What to do when over 25% Lump Sum

[Hawkey99]

Hi all,

Just wondered if anybody has any thoughts of what to do when you have saved an amount which will take you over the 25% of tax free money you can claim in an AVC and the new pension combined when you take your pensions. I may have worded it badly but hopefully you will understand what I mean.

Where is the best and most tax efficient place to save it.

Can you take the 25% tax free and transfer any remaining into a SIPP. Can you pay it into your wife SIPP.

Is there anything else worth doing either inside or out side of Royal Mail to maximise income and be as tax efficient as possible.

Thanks

[heapsy]

You might be able to transfer out, but I think it will be taxable to some extent. Why would you want to get in that situation anyway? No matter how many pensions you have, you can only take 25% tax free. I've been investing in a S&S ISA, on top of work pension, AVCs through work, private pension and ordinary share account. The latter enables you to take advantage of your Capital Gains Tax allowances. This gives great flexibility and you can then mix and match your income to suit you, as and when you need it.

[RobertT]

For someone who's saved hard into AVC's over the years planning to hit that 25% target, the DBCBS or higher than expected investment returns can potentially put a spanner in the works and take them over that limit!

However, there is no option to transfer excess AVC cash to a SIPP when taking your RMPP benefits. So you'll have to take a taxable lump sum or buy an annuity.

Or else transfer out some of your money before you take your pension to try and negate the problem that way. But you can't transfer part balances, it has to be the whole balance of either Bonusplan or Flexiplan. Not too sure about transferring the DBCBS without checking.

So with your RM pension provision it's advisable to stay within that 25% of pot value limit if possible!

But it's perfectly feasible to take all of your pot entirely tax free with a personal pension/SIPP – that is not necessarily limited to 25%!

Let's say you have a pot of £100,000 for example:

You take out the 25% tax free lump sum leaving £75k.
Then assuming you have no other income, you drawdown £12,500(current rate of the personal tax allowance) per year over the next 6 years.
Meaning a average tax free income of £16,666 per year over those 6 years(including the lump sum).
You can also earn up to £5,000 per year in interest without paying any tax on it, on top of any money withdrawn from ISA's.

Which is pretty much my plan for early retirement without taking any of my RMPP early!

*CGT could come into play with an ordinary share account, but your savings are protected from it via pensions and ISA's.

[postie2007]

Morning everyone,

I joined the business in 2007 and am projected to have around 25k in my AVC pot when i retire in 4 years time aged 60. How can i work out wether that will be more or less than 25% of my total pension pot.

TIA

[RobertT]

Morning everyone,

I joined the business in 2007 and am projected to have around 25k in my AVC pot when i retire in 4 years time aged 60. How can i work out wether that will be more or less than 25% of my total pension pot.

TIA

I could go into detail, but the easiest way to answer your question is to point you in the direction of page 12 of your plan guide.

If you don't have your paper copy to hand, it's available on the RMPP website: https://www.royalmailpensionplan.co.uk/ ... ts/library" onclick="window.open(this.href);return false;

[mark.cup]

Personally if I carry on as I am I will have way over the 25% but it's still a no brainer via salary sacrifice...

Like Robert says at the moment you can't do part transfers but with having both flexiplan and bonusplan it gives you the option to transfer all of one to a sipp and drawdown for an early exit!

Does anyone know if for instance you transferred all your flexiplan to a sipp is there any reason why you couldn't just start over again with flexiplan?

[RobertT]

Personally if I carry on as I am I will have way over the 25% but it's still a no brainer via salary sacrifice...

As far as the money going in, yes it is a no brainer. But you also have to consider the money coming out, and I know had I carried on paying into Flexiplan at the rate I was, I'd have ended up paying 40% tax on some of it! So I decided to put the money in my personal pension instead, which meant forgoing the benefits of PSE, but I'll end up paying less tax over all and so keeping more of the money for myself. Plus it gives me a better chance of retiring earlier.
But it will always come down to personal circumstances.

Like Robert says at the moment you can't do part transfers but with having both flexiplan and bonusplan it gives you the option to transfer all of one to a sipp and drawdown for an early exit!

I'm planning on doing just that with my Bonusplan.

Does anyone know if for instance you transferred all your flexiplan to a sipp is there any reason why you couldn't just start over again with flexiplan?

I know of people who've taken all their AVC tax free cash when taking their NRA60 pension and then carried on paying in until they take their NRA65 benefits.
But whether you can transfer independently and start again, I don't know to be honest.

[heapsy]

The current Capital Gains Tax allowance https://www.gov.uk/guidance/capital-gai ... aea-limits" onclick="window.open(this.href);return false;

[RobertT]

The current Capital Gains Tax allowance https://www.gov.uk/guidance/capital-gai ... aea-limits" onclick="window.open(this.href);return false;

Yes, I'm aware of the yearly CGT rates and they're quite generous, especially for small time investors!
But the point I was making is that pensions & ISA's are exempt from CGT altogether. So in terms of that particular tax, there is no benefit from paying into a share account over either of those two other products.

[mark.cup]

I still think putting as much in via salary sacrifice is the best option for most.

Not only can you transfer say all of your bonusplan plan to a sipp prior to taking your benefits I've just had a email response saying I can transfer my whole flexiplan pot as it stands now to a sipp and continue paying into flexiplan after... obviously as long as I remain in employment with Royal Mail!

So doing some sums along the way you should be able to avoid excessive tax and buy your way out X amount of years earlier with any excess money you do transfer to a sipp via drawdown

[RobertT]

I still think putting as much in via salary sacrifice is the best option for most.

Not only can you transfer say all of your bonusplan plan to a sipp prior to taking your benefits I've just had a email response saying I can transfer my whole flexiplan pot as it stands now to a sipp and continue paying into flexiplan after... obviously as long as I remain in employment with Royal Mail!

So doing some sums along the way you should be able to avoid excessive tax and buy your way out X amount of years earlier with any excess money you do transfer to a sipp via drawdown

And buying myself out early is exactly my plan!
Although because I've been saving towards my retirement for 25 years, I'd already built up too much in both my AVC's and my personal pension before salary sacrifice was introduced, to make transferring tax efficient. Especially as I'm planning on retiring in under 4 years!

But I would agree that for most people the AVC/PSE route is best for the majority, it's just when the numbers start to increase that you've got to watch out!

[Hawkey99]

Even if you are over the 25% maximum tax free lump sum wouldn't it be worthwhile to continue paying into your AVC as you would still make some money on the NI reduction.

So about 12%...Is that right.

[RobertT]

Even if you are over the 25% maximum tax free lump sum wouldn't it be worthwhile to continue paying into your AVC as you would still make some money on the NI reduction.

So about 12%...Is that right.

On the way in, yes. But personally I will already pay some income tax on the way out, which is mainly down to the investments performing well over the years rather than me paying too much in. In practice I could end up paying 40% tax on some of it if I continue piling in the cash.

Plus, as I've already got a fairly substantial personal pension pot, transferring my Flexiplan into it as mark.cup says will just mean paying more tax on that instead. And not enough time to build up my Flexiplan pot again.

Although I do plan to transfer my Bonusplan at some point, but probably not until after I leave RM.

As with all things pensions, it always comes down to personal circumstances.

[Hawkey99]

Thanks Robert,

So are you suggesting it may still be worth paying in PSE if your over 25% tax free lump sum as long as you don't hit 40% tax.

Without giving personal details that seems a lot of money to have to earn to pay 40% tax.

Can you explain a little.

Thanks as always.

[RobertT]

Thanks Robert,
So are you suggesting it may still be worth paying in PSE if your over 25% tax free lump sum as long as you don't hit 40% tax.
Without giving personal details that seems a lot of money to have to earn to pay 40% tax.
Can you explain a little.
Thanks as always.

I'm not really suggesting anything, I'm just saying what my situation is!

I've saved heavily over the years well before PSE came along, and have already got over the 25% pot value figure(currently aged 51), and so continuing to pay into my Flexiplan would mean going over that limit even more and therefore paying a lot of tax.
In my case it could have been £50-60k or more over the 25% limit at age 60, had I continued at the rate I was saving and with investment returns.
Meaning a bigger but highly taxed lump sum(after the initial 25% pot value).

The 2nd option was to buy an annuity with that excess cash and getting a miserable return on my money for the rest of my life.
£50k at 60 would give me around £2,200 per year with a single life level income, or a starting amount of about £1,150 if I wanted a single life RPI linked income. Even less with spouses benefits after my death!

Or the 3rd option would be to save into my personal pension instead, with the aim of drawing down that to fund early retirement and to supplement my NRA60 & NRA65 until state pension kicks in at 67. But forgoing the lure of PSE!

I decided on the latter, because the benefits from my RM and state pension will give me a reasonable income from age 67. So the aim was maximise my chances of retiring early(the plan is 55) and to supplement my RM pension before state pension age.
I felt that retiring early was more important to me than building up a massive AVC pot and either getting a crap taxable return from an annuity for the rest of my life, or giving back a good chunk of my fund in tax at the point of taking my AVC's.

Transferring out of my Flexiplan into a SIPP isn't really an option because I'll just pay a load of tax on that instead and not get the full 25% tax free lump sum from my RM pension.

So it's just my personal position, nothing more nothing less. Everyone will be a bit different!