payment of £12.

Even with the taxation difference that's a pretty bum deal if you're in your early to mid sixties. For example, if the annual increase averages 3% and it's being taxed at 20% then by year 13 you're getting more than £12. Inflation is higher at the moment so the crossover point could be sooner. It's tied to the Consumer Prices Index, uncapped...

Edited by PistonHead007 on Friday 19th January 11:11

This is sound advice. The commutation rate in the alpha section of the Civil Service Scheme is terrible. Other sections provide for an automatic lump sum without commutation but if you’re giving up pension for a lump sum, I’d recommend getting some independent financial advice.

[Randy Winkman]

sjc said:

Dashnine said:

darreni said:

sjc said:

Apologies for butting in I'm on the OP's thread but is the tax free amount a once only withdrawal,or could you for instance take 10% and then 15% later? And if so,is the 25% based on the balance of the first withdrawal?
Ta.

Unless things have changed in the last couple of years, phased drawdown is not possible with DB schemes.

I'd assumed perhaps wrongly, that the question was related to a DC scheme, rather than DB which as per the post above the lump sum is defined by the actuary.

Yes, mine is a DC private pension scheme, thanks to you both for coming back, and apologies to the OP for me butting in!

I'm happy for you to join in - I'm learning all the time.

[darreni]

GT03ROB said:

You can take up to 25% of your total pension as a lump sum & tax free. So assuming you are referring to this its irrelevant when you take it.

As a DB scheme, the lump sum can only be taken with the pension income, so the timing may well be relevant to the OP.