Direct Benefit Pension (DB Pension) - Can I take This at 55 & Continue to Work for the Same Employer

[AsleepInYorkshire]

I'm asking on behalf of Mrs. AiY - alternatively known as Commanding Officer My bad

My good lady is 55 in October. Eeek ... doesn't time fly

We are reviewing options - subject to her employers policies and procedures (it's the LA) are there any legal reasons preventing her from taking her pension and staying in her post?

Thank you

AiY

[Avantegarde]

Whether she can or not will depend entirely on the policy of the employer and the pension scheme. Just ask them.

[AsleepInYorkshire]

Whether she can or not will depend entirely on the policy of the employer and the pension scheme. Just ask them.

Thank you.

What we're reviewing is a potential "work round" to the problem of transferring a DB to a DC. The approach would be to take 25% tax free from the DB and immediately slap that in her DC (should be possible) which should attract (hopefully?) a rebate from the tax man. So at that point we will have transferred 31.25% of her DB to her DC without the need for an IFA. At that point the monthly income from her pension, which will be taxed and NI, will be invested in her DC and again (hopefully) attract rebate from government. Over 4 years we should be able to get about 55% of the DB into a DC (which includes a little growth).

AiY(D)

[tjh290633]

We are reviewing options - subject to her employers policies and procedures (it's the LA) are there any legal reasons preventing her from taking her pension and staying in her post?

Surely it is the rules of the DB Pension scheme that determine this. They may allow early retirement, but I suspect that any continuing employment would have to be on a different basis. Going back 30-odd years, and before IR35 had been invented, some of my friends did indeed take early retirement and then continue working as consultants.

Nowadays I suspect that this would not be possible.

TJH

[mc2fool]

What we're reviewing is a potential "work round" to the problem of transferring a DB to a DC. The approach would be to take 25% tax free from the DB and immediately slap that in her DC (should be possible) which should attract (hopefully?) a rebate from the tax man.

And you figure HMRC haven't already thought of that wheeze?

It's called "pension recycling" and the rules around it are complex. Here's the HMRC manual on it:

"Recycling of a pension commencement lump sum involves using that lump sum as the means to increase contributions significantly to a registered pension scheme. The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax relieved, contribution to a registered pension scheme."

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 and the following sections.

Googling for "pension recycling" gets lots of results, some of which are (arguably) more readable that HMRC's manual. Here's a couple for starters:

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/
https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash

[Dod101]

Not related to the exact problem but a DB benefit is actually a Defined Benefit pension in contrast to a Defined Contribution one. Easy to see why. The first guarantees a benefit; the second puts all the onus onto the holder or beneficiary and simply guarantees a pension contribution from the employer.

Dod

[scotview]

subject to her employers policies and procedures (it's the LA) are there any legal reasons preventing her from taking her pension and staying in her post?

You are also raising an ethical question. I know of several people who have "retired" from Local Government posts and been re-appointed to continue work with the same LA, virtually in the same job.

It seems to me that a much better UK wide policy might be to ensure that all Public Sector staff actually retire, and those desirable jobs with nice future pensionable benefits go to young people who are desperate to join the jobs market.

[AsleepInYorkshire]

What we're reviewing is a potential "work round" to the problem of transferring a DB to a DC. The approach would be to take 25% tax free from the DB and immediately slap that in her DC (should be possible) which should attract (hopefully?) a rebate from the tax man.

And you figure HMRC haven't already thought of that wheeze?

It's called "pension recycling" and the rules around it are complex. Here's the HMRC manual on it:

"Recycling of a pension commencement lump sum involves using that lump sum as the means to increase contributions significantly to a registered pension scheme. The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax relieved, contribution to a registered pension scheme."

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 and the following sections.

Googling for "pension recycling" gets lots of results, some of which are (arguably) more readable that HMRC's manual. Here's a couple for starters:

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/
https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash

Well that's a slap in the old face with a wet government fish

I'll have a read - but my first thought is even if it doesn't attract rebate the 25% lump sum is still tax neutral and will still grow better in the chosen pension fund (NA Companies) and the monthly income can still go back into an ISA. Sorry I don't wish to sound disingenuous regarding your reply. I'm grateful and appreciate your response. Thank you.

Effectively what I am reviewing is a slightly larger picture regarding the "retirement plan". And included in that is some thought towards the exit and IHT. We would prefer to give our daughter financial help (if we can) whilst we're alive. So I'm looking at how we take from the DB, without the hassle of trying to transfer it all into a DC. I know I may end up running clean up my own [expletive deleted], but it's a theoretical review currently.

As part of our retirement plan we are trying to build in annual payments into an ISA for our daughter. We do put £9K a year into her JISA and the current projection is to raise that to £12K when she's 18 (on the grounds that she doesn't spend it when she feels like it). So if we "need" £2K per month to live on in retirement we will increase that "need" to £3K to allow us to increase the ISA.

We aren't needy people. We have a decent home and two paid for cars. We don't mind the odd holiday in the sun though

My health isn't great although I do somehow muddle through. We aren't rushing for retirement "at any cost" but we are keen to get there as quickly as possible. I feel we need a pot of £700K to safely retire. We should be able to achieve that (with good growth tail winds - 10%) within the next 2-3 years. Which does mean we should all now become very aware of the impending depression

Take care

AiY

[mc2fool]

It's called "pension recycling" and the rules around it are complex. Here's the HMRC manual on it:

"Recycling of a pension commencement lump sum involves using that lump sum as the means to increase contributions significantly to a registered pension scheme. The recycling rule is intended to prevent the systematic exploitation of the tax rules for registered pension schemes to generate artificially high amounts of tax relief by using the pension commencement lump sum to make a further, tax relieved, contribution to a registered pension scheme."

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 and the following sections.

Googling for "pension recycling" gets lots of results, some of which are (arguably) more readable that HMRC's manual. Here's a couple for starters:

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/
https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash

Well that's a slap in the old face with a wet government fish

I'll have a read - but my first thought is even if it doesn't attract rebate the 25% lump sum is still tax neutral and will still grow better in the chosen pension fund (NA Companies) and the monthly income can still go back into an ISA.

Do have a read, the rules are complex and you (she) may still be able to do it. If it's not clear how her situation fits from those sources then do google for others, as many/most have various examples.

Re "even if it doesn't attract rebate", there's some gotchas around that too. Some (many? most?) pension schemes will not allow a contribution into them that doesn't get the (automatic) tax relief, certainly some posters on these boards have reported that, so do check with her DC scheme first.

Also, life gets complicated (like extra paperwork and repaying of tax relief) if payments into her pensions (all of them) exceed 100% of her annual earnings or £40,000, whichever is less. Read the whole of this section: https://www.gov.uk/tax-on-your-private-pension

[ursaminortaur]

Whether she can or not will depend entirely on the policy of the employer and the pension scheme. Just ask them.

DB pensions assume that you retire at the normal retirement age which for most schemes nowadays is aligned with the age you get your state pension. If you voluntarily take the pension earlier there will be an actuarial reduction in the amount of pension you get each year to take account of the fact that you are retiring early. Many schemes though will waive the reduction if you are made redundant or are forced to retire early due to ill health.

For instance the LGPS (Local Government pension scheme) has the following actuarial reductions if you retire early

https://www.lgpsmember.org/more/reductions.php

It is also worth noting that taking the full 25% tax free lump sum from a DB pension may well involve commuting some of the annual pension ie you get £x of tax free lump sum for each £1 of annual pension given up. Older DB pensions may come with an automatic lump sum often something like 3x the annual pension but in most cases that is less than the 25% that you are entitled to under current legislation (and more modern schemes may not have any such automatic lump sum and thus require you to use commutation if you want to have any lump sum). The reason for mentioning this is that commutation rates are often pretty terrible. Commutation rates for public sector pensions being particularly bad at a rate of £12 of tax free lump sum for each £1 of annual pension given up - for reasonable value you really need it to be above £20 at least.

https://www.lgpsmember.org/more/lump-sum-calculator.php

When you take payment of your pension benefits you will have the option to exchange some of your pension for lump sum. The maximum lump sum you can take is set by HM Revenue and Customs and is the lower of:

25% of the capital value of your pension benefits
25% of your remaining lifetime allowance

Note: 25% of the lifetime allownce is £268,275 (£1,073,100 x 25%); however, if you have previously taken payment of (crystallised) pension benefits you will have already used up some of your lifetime allowance, so the maximum tax free lump sum you can take will be 25% of your remaining lifetime allowance.

For every £1 of pension you exchange you will receive £12 of tax free lump sum.
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How to use the calculator

Yearly Pension
Enter the amount of yearly pension payable from your chosen retirement date. You will find the yearly pension payable from your normal pension age on your annual benefit statement.

Automatic lump sum
Enter the amount of automatic lump sum payable in respect of your membership up to 1 April 2008. This figure will be shown on your annual benefit statement if applicable. This lump sum is payable automatically i.e. you have to take it. If you joined the LGPS after 1 April 2008 you will not receive any automatic lump sum but you will be able to give up pension for lump sum when you take your pension.

[DrFfybes]

We are reviewing options - subject to her employers policies and procedures (it's the LA) are there any legal reasons preventing her from taking her pension and staying in her post?

AiY

If it is LGPS, then the short answer is "yes". And 'no'.

It is (or was) possible to retire and continue part time in the same role, I think the rules (these are the rules of the LGPS) say a maximum of 20 hours/week which applies for a minimum period of time (1 or 2 years)... I know several people who have done this although none have reverted to full time, most use it as a financial stepping stone to retirement, and it helps to keep some of the knowledge in place and handover to new staff.

MrsF retired early with an LGPS pension a few years ago, and currently is still in her old role 3 days a week. She was initially on 17.5 hours, supposedly tailing off last year, however demands from Covid have seen little chance of the work tailing off, and so this month she has gone up to 3 days a week until August when she plans to finish completely and go 'cold turkey'. I'll believe it when it happens

If your good lady boss wants to retire and stay in the same post full time, it is extremely likely that she will need to resign, and then go through the interview process etc. in the hope of getting the same role. There may also be objections and scrutiny from HR, the pensions people, and the Unions, and her continuity of service would be reset.

As you have heard, the pension would be reduced by about 45% (the table is on the LGPS website https://www.lgpsmember.org/more/reductions.php ) for going 12 years early. Obviously if she does return part time, the new pension accrues at a pro-rate rate according to her hours.

Paul

[Alaric]

Thank you

Nit picking about the thread title but DB in the pensions context means "Defined Benefit". In other words where the benefit is defined by a formula usually related to service and salary, rather than by the outcome of investment.

As others suggest whether it is possible to "cash in and carry on" would depend on the attitude and rules of the employer.

[ursaminortaur]

We are reviewing options - subject to her employers policies and procedures (it's the LA) are there any legal reasons preventing her from taking her pension and staying in her post?

AiY

If it is LGPS, then the short answer is "yes". And 'no'.

It is (or was) possible to retire and continue part time in the same role, I think the rules (these are the rules of the LGPS) say a maximum of 20 hours/week which applies for a minimum period of time (1 or 2 years)... I know several people who have done this although none have reverted to full time, most use it as a financial stepping stone to retirement, and it helps to keep some of the knowledge in place and handover to new staff.

MrsF retired early with an LGPS pension a few years ago, and currently is still in her old role 3 days a week. She was initially on 17.5 hours, supposedly tailing off last year, however demands from Covid have seen little chance of the work tailing off, and so this month she has gone up to 3 days a week until August when she plans to finish completely and go 'cold turkey'. I'll believe it when it happens

If your good lady boss wants to retire and stay in the same post full time, it is extremely likely that she will need to resign, and then go through the interview process etc. in the hope of getting the same role. There may also be objections and scrutiny from HR, the pensions people, and the Unions, and her continuity of service would be reset.

As you have heard, the pension would be reduced by about 45% (the table is on the LGPS website https://www.lgpsmember.org/more/reductions.php ) for going 12 years early. Obviously if she does return part time, the new pension accrues at a pro-rate rate according to her hours.

Paul

This may be of some help

https://www.lgpsmember.org/arl/already-left-remp.php

Returning to work if you are being paid a pension from the LGPS