Should I take the full allowance from my DC pension, leave the rest as drawdown and claim the maximum income from my DB?
30 July 2021
Question by Kirti
I have DB and a DC pension. I plan retirement in Jan 2022 . I have the 2016 LTA Fixed protection registered with HMRC . Should I take the full allowance from DC, leave the rest as drawdown and claim the maximum income from the DB as its guaranteed with inflation protection. I'm in good health so expectancy is another 15-20 years
Answered by Helena Wardle
Good question, and it is a complicated one to answer without more detail about you and your pensions.
Usually, it would be better to preserve your Defined Benefit income, so your thinking makes sense, but I would strongly recommend you seek advice.
As you mentioned, your Defined Benefit pension is guaranteed and inflation-proof which is why it is seen as gold plated pension benefits. Usually, if there is a Lifetime Allowance tax charge on your Defined Benefit pension, the pension scheme would reduce your income for life. This is typically more costly for people than paying the excess tax charges from Defined Contribution pensions. When I advise clients on this, we would usually consider various scenarios to work out the best solution for them based on what the client needs or wants from their pensions. It takes into account other tax considerations such as income tax and inheritance tax as well. You also need to factor in that pensions in drawdown face another Lifetime Allowance test at age 75. Suppose you use your remaining Lifetime allowance from your Defined contribution pension as mentioned. In that case, any unspent growth on the money after your tax-free cash could be tested against the Lifetime allowance again at age 75. This is often referred to as the second drawdown test which you may need to factor in.
While this would cost you, it usually saves clients money by getting advice in this area, particularly when faced with a 55% tax charge.
I hope this helps