Lump sum calculation

[renrag40]

As far as i can gather from what people in Section B have told me who have taken their pension. The DBCBS would mainly be used to fund the difference between the standard and the maximum tax free lump sum for the years 2012 to 2018. This would mean that your pension would not be reduced for those years. The surplus would then be paid out as a lump sum...... 25% of which would be tax free.
So if the standard tax free lump sum is £6,000 and the maximum tax free lump is £10,000 then the £4,000 difference would be paid out of the DBCBS.
If you had say £25,000 in the DBCBS that would be reduced to £21,000 of which £5,250 would be tax free. The remaining £15,750 would be taxed at your nominal rate. If your tax rate is 20% you would pay £3,150 in tax so would receive £12,600.
This would appear to be the most tax efficient way of taking the DBCBS.

[wolfman]

Thanks for the reply Robert & Renrag. Do you not lose 5% per year of your DBCBS as it's mainly attached to your NRA 65 if you take it early?

[RobertT]

The RMPP website says the DBCBS is reduced if taken before NRA, but not by how much.

Posters on this forum have previously suggested the reduction is minimal, if there is one at all.

[wolfman]

Thanks again Robert, appreciate your time to help out

[renrag40]

The RMPP website says the DBCBS is reduced if taken before NRA, but not by how much.

Posters on this forum have previously suggested the reduction is minimal, if there is one at all.

1 person posted on a thread from last year that he phoned RMPP to ask what was the DBCBS early redemption reduction percentage and was told it was 1.6% per year.

[RobertT]

The RMPP website says the DBCBS is reduced if taken before NRA, but not by how much.

Posters on this forum have previously suggested the reduction is minimal, if there is one at all.

1 person posted on a thread from last year that he phoned RMPP to ask what was the DBCBS early redemption reduction percentage and was told it was 1.6% per year.

I can't recall anyone posting that. Nor can I find anything via the search function. Perhaps you can provide a link?

[renrag40]

I can't remember what thread it was on.
Maybe they were having everyone on but given the likes of Stephen500 took his nra65 at 59.75 (because he wanted to avoid another Christmas in Royal Msil..... who can blame him about that!) and he said the reduction was negligible I'm minded to believe it is around 1.6%..... hopefully less

[wolfman]

The majority of the Cash Balance(DBCBS) is payable with NRA65 benefits, so you need to work out NRA60 and NRA65 separately.

The best way is to assume your pension equals 75% of your pot, therefore the maximum tax free lump sum is the other 25%.

For example:

NRA60 = £9,000 x 20 = £180,000. Max tax free lump sum = £60,000.
NRA65 = £3,000 x 20 = £60,000. Max tax free lump sum = £20,000.

Any excess cash, once the tax free lump sum has been paid by AVC's and DBCBS, can be taken as a Uncrystalised Pension Funds Lump Sum. Which means the first 25% of that is also tax free, with the remainder being classed as income and coming under normal PAYE income tax rules.

How do you work out your max tax free lump sum for your nra 60 if your in section A/B?
NRA 60 = £12,000 x 20 = £240,000. Max tax free lump sum = £80,000 plus the £35,000 standard lump sum. Total £115,000

Or is it.....

NRA 60 = £12,000 x 20 = £240,000 + £35,000 lump sum = £275,000. Max tax free lump sum = £91,666?

Thanks Robert or anyone who replies

[RobertT]

The majority of the Cash Balance(DBCBS) is payable with NRA65 benefits, so you need to work out NRA60 and NRA65 separately.

The best way is to assume your pension equals 75% of your pot, therefore the maximum tax free lump sum is the other 25%.

For example:

NRA60 = £9,000 x 20 = £180,000. Max tax free lump sum = £60,000.
NRA65 = £3,000 x 20 = £60,000. Max tax free lump sum = £20,000.

Any excess cash, once the tax free lump sum has been paid by AVC's and DBCBS, can be taken as a Uncrystalised Pension Funds Lump Sum. Which means the first 25% of that is also tax free, with the remainder being classed as income and coming under normal PAYE income tax rules.

How do you work out your max tax free lump sum for your nra 60 if your in section A/B?
NRA 60 = £12,000 x 20 = £240,000. Max tax free lump sum = £80,000 plus the £35,000 standard lump sum. Total £115,000

Or is it.....

NRA 60 = £12,000 x 20 = £240,000 + £35,000 lump sum = £275,000. Max tax free lump sum = £91,666?

Thanks Robert or anyone who replies

Both your examples would mean a lump sum higher than 25% .

The £12,000 / £240,000 NRA60 pension equates to 75% of your pot, therefore the other 25% or £80,000, is the maximum tax free lump sum you can take. Giving a theoretical total pot value of £320,000.

If your standard lump sum is £35,000, up to another £45,000 can be funded by AVC's if you have them. With any remaining AVC's being paid as a UFPLS(see my previous post).

If you have no AVC's, your actual total pot value is £275,000(240+35). Therefore the maximum tax free lump sum you can take is 25% of that, which is £68,750.
You can do that by commuting some pension.
As a rough guide each £1 in pension you give up will provide £20 in lump sum(although it may be a little less), meaning if you want another £33,750 in tax free cash(68,750-35,000) it would cost about £1,700 in yearly pension.

[wolfman]

Thanks for taking the time to reply Robert. I'm still slightly confused lol.
If 12,000 x 20 = 240k is only 75% of my pot should it be 320 + 35 = 355k & then 25% of that? I have no avc's.

[RobertT]

Thanks for taking the time to reply Robert. I'm still slightly confused lol.
If 12,000 x 20 = 240k is only 75% of my pot should it be 320 + 35 = 355k & then 25% of that? I have no avc's.

Maybe I didn't make things as clear as I could have done?
Although the answer you want is in my previous post.

The method for working out the maximum tax free amount is different depending on whether you have AVC's or not, and if you do how much you have.

The pension being worth 75% of your pot is only relevant when working out the maximum possible tax free amount you can take from AVC's plus standard lump sum(section A/B).

As you don't have any AVC's, I refer you to the answer I gave in my previous post:

If you have no AVC's, your actual total pot value is £275,000(240+35). Therefore the maximum tax free lump sum you can take is 25% of that, which is £68,750.
You can do that by commuting some pension.
As a rough guide each £1 in pension you give up will provide £20 in lump sum(although it may be a little less), meaning if you want another £33,750 in tax free cash(68,750-35,000) it would cost about £1,700 in yearly pension.

[wolfman]

Ok thanks for clearing that up for me Robert. As always much appreciated