Taking pension entitlement early to reinvest

pennyunwise

I'm able to take my deferred pension early as I am now over 50. My pension payment at 60 would be ca£6500. If I take the lump sum of £26000 I can also take a pension payment now of £4000pa. I have the idea of taking the funds early and re-investing them as this deferred pension will only increase at the RPI or max of 4% - I am not a higher rate tax payer.

Is this a good idea ?

TH1878

HMRC frown upon the practice of 'Recycling' of tax free cash (putting it back into a pension) so that's a bit of a no-no.

I'm sure other people can confirm, but I think they are less strict with reinvestment of the pension income (which has been taxed).

EdInvestor

pennyunwise wrote: »

I'm able to take my deferred pension early as I am now over 50. My pension payment at 60 would be ca£6500. If I take the lump sum of £26000 I can also take a pension payment now of £4000pa. I have the idea of taking the funds early and re-investing them as this deferred pension will only increase at the RPI or max of 4% - I am not a higher rate tax payer.

Is this a good idea ?

If you plan to reinvest in your stocks and shares ISA, it's a good idea as that should perform better than inflation over 10 years and will also provide tax free income when you eventually retire.

How much pension income do you expect to be in line for at that time (including state pensions? (get a forecast on theme here: https://www.thepensionservice.gov.uk )

Pension income of 10k or less will be payable tax free So that might be another reason to take it early. Reinvesting in another pension would be something you could consider at the time - unlikely to be a good idea now.

dunstonh

If you plan to reinvest in your stocks and shares ISA, it's a good idea as that should perform better than inflation over 10 years and will also provide tax free income when you eventually retire.

although it will perform no better than the pension.

It can be beneficial to take it early for some people but not others.

Retired_I.F.A.

"I have the idea of taking the funds early and re-investing them as this deferred pension will only increase at the RPI or max of 4%"

Dont think as many do that transfering it to say a money purchase plan that once in there the fund value need only grow in excess of 4% to be better as it does not work like that it's more likely to need a fund growth of 7% plus to match.

pennyunwise

dunstonh wrote: »

It can be beneficial to take it early for some people but not others.

How can I tell if it's beneficial to me ? What criteria do I need to consider ?

pennyunwise

EdInvestor wrote: »

If you plan to reinvest in your stocks and shares ISA, .

I'll invest it in anything that can be recommended as my sole intention is to improve on the deferred pension. However I do wonder if I can beat the deferred pension - At the end of the 8 years I will have gained approx £60000 (8 x £4000 plus the lump sum £26000) but that's in 8 years time.

I'm not sure if my maths reasoning is correct but assuming the pensions increase at say 3% then the early payment pension would be worth approx £5000 in 8 years. If I left the pension untouched it would be worth about £8500.

Am I right in thinking that I'm going to have to build a pot big enough to cover the difference between the two i.e. £3500. That's a pretty tall order in 8 years or is my maths flawed ?

EdInvestor

Ignoring investment growth and inflation, in 10 years time you should have a pension of 6,500 (according to your OP) under option 1.

Or a pension of 4000 plus the income on a pot worth 66,000, which @5% would be 3,300, so total income from option 2 would be 7,300.

Plus under option 2 you have access to and can pass on the capital, and can receive the income tax free, unlike the pension. (note that pension income of up to 10k a year will be tax free in future, this includes state pension income.So depending on how much state pension you are due, this looks like another argument for option 2 )

dunstonh

pennyunwise wrote: »

How can I tell if it's beneficial to me ? What criteria do I need to consider ?

You just need to do a cost analysis of the different options and take into account your current tax position and future tax position. Some things you may need to make assumptions on but investment returns are not one of them as you will get identical performance whether you use an ISA or a pension.

You also need to consider the pros and cons. Such as the change in death benefits and inheritance tax as well as you other savings/investments and personal circumstances.

pennyunwise

EdInvestor wrote: »

....... and can receive the income tax free, unlike the pension.

Thanks for the advice it all sounds like a good idea but can I clarify one more point - I haven't quite understood the comment '...unlike the pension'. If my pension payment is under £10,000 it won't be subject to tax will it ?

EdInvestor

pennyunwise wrote: »

If my pension payment is under £10,000 it won't be subject to tax will it ?

The 10k tax free allowance from age 65 applies to all income/pensions, including state pensions (basic plus SERPS/S2P). Do you know how much state pension you are due?If you have been contracted in for most of your working life, you could get double the basic, so most of the allowance would be taken up by the state pension alone.



.