Pension tax free cash

[anniesdad]

Trying to get all my pensions into one place to simplify things but I’ve been notified about this. It’s an old work pension that I’d like to move into Fidelity where I have all my other pensions, ISAs etc. I am 51 sort of semi retired, some passive income, Net worth in 7 figures including my home, BTLs, ISAs, pensions, but I don’t fully understand this ….
‘A day fund value is £54k, and A day cash free is £28k. You will be entitled to higher of protected sum or 25% of your retirement value. However, any tax free cash protection will be lost if benefits are transferred’.
Thanks in advance.

[Hariseldon58]

Befor you go any further what are the future benefits of this work pension ? You need to know what you are going from before you decide to move to a SIPP.

[ursaminortaur]

Trying to get all my pensions into one place to simplify things but I’ve been notified about this. It’s an old work pension that I’d like to move into Fidelity where I have all my other pensions, ISAs etc. I am 51 sort of semi retired, some passive income, Net worth in 7 figures including my home, BTLs, ISAs, pensions, but I don’t fully understand this ….
‘A day fund value is £54k, and A day cash free is £28k. You will be entitled to higher of protected sum or 25% of your retirement value. However, any tax free cash protection will be lost if benefits are transferred’.
Thanks in advance.

The wording suggests that you may have that rare pension where the scheme rules before A-day allowed you to take more than 25% of the pot as a tax free lump sum. The legislation for the A-day pension changes (6th April 2006) provided protection so that those having such schemes could continue to take more than 25% as a tax free lump sum when commencing to take the pension - however that protection is lost if the pension is transferred. You really need to contact the scheme administrators to confirm that this is the case. In addition if it does have such a benefit you will need to take advice before transferring as the transfer value is more than £30k.

See

https://techzone.abrdn.com/public/pensions/Tech-guide-scheme-specific-tfc

Scheme specific protection is available to pre-6 April 2006 (A-Day) members of occupational schemes (or section 32 buy-out contracts) who had an entitlement to more than 25% tax free cash from their scheme on 5 April 2006. Before 6 April 2006, a scheme member could have more than 25% tax free cash under previous limits, when lump sum entitlement was based on the member's salary and service with the employer linked to the scheme.

A member with more than 25% tax free cash could have this higher entitlement protected through one of two protections introduced at A-Day:

Scheme specific tax free cash protection
Stand-alone lump sum (for those entitled to 100% of their pension rights as tax free cash)

Before taking benefits, or transferring to another scheme, it's vital to identify individuals who could be entitled to more than 25% tax free cash so that they don't lose out.
Identifying members with more than 25% tax free cash

The simplest way to identity these members is to ask the scheme administrator. They may be able to confirm immediately if the member has protected tax free cash. If not, they may need additional information in order to calculate A-Day tax free cash.

[anniesdad]

Dear ursinsnator, yes it is exactly that. I seem to have a mental block with this. Im maybe missing something or my circumstances are maybe just odd. If I did take 27k tax free id probably just invest it all into an Isa (over 2 years) so would I actually get any benefit? If not I’d prob leave it in the pension to roll up for future increased income. I haven’t contributed to it for 20 years. Do I Need tax free cash? Am I missing something / am I being stupid?

My strategy for early retirement has basically been to accumulate a big pot wherever they may be (BTL, ISAs, non ISA investments, pensions) keep my outgoings low and gradually turn on the income options as I reduce work.

Thank you

[ursaminortaur]

Dear ursinsnator, yes it is exactly that. I seem to have a mental block with this. Im maybe missing something or my circumstances are maybe just odd. If I did take 27k tax free id probably just invest it all into an Isa (over 2 years) so would I actually get any benefit? If not I’d prob leave it in the pension to roll up for future increased income. I haven’t contributed to it for 20 years. Do I Need tax free cash? Am I missing something / am I being stupid?

My strategy for early retirement has basically been to accumulate a big pot wherever they may be (BTL, ISAs, non ISA investments, pensions) keep my outgoings low and gradually turn on the income options as I reduce work.

Thank you

For DC schemes taking the maximum tax free lump sum is generally seen as the right thing to do since it allows you to get money out of the pension tax free which otherwise would be taxed at your marginal rate as you extracted it over the years as annual income.

In general for DB schemes it can be more problematic as you might need to reduce the annual pension in order to free up the cash for the tax free lump sum in a process known as commutation (ie you get £x of tax free lump sum for each £1 of annual pension given up) and the commutation rate used (value of x) is often pretty poor value. Older DB schemes though often came with an automatic lump sum (often calculated using a formula such 3 x annual pension) which you had to take. For most schemes this automatic tax free lump sum would still be less than the 25% you are allowed to take and hence the pensioner would be able to increase it to that level by using commutation if they wished. Such rules may have been carried over to any Section 32 buyout plan which replaced such a DB scheme. Since your scheme has protection which means that your tax free lump sum is above the 25% tax free lump sum normally allowed it may well be that is all in the form of an automatic lump sum and hence you may have no choice but to take the full tax free lump sum if you just take the pension when you are old enough. Only the scheme administrators will be able to give full details of what is and what is not allowed.

Because of these complications and the fact that the pension is worth more than £30k I think you will have to talk to and pay an authorised Financial advisor if you wanted to transfer. That advice may well be not to transfer.

[Bminusrob]

For DC schemes taking the maximum tax free lump sum is generally seen as the right thing to do since it allows you to get money out of the pension tax free which otherwise would be taxed at your marginal rate as you extracted it over the years as annual income.

To complicate this statement, my understanding (and I have just done a bit of research, which confirms my understanding), if you draw down funds from your DC pension, and you do not wish to take the 25% lump sum, you may draw down and only pay tax at your marginal rate on 75% of the drawdown, the remaining 25% being considered as a partial tax free lump sum withdrawal.

[ursaminortaur]

For DC schemes taking the maximum tax free lump sum is generally seen as the right thing to do since it allows you to get money out of the pension tax free which otherwise would be taxed at your marginal rate as you extracted it over the years as annual income.

To complicate this statement, my understanding (and I have just done a bit of research, which confirms my understanding), if you draw down funds from your DC pension, and you do not wish to take the 25% lump sum, you may draw down and only pay tax at your marginal rate on 75% of the drawdown, the remaining 25% being considered as a partial tax free lump sum withdrawal.

There are two different ways of drawing down a DC pension.

1) Flexi-access which involves crystallising the pension pot and taking the tax free lump sum.
and
2) UFPLS which involves just drawing down money from an uncrystallised pot. Using this method 25% of each drawdown payment is tax free with the remaining 75% being taxed at your marginal rate.

UFPLS has the advantage that ongoing growth of the untouched remainder of the uncrystallised pot is captured by subsequent drawdowns potentially increasing the total amount of money you can take tax free. However this capturing of growth can also result in problems if you are anywhere close to exceeding the LTA limit since each UFPLS drawdown results in an LTA test and using up a percentage of the remaining lTA limit and there is a final LTA test on any remaining uncrystallise funds at age 75. Using UFPLS also means that any future pension contributions are limited by the MPAA limit to £4000 gross per year.

In contrast drawdowns from a flexi-access crystallised pot do not attract any LTA tests though there is a final LTA test at age 75 that only tests growth still remaining in the crystallised pot and therefore can be avoided by drawing down that growth before age 75. Hence it is better to use flexi-access if you are getting close to the LTA limit. Also with flexi-access you can decide to just crystallise the pot and take just the 25% tax free lump sum. Doing this does not cause the MPAA to be invoked and thus you can continue to contribute upto the minimum of your gross income and the Annual allowance of £40,000 to your pension up until the time you decide to drawdown potentially taxable income from the crystallised pot.

With UFPLS you will be taking the full 25% tax free lump sum - taking it is just spead out over time. Though, of course, if you die before emptying the pot you will not receive the full amount of tax free lump sum (and the ability to take a tax free lump sum dies with you though if you died before age 75 your beneficiaries would be able to access the pot tax free).

With flexi-access you would normally want to take the full 25% tax free lump sum but can decide to take a lesser percentage or none. However that is a one-off decision you can't decide to not take a tax free lump sum when you crystallise the pot and then decide to take the tax free lump sum later from that crystallised pot ie it is use it or lose it at the moment of crystallisation.

[Hariseldon58]

Dear ursinsnator, yes it is exactly that. I seem to have a mental block with this. Im maybe missing something or my circumstances are maybe just odd. If I did take 27k tax free id probably just invest it all into an Isa (over 2 years) so would I actually get any benefit? If not I’d prob leave it in the pension to roll up for future increased income. I haven’t contributed to it for 20 years. Do I Need tax free cash? Am I missing something / am I being stupid?

My strategy for early retirement has basically been to accumulate a big pot wherever they may be (BTL, ISAs, non ISA investments, pensions) keep my outgoings low and gradually turn on the income options as I reduce work.

Thank you

The advantage of a larger tax free sum is that it is not subject to income tax, if it goes into an ISA the income subsequently drawn is tax free, it’s an advantage.

The whole process of choosing between transfer or sticking is complex. You will need to really understand the choices yourself before you take compulsory advice.

If you game out the numbers for both choices on a spreadsheet, make some different scenarios for future comparisons. You’ll get a feel for the choices and then when you take advice you can ensure your assumptions etc are robust and you may well find that you have overlooked some factors.

I have gone through the process a few years back , I was certain that transferring was the right option but it was useful to be challenged and there were wrinkles in my scheme that I was unaware of, despite doing a fair bit of research.

Ursaminortaur has highlighted some of the complexities, take your time and get as much information as you can, good luck.

My transfer worked out well but it’s the numbers of your individual situation that matters.