Cashing Out Defined Benefit pension?

alivingstone · 20 April 2017 at 4:51PM

Malthusian wrote: »

You have 7 years before you can use the lump sum to clear your debts. Are you planning to have £20,000 on high interest credit cards for the next 7 years? Because that's mad. You could pay twice the amount owed in interest and not reduce the balance by a penny.

Agreed - but I have no way of converting this debt to low interest. there is no equity in the house as we recently moved and I am unable to secure any loans.

alivingstone · 20 April 2017 at 4:55PM

greatkingrat wrote: »

You say you are paying a large amount into your current pension every month, so you may be better off leaving the DB pension where it is, reducing your contributions to the DC scheme and using the money saved to clear the credit cards.

Well "large amount" is relative I suppose.
I pay 10% of my wage into the pension and my employer matches this.
If i drop my percentage payment my employer will do likewise and what looks to be enough to be comfortable in retirement very quickly becomes not enough to live on.

Dropping to 5% makes a massive difference in my pesnion projection but doesn't give me much more in my pocket each month to make any appreciable impact on the unsecured debt.

dunstonh · 20 April 2017 at 5:26PM

I pay 10% of my wage into the pension and my employer matches this.

That makes sense as you should always try and match the employer contribution to the maximum.
Are you a higher rate taxpayer? (how much do you earn)
Does the total gross contributions of both yours and the employer exceed £4000 a year?

xylophone · 20 April 2017 at 5:34PM

My understanding is I can drawdown 25% tax free and the remainder at 40% tax - potentially a lump sum of around £50k based on my assumption of £75k - but the regulation surrounding Defined Benefit are confusing me and my assumption / understanding may not be correct.

You don't "draw down" a DB pension. You are usually able to take a Pension Commencement Lump Sum and then a scheme pension for life.

What you seem to be wanting to do is obtain a CETV from the DB pension administrators and transfer this in cash to a DC pension either now or when you reach the earliest age that you can access a pension.

You would then be seeking to access the 25% tax free PCLS and flexibly access the balance as a taxable lump sum.

Not only would you pay a lot of tax but also, having flexibly accessed a DC pension, you would be subject to the MPAA in respect of contributions to any then current DC pension .

https://www.fidelity.co.uk/static/pdf/personal/pensions/mpaa-factsheet.pdf

Remember that the cost of advice from a pensions transfer specialist is likely to be high and you would not necessarily obtain a positive recommendation.

The obligation is to obtain the advice not to follow it but in practice you could find a limited choice of providers ready to accept the transfer.

alivingstone · 20 April 2017 at 5:35PM

dunstonh wrote: »

That makes sense as you should always try and match the employer contribution to the maximum.
Are you a higher rate taxpayer? (how much do you earn)
Does the total gross contributions of both yours and the employer exceed £4000 a year?

I just scrape into the higher rate, so yes over £4k a year - I have worked for BT for the past 10 years (and 5 before that as a contractor with no pension contribution

).

alivingstone · 20 April 2017 at 5:38PM

A bit of background - we are a family of 6.
We had a large 5 bedroom detached house, nice cars & holidays and things were going well.
Within a few months a number of things hit us which meant we lost between £1500 - £2000 a month net income.
My wife was no longer able to work, I lost extensive O/T from my main job and lost a lucurative 2nd job.
This hit hard and debts rose quickly - we are not entitled to any benefits (bizarely if I 'seperated' from my wife and lived in a bedsit she would be entitled to considerable benefits!).
We were forced to sell up at less than market price and downsize considerably but retained a large chunk of unsecured debt.

I'm working though it as best I can - including delivering pizza a few nights a week - and I am making all our commitments currently. It's not easy supporting 4 adults and 2 children when I am the only one bringing money in but it is doable. The two teenagers are in full time education at a local college and will both finish in another year, they have been trying to find part time jobs for the last year or so but so far have been unsuccessful. My wife is unable to work due to illness although this is not recognised by the government... We have two younger children - one who has medical needs which again are not recognised by the government.

It's not a sob story - I'm working hard to maintain our family, things will get better over time.
One day the 2 older boys will get jobs and be able to contribute to the bills or eventually move out...
Maybe my wife will be able to find something suitable that she can do again to bring in a little extra.
Until then I will do what I have to to make ends meet.

Cashing in pension1 in 7 years is light at the end of the tunnel for me.
It would pay off all unsecured debt and a portion of the outstanding mortgage.
By this stage the 2 teenagers will be in their mid 20's - possibly moved out and we could move to a smaller house again with a very minimal mortgage.
Come retirement in my mid 60's we should have enough to be comfortable from the pension from my current employer.

If releasing capital from my 1st pension at 55 to cover this isn't an option I need to start looking at other solutions now... I have briefly looked at IVAs but I don't like that route, I'm currently able to make all payments and am not looking for an easy out...

Oh and thanks to the person for the suggestion of the tent in leiu of family holidays - we do have a 6 person tent but have found that it is very challenging due to medical needs, it also tends to rain a lot in Northern Ireland!

dunstonh · 20 April 2017 at 6:38PM

I just scrape into the higher rate, so yes over £4k a year - I have worked for BT for the past 10 years (and 5 before that as a contractor with no pension contribution ).

So, this means that you would pay 40% on the taxable part of the pension.
You would also lose child benefit that year.
You would also lose your personal allowance (creating nearly £5000 in additional tax)
You would also have to reduce your pension contributions which would mean losing some of the employer contribution (free money).

So, you would lose around half that pension in tax and benefits as well as future lost free money.

I would start looking at the other options. IVAs you may not like but it is almost certainly the cheaper option.

atush · 21 April 2017 at 1:11PM

Malthusian wrote: »

You have 7 years before you can use the lump sum to clear your debts. Are you planning to have £20,000 on high interest credit cards for the next 7 years? Because that's mad. You could pay twice the amount owed in interest and not reduce the balance by a penny.

A far more senisble plan would be to go to the debt free forum, and post an SOA. helpful folks will look over your outgoings and help you to reduce them. This creates 'wiggle room' as would be increasing yoru income with a second job, getting your spouse back into work DT is they arent etc. Selling used items on Ebay etc.

Then use this spare money to Snowball your highest debt. Once that is eliminated, go for the next highest etc.

This will be a far better option for your future than what you are planning.

Also, tell us mroe about your other pension. Is it DB or DC? A tax free lump sum from a DC pension at 55 would be the only option to truly consider using.

atush · 21 April 2017 at 1:21PM

A side note, concerning your teenagers. Once they finish college and get work, charge them rent. I charge mine 50 a week to live and eat at home.

This could be 400 a month towards your CCs.

Consider http://debtwise.org.uk/

LHW99 · 21 April 2017 at 1:44PM

Would it be possible to transfer your existing current employers DC pot to somewhere where you could draw it down, and then rejoin the employer's scheme a week later to build up a new pot?
25% of that may clear the credit card debt, and if that's all you take, doesn't (I think) trigger a reduction in future contributions to DC schemes.

Cashing Out Defined Benefit pension?

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