Whole of pension as a lump sum

[jetblack]

I understand that under the new Government reg.s, the individual is allowed to take the whole of their pension as a cash lump sum (albeit taxable after the first 25%).

Does this apply to the Royal Mail pension and employees ?

How would the value of the pot be calculated ? Is it the same as the cashable value/equivalent given on our annual pension statement ?

Thanks in advance.

[RobertT]

I understand that under the new Government reg.s, the individual is allowed to take the whole of their pension as a cash lump sum (albeit taxable after the first 25%).

If you are 55 or over you can take all of the money in a defined contribution/money purchase scheme from April 2015 if you want, with as you say, the first 25% being tax free.

Does this apply to the Royal Mail pension and employees ?

If you are a member of the RM Defined Contribution Pension or pay AVC's via the main final/average salary scheme, potentially yes.

How would the value of the pot be calculated ? Is it the same as the cashable value/equivalent given on our annual pension statement ?

The value is irrelevant because pensions backed by the government, which the RM final/average salary scheme now is, are separate from the new plans.

More info can be found by downloading this:
http://royalmailpensionplan.co.uk/65/22 ... on-changes" onclick="window.open(this.href);return false;

[jetblack]

Thanks for the link.

It seems quite complicated - but if I'm reading it right it seems that the new regs won't really affect us. Yes, I can take my AVC's as a tax free lump sum (providing they don't account for more than 25% of my total "pot") - but I could do this before anyway.

I suppose my question was, can I take my money out of the main plan as a cash lump sum ? - but according to the link it seems I can't.

But this seems the opposite of what the new regs are about.

Still slightly confused .

[RobertT]

It seems quite complicated - but if I'm reading it right it seems that the new regs won't really affect us. Yes, I can take my AVC's as a tax free lump sum (providing they don't account for more than 25% of my total "pot") - but I could do this before anyway.

There has always been a link between the two, so you have to take your AVC’s at the same time as your main scheme benefits. Although the way I have read the literature in the press suggests that link may be removed. It is still unclear whether that will be the case and it would still be up to the RM pension trustees whether they allow it for our scheme anyway.

I suppose my question was, can I take my money out of the main plan as a cash lump sum ? - but according to the link it seems I can't.

As far as I’m aware, no you can’t. And why would you want to forgo a guaranteed index linked income for life in favour of a highly taxed lump sum anyway?

But this seems the opposite of what the new regs are about.
Still slightly confused .

I know what you’re saying but the new rules only really apply to defined contribution pensions.

[jetblack]

nd why would you want to forgo a guaranteed index linked income for life in favour of a highly taxed lump sum anyway?

Yes - I'm not sure that I would - I'm kind of thinking aloud really.

But I guess you might want to take it all as cash if 1) you were confident you could invest it shrewdly and 2) you wanted to be able to pass on the cash/investments to your children, which you wouldn't be able to if it were used to provide a pension from the plan.

I believe, also, that there are ways of minimising the tax burden of taking it all as cash by, for eg., staggering the drawdown.

[RobertT]

and why would you want to forgo a guaranteed index linked income for life in favour of a highly taxed lump sum anyway?

Yes - I'm not sure that I would - I'm kind of thinking aloud really.

But I guess you might want to take it all as cash if 1) you were confident you could invest it shrewdly

The first thing any investment would have to do is recoup the tax you’ve paid on the lump sum. On a pension value of £100,000 and assuming no other income in that tax year, then I work out £19,600 would be paid in tax. If the value was £200,000, another £32,500 in tax would be payable. You’d need to be best mates with Warren Buffet to get that back in a hurry.

and 2) you wanted to be able to pass on the cash/investments to your children, which you wouldn't be able to if it were used to provide a pension from the plan.

Very true, but you’ve never been able to pass on the cash from the plan to your children so if you wanted to leave money for them, wouldn’t you already have something in place?

Plus the regular income that your pension provides will be there every month, rain or shine until you pop your clogs. While that pot of money will be at the whims of the stock market and /or interest rates, be a temptation to dip into and could potentially run out long before you die so they’d be nothing to leave behind anyway.

I believe, also, that there are ways of minimising the tax burden of taking it all as cash by, for eg., staggering the drawdown.

Yes, it will be possible to take out an amount from a defined contribution pension each year that enables you to stay within the personal tax allowance and potentially not pay any tax at all. Although that will depend on any other income you may have.
However that option will not be available with the RM final/average salary pension.

[heapsy]

The tax bands are as follows 0 to £31,865 20%, 31,866 to £150,000 40%, over £150,000 45%. As it would be classed as earnings your pot would be taxed in the usual way. Each different tax band applied to the relevant portion of the pot. Btw anybody who is lucky to earn over £100,000 has their tax allowance reduced by £1 for every £2 their adjusted net income's above £100,000. This means that your allowance is £0 if your income is £120,000 or above. If I use MY pension statement as an example, my NRA 60 pension has a lump sum of £31,958, (25%) or £31,958 x 4. £127,832. That's £27,832 over the £100,000 allowed.
This means £27,832/2 = £13,916. Even that is above the £10,000 allowance therefore wiping out my allowance which means tax on 100%. By my calculations that means my pot of £127,832 would be reduced to £83,146.60. 20% tax being paid from £0 to £31865 then from £31,866 to £127,832 at 40%. So losing more than a third in one go just isn't worth it. Hope that helps.

[heapsy]

Also for got to add that I only used my NRA 60 figures. More tax would be paid if I'd added my NRA 65 pot to the equation

[jetblack]

If I use MY pension statement as an example, my NRA 60 pension has a lump sum of £31,958, (25%) or £31,958 x 4. £127,832.

25% of your pot would be tax free.

Lets say your NRA65 pot is double that of your NRA60 pot, then your tax free lump sum would then be 0.25 x ((2x£127,832)+£127,832)= £95,874 - I think.

Then you have a £10k personal tax allowance. Then you'd be taxed at the applicable tax bands at any drawdown over and above the (£95,874 +) £10k. Again, "I think".

But yes, unless you indulged in some cunning (and legally grey area) plan whereby you were re-investing your drawdowns back into pension plans etc, then you would definitely be penalised tax wise for taking your pot as cash.

But really the question is (for eg), if I can live on say £10k per year instead of £13k and thereby leave my kids £200k (as opposed to nothing), how long would I have to live to make this not advantageous to my kids ? That is, how many £3k's per year saved to make up the £200k they would inherit on my death, if you see what I mean ?

And, to be fair, my kids are my priority, as I'm sure they are for most parents. I can live on peanuts (and so can Mrs.Jetblack). I do have other provisions for my children, most notably my house (and amongst other things some Bitcoins stashed away (high risk I'll grant you). But a potential (in my case) £200k to £250k pot/inheritance would most definitely help them on their way.

Of course, its all academic anyway, because as has already been pointed out, the whole pension pot cash lump sum doesn't apply to us. For some reason

[heapsy]

Wrong. You lose your £10,000 tax free allowance. Check this out https://www.gov.uk/income-tax-rates/income-over-100000" onclick="window.open(this.href);return false;
Taking a pension in one go counts as income for that tax year, therefore wiping out the tax free allowance. However, it would be pretty foolish to do such a thing unless you were on your last legs and wanted to max out your pension so you come give it away.

[jetblack]

You lose your £10,000 tax free allowance. Check this out https://www.gov.uk/income-tax-rates/income-over-100000" onclick="window.open(this.href);return false;

Yes - you're right. I didn't know that - mostly because I have never been in the position of earning £100-120k pa
So that would mean what ? You're down an extra £2k ?

[heapsy]

You lose your £10,000 tax free allowance. Check this out https://www.gov.uk/income-tax-rates/income-over-100000" onclick="window.open(this.href);return false;

Yes - you're right. I didn't know that - mostly because I have never been in the position of earning £100-120k pa
So that would mean what ? You're down an extra £2k ?

I had to look it up myself tbh. I wasn't even sure where the tax bands started/finished. Didn't realise there was the added chance of losing the tax allowance, assuming very high earnings.