Pension lump sum

[mudskipper]

Mr ms is getting made redundant at the end of the month.

He's getting a pretty decent payout, and has the option to put a fair bit of it into the company pension scheme instead of taking it now (and paying lots of higher rate tax).

He's 55 in a couple of months - if he puts the money into his pension, then draws his lump sum at some point in the next couple of years, does he need to start drawing his pension at the same time or can he leave that for later? It's a final salary scheme.

TL;DR - when you take a lump sum from your pension, do you have to start taking the pension too?

(Yes, I know he should get professional advice - I have made this point but he has now left it rather too late)

[vwdan]

If it's a defined benefit scheme, I'd have thought the scheme would be the only one who can answer that? I think there's a lot less flexibility for those (Going on my local govt pension, anyway - the paperwork implies I have few options with it)

Would they pay it into a SIPP or Defined Contribution pension for him? Can do whatever you like with it then.

[northernladuk]

I thought the lump sum was actually called Pension Commencement Lump Sum (PCLS) which helps with clarity. It also depends on what type of pension it is...

This might help

https://www.pensionsadvisoryservice....-cash-lump-sum

[Fred Bloggs]

You need to look at the details of this with the the pension scheme directly. "Generally" speaking in a DB scheme any lump sum comes from a commutation of benefits, ie a reduced pension. That means you can only take the lump sum when you draw the pension. "Some" very generous schemes have a lump sum built in as well as the income element. I doubt you can have access to this without taking the pension income, but you can't be sure without asking the pension scheme. Lastly, if Mr MS is paying extra money into the scheme you need to determine the actual terms of this. Is he buying more years in the DB plan? Of is his extra contribution going into a DC "pot"? The terms relating to that possible DC "pot" need to be explored. I hope that helps you to know what to ask the pension administrators.

NB - I have a DB pension with a DC "pot" attached to it in the form of AVC's. I have found out that I am unable to take any of the DC AVC "pot" without putting the DB pension into payment as well. I was disappointed at this outcome, but that is the rules of that scheme. Mr MS's may be different. HTH.

[mudskipper]

Thanks both -

"If you defer your benefits, the amount of your severance package you wish to use to augment your pension is placed in a money purchase fund with <provider> (cash fund or unit-linked based)."

Ah, rereading the docs, it does call it a PCLS, but also says you can transfer the fund to a different provider,which would allow you to take money purchase benefits without going into drawdown or buying an annuity (only 25% would be tax free).

But I think that makes it clear - he'd need to start to draw his pension, or transfer the extra to a different provider and effectively operate it as a different pension fund.

[Fred Bloggs]

Thanks both -

"If you defer your benefits, the amount of your severance package you wish to use to augment your pension is placed in a money purchase fund with <provider> (cash fund or unit-linked based)."

Ah, rereading the docs, it does call it a PCLS, but also says you can transfer the fund to a different provider,which would allow you to take money purchase benefits without going into drawdown or buying an annuity (only 25% would be tax free).

But I think that makes it clear - he'd need to start to draw his pension, or transfer the extra to a different provider and effectively operate it as a different pension fund.

OK. So, it is a DC "pot" as I suspected. From what you have said, I would say that you could transfer the DC pot to a SIPP and take 25% from there. But you'd still have 75% of that pot in the SIPP then.

I "think" but you'd need to check, that for the purposes of the PCLS from the DB and DC pot combined, maybe all or most of the DC "pot" could be taken as the PCLS because it's all part of the same occupational scheme. Exactly how much you could take of the DC pot in such an arrangement would depend on the actuarial value of the total "pot" value DB ad DC combined. But, you'd have to take the income to do that. So, possibly good news but you need to ask more questions. HTH.

[Dark Black]

Thanks both -

"If you defer your benefits, the amount of your severance package you wish to use to augment your pension is placed in a money purchase fund with <provider> (cash fund or unit-linked based)."

Ah, rereading the docs, it does call it a PCLS, but also says you can transfer the fund to a different provider,which would allow you to take money purchase benefits without going into drawdown or buying an annuity (only 25% would be tax free).

But I think that makes it clear - he'd need to start to draw his pension, or transfer the extra to a different provider and effectively operate it as a different pension fund.

Set a SIPP up and pay the lump sum into that? As I've just discovered, it's very simple to do and pain free. It's not necessary to invest any of it all, he can just leave it in the cash account. Although obviously it's not going to earn much like that.

[fibio]

Slightly off-topic but something to be aware of in case it factors into your tax planning. Be aware of the lifetime allowance (LTA) and what events cause a comparison to how much of the lifetime allowance you've used up. Taking the lump sum is considered a crystallisation event where the full pot of that specific pension is assessed against the LTA at that point.

For example, if I have the following two DC pensions at age 60:
A £100,000 DC pot with provider X
A £1,030,000 DC pot with provider Y

Taking the 25% lump sum from provider Y would mean that I've used up my full LTA (currently £1.03M) such that whenever I take money from provider X in the future, I no longer have any of my allowance left and future withdrawals would be taxed at the 55% rate.

However, if I had the following pensions at age 55 (and assuming the LTA was the same 5 years ago as it was today - most recently it has increased with CPI, but investments would hope to grow faster than this so the comparison is still valid):
A £80,000 DC pot with provider X
A £824,000 DC pot with provider Y.

I could take the 25% lump sum from both providers, crystallise the full amount of my pensions whilst below the LTA, and leave the remainder fully invested to grow. Even if the full amount grows beyond the LTA, because I've already fully crystallised the amounts the future drawdowns are only taxed at my marginal rate.

[mudskipper]

OK. So, it is a DC "pot" as I suspected. From what you have said, I would say that you could transfer the DC pot to a SIPP and take 25% from there. But you'd still have 75% of that pot in the SIPP then.

I "think" but you'd need to check, that for the purposes of the PCLS from the DB and DC pot combined, maybe all or most of the DC "pot" could be taken as the PCLS because it's all part of the same occupational scheme. Exactly how much you could take of the DC pot in such an arrangement would depend on the actuarial value of the total "pot" value DB ad DC combined. But, you'd have to take the income to do that. So, possibly good news but you need to ask more questions. HTH.

Yes, the illustration he's been given shows him taking the DC pot as the lump sum (would be slightly less than 25% of the total) then getting his full pension from his contributions. I'll nag him to ring them!

Thanks all - helpful stuff.

[Fred Bloggs]

Yes, the illustration he's been given shows him taking the DC pot as the lump sum (would be slightly less than 25% of the total) then getting his full pension from his contributions. I'll nag him to ring them!

Thanks all - helpful stuff.

Happy to help