My Pension pot
Discussion
My pension pot has a cash value of approx. £825k.
I'm allowed 25% tax-free but my question is - would I be immediately liable for tax on the balance and if so at what rate? I currently pay tax at 40%.
Im hoping that after the tax free sum is taken that I can reduce my tax by drawing it down as income and keep it hopefully at 20% rate. If Im immediately liable and at the 40% rate then this option becomes less attractive.
(ps, my pension is a defined benefit final salary type).
Thanks
I'm allowed 25% tax-free but my question is - would I be immediately liable for tax on the balance and if so at what rate? I currently pay tax at 40%.
Im hoping that after the tax free sum is taken that I can reduce my tax by drawing it down as income and keep it hopefully at 20% rate. If Im immediately liable and at the 40% rate then this option becomes less attractive.
(ps, my pension is a defined benefit final salary type).
Thanks
As you're in a DB scheme the 825k is either a transfer value or a lifetime value to measure against the lifetime allowance - if you remain in the DB scheme and don't transfer to a DC scheme your tax free cash will depend on the scheme's cash commutation factors rather than be 25% of that value - which is by-the-by as it's not directly what you asked!
You can only draw down if you transfer your pension to a defined contribution arrangement- when also the tax free cash will be 25% of the investment value. The pension drawn down from the residual funds will be taxed at your marginal rate.
If in a DB scheme still, the residual pension, when drawn, will also be taxed at your marginal rate.
Email your scheme administrator- details on your benefit statement/retirement quote. Take independent professional advice if transferring from DB.
You can only draw down if you transfer your pension to a defined contribution arrangement- when also the tax free cash will be 25% of the investment value. The pension drawn down from the residual funds will be taxed at your marginal rate.
If in a DB scheme still, the residual pension, when drawn, will also be taxed at your marginal rate.
Email your scheme administrator- details on your benefit statement/retirement quote. Take independent professional advice if transferring from DB.
More here: https://www.pensionwise.gov.uk/en/tax
Basically yes you'll have to pay tax on the remainder, but at your prevailing income tax rate, and you'll need to have an annuity or flexi-draw down.
Basically yes you'll have to pay tax on the remainder, but at your prevailing income tax rate, and you'll need to have an annuity or flexi-draw down.
Pheo said:
More here: https://www.pensionwise.gov.uk/en/tax
Basically yes you'll have to pay tax on the remainder, but at your prevailing income tax rate, and you'll need to have an annuity or flexi-draw down.
As number2 says, that's not the arrangement with a DB scheme.Basically yes you'll have to pay tax on the remainder, but at your prevailing income tax rate, and you'll need to have an annuity or flexi-draw down.
OP, the nominal value of a DB scheme is somewhat notional, unlike a DC scheme. If one of your goals is reducing total tax paid, consider starting claiming the pension earlier rather than later - that reduces the amount paid annually (obviously) but as a consequence means more of the money returned to you from your pension is taxed at 20 rather than 40%
Your pension scheme I would anticipate has tables at the rate of reduction in payment and its relationship to when you start drawing. Note that state pension income is added to DB pension income for tax purposes, so the tax situation will get more significant as you reach state pension age.
Thank you folks, appreciate your comments, some new information there some Id assumed.
Once I access my pension Im a pensioner - will I revert to a 20% rate as a start position or will my residual (tax liable) lump sum immediately attract tax deduction and if so at what rate?
Sorry if my original question wasn't clear.
Paul
Once I access my pension Im a pensioner - will I revert to a 20% rate as a start position or will my residual (tax liable) lump sum immediately attract tax deduction and if so at what rate?
Sorry if my original question wasn't clear.
Paul
Edited by pauljdh on Wednesday 6th June 17:24
pauljdh said:
Thank you folks, appreciate your comments, some new information there some Id assumed.
Once I access my pension Im a pensioner - will I revert to a 20% rate as a start position or will my residual (tax liable) lump sum immediately attract tax deduction and if so at what rate?
Sorry if my original question wasn't clear.
Paul
Are you remaing in the defined benefit scheme or intending to transfer it to a personal pension?Once I access my pension Im a pensioner - will I revert to a 20% rate as a start position or will my residual (tax liable) lump sum immediately attract tax deduction and if so at what rate?
Sorry if my original question wasn't clear.
Paul
Edited by pauljdh on Wednesday 6th June 17:24
pauljdh said:
Thank you folks, appreciate your comments, some new information there some Id assumed.
Once I access my pension Im a pensioner - will I revert to a 20% rate as a start position or will my residual (tax liable) lump sum immediately attract tax deduction and if so at what rate?
Sorry if my original question wasn't clear.
Paul
A DB scheme wont allow to take the Tax free lump sum & defer the pension income, so if you take the lump sum, your pension income will commence.Once I access my pension Im a pensioner - will I revert to a 20% rate as a start position or will my residual (tax liable) lump sum immediately attract tax deduction and if so at what rate?
Sorry if my original question wasn't clear.
Paul
Edited by pauljdh on Wednesday 6th June 17:24
The income will be taxed. If you are already a 40% taxpayer & your current level of income will continue, then the pension income will attract tax at the same rate - or higher if it pushes you into the next banding.
You only pay income tax on the taxable element of your pension in the tax years when you withdraw it.
Taking the tax free cash element does not trigger a tax liability on the remaining fund at all.
Are you planning to stay in the defined benefit (final salary) scheme or move out into a money purchase scheme (a personal pension or SIPP)?
It is (for great reasons) the perceived wisdom that it is rarely a good idea to move away from a final salary scheme unless there is serious doubt about the scheme being able to continue to meet its liabilities or you have health issues that would make a transfer better suited to estate planning.
Taking the tax free cash element does not trigger a tax liability on the remaining fund at all.
Are you planning to stay in the defined benefit (final salary) scheme or move out into a money purchase scheme (a personal pension or SIPP)?
It is (for great reasons) the perceived wisdom that it is rarely a good idea to move away from a final salary scheme unless there is serious doubt about the scheme being able to continue to meet its liabilities or you have health issues that would make a transfer better suited to estate planning.
I’d be careful. Although some people do have simple affairs, if matters are otherwise, and/or if the deceased made a pension transfer within two years of death, the estate will need to complete IHT400 (unless the deceased was in normal health for their age when the transfer was made).
If an individual knew they had a life-threatening ailment when they transferred, HMRC *can* allocate an inheritance tax charge, on the basis that the deceased had a specific intention for beneficiaries to enjoy otherwise unrealisable death benefits (as well as them possibly drawing their own retirement benefits).
https://www.gov.uk/government/publications/inherit...
The regulator has very recently tabled some very interesting thoughts in light of a recent pension DB transfer scandal.
If an individual knew they had a life-threatening ailment when they transferred, HMRC *can* allocate an inheritance tax charge, on the basis that the deceased had a specific intention for beneficiaries to enjoy otherwise unrealisable death benefits (as well as them possibly drawing their own retirement benefits).
https://www.gov.uk/government/publications/inherit...
The regulator has very recently tabled some very interesting thoughts in light of a recent pension DB transfer scandal.
Ginge R said:
I’d be careful. Although some people do have simple affairs, if matters are otherwise, and/or if the deceased made a pension transfer within two years of death, the estate will need to complete IHT400 (unless the deceased was in normal health for their age when the transfer was made).
If an individual knew they had a life-threatening ailment when they transferred, HMRC *can* allocate an inheritance tax charge, on the basis that the deceased had a specific intention for beneficiaries to enjoy otherwise unrealisable death benefits (as well as them possibly drawing their own retirement benefits).
https://www.gov.uk/government/publications/inherit...
The regulator has very recently tabled some very interesting thoughts in light of a recent pension DB transfer scandal.
In all fairness, this rule only applies to people who know they have less than two years to live when they look to make the transfer and therefore such a move would not benefit them as so would therefore fall out of the scope of my statement above.If an individual knew they had a life-threatening ailment when they transferred, HMRC *can* allocate an inheritance tax charge, on the basis that the deceased had a specific intention for beneficiaries to enjoy otherwise unrealisable death benefits (as well as them possibly drawing their own retirement benefits).
https://www.gov.uk/government/publications/inherit...
The regulator has very recently tabled some very interesting thoughts in light of a recent pension DB transfer scandal.
Anyone in good health at the time of transfer who subsequently dies within two years would not be affected and anyone with a heath condition that is not life threatening over the subsequent two years is also not affected.
The specific form required by HMRC for transfers that are affected is IHT409 (which is supplemental to IHT400 and specific to pensions).
Hi Paul, there's some confusion with your post.
Firstly, if this is a DB scheme, there is no 'pot value' per se, you get an annual income amount (and in some cases an initial tax free lump sum) the calculation is based on your service and final salary.
You quote £825k which I assume is the transfer out value (i.e. what the company will pay you out, to forgo the above benefit), so if you were to transfer this to a private pensions scheme you would have this amount, and therefore be able to access the 25% tax free cash. BE VERY CAREFUL BEFORE DOING THIS AS YOU LOSE ALL GUARANTEED BENEFITS!
If you are able to take the full tax free cash (£206,250) from the DB scheme, you will turn on the income from the scheme (DB schemes are not very flexible, but in return you get very valuable guarantees). so yes, this income will be added to your annual income and taxed accordingly (i.e. if this is above £46,350 then you will be a 40% rate payer).
The only way to take the TFC and not take the income is to transfer it to a personal pension arrangement. You will need to involve a Financial Adviser for this, and (as above) you need to be fully aware of the risks.
Firstly, if this is a DB scheme, there is no 'pot value' per se, you get an annual income amount (and in some cases an initial tax free lump sum) the calculation is based on your service and final salary.
You quote £825k which I assume is the transfer out value (i.e. what the company will pay you out, to forgo the above benefit), so if you were to transfer this to a private pensions scheme you would have this amount, and therefore be able to access the 25% tax free cash. BE VERY CAREFUL BEFORE DOING THIS AS YOU LOSE ALL GUARANTEED BENEFITS!
If you are able to take the full tax free cash (£206,250) from the DB scheme, you will turn on the income from the scheme (DB schemes are not very flexible, but in return you get very valuable guarantees). so yes, this income will be added to your annual income and taxed accordingly (i.e. if this is above £46,350 then you will be a 40% rate payer).
The only way to take the TFC and not take the income is to transfer it to a personal pension arrangement. You will need to involve a Financial Adviser for this, and (as above) you need to be fully aware of the risks.
JulianPH said:
In all fairness, this rule only applies to people who know they have less than two years to live when they look to make the transfer and therefore such a move would not benefit them as so would therefore fall out of the scope of my statement above.
Anyone in good health at the time of transfer who subsequently dies within two years would not be affected and anyone with a heath condition that is not life threatening over the subsequent two years is also not affected.
The specific form required by HMRC for transfers that are affected is IHT409 (which is supplemental to IHT400 and specific to pensions).
I was clarifying this;Anyone in good health at the time of transfer who subsequently dies within two years would not be affected and anyone with a heath condition that is not life threatening over the subsequent two years is also not affected.
The specific form required by HMRC for transfers that are affected is IHT409 (which is supplemental to IHT400 and specific to pensions).
JulianPH said:
It is (for great reasons) the perceived wisdom that it is rarely a good idea to move away from a final salary scheme unless there is serious doubt about the scheme being able to continue to meet its liabilities or you have health issues that would make a transfer better suited to estate planning.
Unless any of us has a time machine, we probably don’t know we should transfer based on an illness that requires estate planning. If we do know (and I had this in mind - "if.. you have health issues that would make a transfer better suited to estate planning was referencing the HMRC guidance”), I amplified with a reference to the two year rule that you have now also followed up with. I wasn’t suggesting that if you simply died within two years of transferring you might automatically have issues with HMRC.As an aside, it’s probably worth pointing out that the two instances you gave would be unsafe if relied upon in isolation as a recommendation to transfer. A DB Scheme for a dependent still offers income security, albeit 50% (possible survivor’s) income, which - for *most* widows/widowers - is the most important aspect in the event of a breadwinner’s death.
Further, the fact that a Scheme might be in distress, or might go into PPF, is not (again, in isolation) a valid excuse to transfer. For most people, the transition is painless/seamless. An issue might revolve around potential loss of incremental increases for PPF policy holders, partly due to the compensation cap and 90% restriction on benefits but also because the indexation provided by the PPF may not be as generous as that otherwise provided by the scheme. But in itself, still not grounds for a competent, compliant adviser to suggest a transfer.
Al, I have never been anything other than courteous towards you and recommending of your services. I don't understand why you have decided to take this stance with me.
You say nothing that goes against what I said (you simply elaborate only upon the points you initially raised, as if this would negate the points I raised). It is as though you are arguing about the lines between my words.
"The fact a Scheme might be in distress... is not a valid excuses to transfer". WTF?!
Anyway, I don't advise on pension transfers from final salary Schemes. You do though.
You say nothing that goes against what I said (you simply elaborate only upon the points you initially raised, as if this would negate the points I raised). It is as though you are arguing about the lines between my words.
"The fact a Scheme might be in distress... is not a valid excuses to transfer". WTF?!
Anyway, I don't advise on pension transfers from final salary Schemes. You do though.
Ginge R said:
Unless any of us has a time machine, we probably don’t know we should transfer based on an illness that requires estate planning. If we do know (and I had this in mind - "if.. you have health issues that would make a transfer better suited to estate planning was referencing the HMRC guidance”), I amplified with a reference to the two year rule that you have now also followed up with. I wasn’t suggesting that if you simply died within two years of transferring you might automatically have issues with HMRC.
As an aside, it’s probably worth pointing out that the two instances you gave would be unsafe if relied upon in isolation as a recommendation to transfer. A DB Scheme for a dependent still offers income security, albeit 50% (possible survivor’s) income, which - for *most* widows/widowers - is the most important aspect in the event of a breadwinner’s death.
Further, the fact that a Scheme might be in distress, or might go into PPF, is not (again, in isolation) a valid excuse to transfer. For most people, the transition is painless/seamless. An issue might revolve around potential loss of incremental increases for PPF policy holders, partly due to the compensation cap and 90% restriction on benefits but also because the indexation provided by the PPF may not be as generous as that otherwise provided by the scheme. But in itself, still not grounds for a competent, compliant adviser to suggest a transfer.
Think you are being overly prickly. Julian wasn't advising what the OP should do with regard to his defined benefit scheme.As an aside, it’s probably worth pointing out that the two instances you gave would be unsafe if relied upon in isolation as a recommendation to transfer. A DB Scheme for a dependent still offers income security, albeit 50% (possible survivor’s) income, which - for *most* widows/widowers - is the most important aspect in the event of a breadwinner’s death.
Further, the fact that a Scheme might be in distress, or might go into PPF, is not (again, in isolation) a valid excuse to transfer. For most people, the transition is painless/seamless. An issue might revolve around potential loss of incremental increases for PPF policy holders, partly due to the compensation cap and 90% restriction on benefits but also because the indexation provided by the PPF may not be as generous as that otherwise provided by the scheme. But in itself, still not grounds for a competent, compliant adviser to suggest a transfer.
Your specific post about the nuances relating to the tax rules if a person had life-threatening ailments was interesting (I for one didn't know about it), but neither was it hugely relevant as the OP doesn't have such a condition (as far as we know).
JulianPH said:
Al, I have never been anything other than courteous towards you and recommending of your services. I don't understand why you have decided to take this stance with me.
"The fact a Scheme might be in distress... is not a valid excuses to transfer". WTF?!
I said "not in isolation" and I stand by that. In context, and as part of a series of factors, transferring could be the right thing to do. As I said, most scheme members heading for the lifeboat might benefit from other/better (commutation etc) terms. I regularly discuss aspects of distressed schemes with people far more qualified to comment on them than I, and the one thing about scheme viability that is apparent is that the real experts are invariably divided, and therefore, some are also ultimately wrong. "The fact a Scheme might be in distress... is not a valid excuses to transfer". WTF?!
The past twelve months have bought home to me just how little any of us really know about distressed scheme viability. We only have to look at the numbers from (New) BSPS to see that it's far healthier now following gestation than even the scheme trustees promulgated that it would be even six-eight months ago. Another example that springs to mind, where actuarial equivalence can help *some* scheme members heading into PPF, was the Kodak scheme.
If any adviser made a recommendation *solely* on a scheme looking likely to head into PPF, they'd better be minutely checking their PI cover. But if a guaranteed income for life most helps a widow, and if that might be achieved more likely through remaining a scheme member, then the correct advice will be to remain within the scheme, and not to transfer in the (invariably) suspect pursuance of 'flexibility', estate planning benefits etc. That's not to say they don't have merit, again in context, but certainly not dogmatically either.
My point is, there is no definitive right/wrong answer, and I was simply suggesting (too crisply it seems!) that we have to be really careful when chatting with people about (in particular) DB scheme transfers. Maybe, as you know, picking up the pieces of bad transfer advice has flared my radar these past eight months or so. The singular point is, we are starting to see some distinction between what a pension is (ie, an income for life) and a 'pension' (ie, the wrapper) and it is becoming a fascinating space. My discussions with the regulator and other experts in unpicking the disastrous actions of (allegedly) a few, have been fascinating.
I enjoy our more feisty phone conversations (for those who don't know, Julian and I live quite close to each other and it's fair to say we have enjoyed robust conversation along the way). We are both polite and cordial, and we both give as good as we get. I certainly don't think I was discourteous though, mate, and I didn't take any stance. I was merely amplifying. Speak soon. Let me know if you want a ticket if two to the event we discussed and I'll send you a couple - and we'll have a beer or two.
EddieSteadyGo said:
Think you are being overly prickly. Julian wasn't advising what the OP should do with regard to his defined benefit scheme.
Your specific post about the nuances relating to the tax rules if a person had life-threatening ailments was interesting (I for one didn't know about it), but neither was it hugely relevant as the OP doesn't have such a condition (as far as we know).
This is an information board; you're correct, and I mentioned it *because* we didn't know if a medical condition was a factor. I thought it would be interesting and useful to pass it on. If it saves one PHer from making a similar potential mistake, then it's worth it. I probably would talk to a fellow financial services specialist more directly than I would a retail client. I hope I didn't come across as rude or prickly, Direct, for sure. Your specific post about the nuances relating to the tax rules if a person had life-threatening ailments was interesting (I for one didn't know about it), but neither was it hugely relevant as the OP doesn't have such a condition (as far as we know).
Ginge R said:
This is an information board; you're correct, and I mentioned it *because* we didn't know if a medical condition was a factor. I thought it would be interesting and useful to pass it on. If it saves one PHer from making a similar potential mistake, then it's worth it. I probably would talk to a fellow financial services specialist more directly than I would a retail client. I hope I didn't come across as rude or prickly, Direct, for sure.
Fair enough. Good points.Gassing Station | Finance | Top of Page | What's New | My Stuff