Missold Pension

A spouse or certain other types of financial dependent can get 100% of a pension pot inherited to a pension pot in their name with no tax charge at all on that inheritance. It's only those getting money outside a pension pot who'd pay the 55% tax charge, including a spouse who wanted the money that way.

There is no 3.5% restriction on how much money you can take out of a pension so you are not limited to £35 per year per £1,000. You can take out up to £250 as a lump sum. For the remaining £750 you have a number of choices including buying an annuity, using income drawdown or using a scheme pension wit personal life expectancy calculation to work out how much income is appropriate.

If using income drawdown with a 2% gilt yield the current minimum percentage income for normal retirement for a man is 4.1% of the pension pot at age 55.

Current gilt yields are at record lows, below those seen for hundreds of years. At a more normal gilt yield of 4.5% the income limit would be 5.8% at age 55. Plus whatever you get from the 25%, which can be used at any rate you like.

Now, that's assuming that all of the money in the pension pot is money of your own. It probably isn't. A significant chunk is tax relief. Another significant chunk is probably money from your employer. Those two things mean that you're probably getting out way more than you actually put in yourself - it wouldn't be surprising if taking the 25% lump sum would have you taking out most of what you paid in as your net out of pocket cost, leaving the 75% that remains as mostly free money.

Say you were a basic rate tax payer and not using a salary sacrifice pension scheme. Using an employer pension scheme where the employer matched your gross pension contributions. For £1,000 in the pension pot, £500 comes from the employer. £500 gross comes from you but your net cost isn't £500, it's £500 less the income tax, so the net cost is £400. So 40% of the money in the pension is your net cost. Take 25% lump sum out of the pension pot and that leaves £750 in it and your net cost for that £750 is only £150 - £400 less the £250 lump sum. So you end up getting a capped income from £750 that only cost you £150 to buy. And you're not going to come close to that level of income if you hadn't used the pension and only had £150 to take an income from.

The 55% is around because the purpose of a pension pot is to produce income while alive, not to produce a pension pot that can be inherited. So there's a tax charge in part to get back the tax relief once the person has died and the tax relief portion is no longer able to be used for what it is intended for. 55% of the 75% in a pot comes to 41%, a bit more than the current higher rate tax band, so enough to recover that tax relief with a bit extra. No inheritance tax on top of this so those subject to that gain a fair bit from this treatment, making a pension still useful as an inheritance tax dodge.

By this point you should see that it's nowhere near as bad a deal as you thought it was, particularly when you look at how much you actually had to pay in net cost to get the money in there in the first place.

I also feel this is an exact copy of another post months ago. Amy have b een another poster, but some comment incl callow youth, dotage and even pi55ing it up against the wall ae all ringing my proverbial bells.

Unless, of course, I am suffering a sever case of Deja vue. In which case I withdraw the comment.

As D says, any income in retirement is better than no income.