Tax Free Amount on remaining AVC & DBCBS

[Hawkey99]

Once you have take the maximum amount of 25% tax free money from your pension, if you have AVC or DBCBS MONEY remaining do you also get a further 25% of this as tax free.

Trying to understand that if none of this remaining amount (AVC & DBCBC) has been dealt with for tax purposed than you should get 25% tax free....

[RobertT]

Any excess AVC & DBCBS cash is paid out as a UFPLS, which means the first 25% of that excess is also tax free. With the remainder classed as income under normal PAYE rules.

As long as your total income for the financial year you take your benefits is lower than £50,270(current 20% band rates) and because the first 25% is tax free, you will effectively only lose 15% of that excess amount to the taxman.

*The tax free element of your pension doesn't count as income!
*UFPLS stands for Uncrystallised Funds Pension Lump Sum

I'm in a similar position and although it means paying tax when ideally I might not want to, it also means more cash in my pocket than if I'd stayed within the 25% tax free amount.
Personally I think it's better to have 85% of something rather than 100% of nothing.

[Hawkey99]

Thank Robert, Brilliant as always.

Would a better option be for us to divest our AVCs into a SIPP and get the 25% tax free and pay the 20% tax on this when we take it out.

Would this give us any more or same amount (i.e. 25% tax free and remainder taxed at 20%)

Thanks

[RobertT]

It'll depend on personal circumstances to a large degree!

Some people will take the full lump sum from their main pension benefits and then also have their AVC's and DBCBS on top. In which case they'll probably pay more tax than if they take a full pension and use the AVC's and DBCBS to fund the tax free lump sum.

How much your income is in comparison to the Personal Tax Allowance will also come into it.
If it's equal to or more than the PTA, then once you've taken the 25% tax free lump sum everything else will be taxable.

But if your income is under the PTA, then the remaining 75% can be offset against it, and you'll pay less tax. Particularly if you draw it down over a period of time, rather than taking it in one go. But again that will depend on the individual in terms of age, income, etc.

In practice, what's right for one person isn't necessarily right for another. It's a case of doing your own maths and making the right choice for you.

[Hawkey99]

Im my case my income will be always above my PTA due to pension payments so Im looking at taking (Section C) smaller NRA 65 pension and the max lump sum and then pay standard rate tax on my DBCBS money after taking the 25% tax free amount.

Im also going to move my AVC money into a SIPP and take smaller amount of this with 25% of each amount being tax free and then paying standard tax on the rest of the amount...

At least thats the plan......

Thanks again Robert...

[Hawkey99]

My AVC & DBCBS together with other income such as current pensions I am in receipt of will take more over the 50k into the high tax band when I take my NRA65 if I take the maximum lump sum.

Therefore my best option is to transfer my AVC funds into a SIPP.

The plan would be to take amounts each year when there is no other major income and therefore just pay 20% tax on it.

So as an example when I draw down my SIPP I could take the following.

£60,000 transferred to SIPP
Take £20,000 in year 1. £15,000 tax free and pay £3000 tax on remaining £15,000 leaving £12,000 netting me £17,000
Repeat in Year 2
Repeat in Year 3

Does this make sense ?

[RobertT]

Without knowing all the details it's hard to answer which is the best option for you.

You've told us over the 3 years you will pay £9k in tax via a SIPP!

So how does that compare to leaving it with RM and taking it with your NRA65 benefits?

[freespeech]

My AVC & DBCBS together with other income such as current pensions I am in receipt of will take more over the 50k into the high tax band when I take my NRA65 if I take the maximum lump sum.

Therefore my best option is to transfer my AVC funds into a SIPP.

The plan would be to take amounts each year when there is no other major income and therefore just pay 20% tax on it.

So as an example when I draw down my SIPP I could take the following.

£60,000 transferred to SIPP
Take £20,000 in year 1. £15,000 tax free and pay £3000 tax on remaining £15,000 leaving £12,000 netting me £17,000
Repeat in Year 2
Repeat in Year 3

Does this make sense ?

If you take the max LS won't that be funded entirely by the DBCBS?

[Hawkey99]

No,

I believe if you are Section C you can take a lump sum as part of your pension and also your DBCBS. Then anything left from your DBCBS after your 25% you pay tax on.

Thats my understanding but Im sure Robert can explain better or confirm/correct.

[RobertT]

No,

I believe if you are Section C you can take a lump sum as part of your pension and also your DBCBS. Then anything left from your DBCBS after your 25% you pay tax on.

Thats my understanding but Im sure Robert can explain better or confirm/correct.

Yes, that's correct.

You can commute some pension to get a lump sum, and you can take the DBCBS and any AVC's on top. But if you've used up the 25% tax free allowance via commuting pension to lump sum, tax will be payable on the DBCBS and AVC's.

Therefore not commuting any pension, would perhaps mean paying less tax? As ever, allowing for individual circumstances.