Help needed - VER

superloopy_2

Hi Can someone advise me please. I am about to retire from a final salary scheme after 36 years service, which with enhnacements mean that i receive the full 40years (half) pension. This has been quoted at £20k per annum plus a lump sum of £75k. My question is ... what are my options in respect of the lump sum? I do not need the full lump sum upfront so to speak and also wish to minimise the taxmans share of the £75k understandably. I understand that the first £30k is tax free so by my reckoning i'd 'lose' approx £18k on the deal unless i can make arrangements to protect the remiander in some way. AVC's have been mentioned but tbh i'm a total deadbeat in this field. What questions do i need to ask and would AVC's even be possible given that i'm due to receive a full pension?? Any suggestions would be appreciated.

MrChips

Are you retiring - or being made redundant and being given an augmented ("with enhancements") pension in compensation? I only ask as you mention the £30k being tax free.

Normally, a lump sum on retirement is all tax free. Lump sum on redundancy is tax free up to £30k.

Can you clarify?

dunstonh

Can someone advise me please.

Just for clarifiction, no-one on the internet can give you advice. If you act on it then you get no consumer protection. What is posted here is discussion only.

I understand that the first £30k is tax free

I dont know how you get that figure. Can you say?

To be honest, your question is a bit too specific and we dont have full facts so there could be a range of situations where you take no tax free cash, all the tax free cash or something in between.

You will need to find out if the AVC can enhance the lump sum benefits of the main scheme. If they do, this could alter the options that are best. If not, then there is the potential of utilising the open market option on the AVC. You would also need to know if the AVC has the option of tax free cash taken from it (if it cannot enhance the main scheme benefits).

What you are about to do is a one off transaction that is cast in stone for life when you do it. So, you need to get it right first time as you cant go back and change it later on. If you do have doubts that your knowledge isnt good enough to make the right decisions or you dont know the options available then you should seek advice.

MikeJones_2

Hi superloopy,

I'm really with dunstonh on this issue in that you should be seeking the help of an IFA given what's at stake.

This is a useful post to read.


Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a current member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

superloopy_2

Thanks for responses so far ... I should qualify that it is redundancy although I am in a scheme (PSCPS preserved benefits) whch allows me to take the benefits early, being classed as compulsory early retirement (CER). Not sure about AVC's generally. Have never needed to pay into any enhancements as my final salary scheme seemed to cover all needs. As I say, the £20k per annum is paid as of now with a lump sum of £75k, first £30k being tax free. My PCSPS lump sum and pension payment comes into force at age 60 (7years) and at that point the lump sum itself IS tax free. Just wondering about how to keep my hands on a bit more of this first lump sum as i don't need it all at present. Someone mentioned that i should take out the tax free element of £30k and consider putting the remainder into an AVC account within the company if at all possible. Just looking for any opinions on the feasibility or merit of this ...? Am i able to take the full lupm sum and pay most of it into a personal pension myself or is it the case that once the company makes the payment i am responsible for the full 40% tax on anything above £30k irrespsective of what i choose to do with it? I only have a couple of days to make my mind up and decide whether to walk based on this offer, just trying to clear a few points up where at all possible. Thanks ...

jamesd

Talk to an IFA who can rapidly get all the required details of your circumstances and tell you the implications of various choices.

I'll describe one option that may be suitable for many, but it might not fit your situation.

Take the 30k as cash, tax free. Ignoring inflation this provides you a potential income of up to 4200 a year for seven years, leaving nothing left at the end. I'm assuming that you don't actually need this income and it's just a safety margin. If you did need the income you'd perhaps look at a term annuity for a certain number of years.

Ask your employer to pay the remainder directly into a personal pension for you. This way you will not have any national insurance to pay on it. The employer would save employer's NI so you can ask your employer to add their saved employer NI to the amount paid into the pension. The amount goes in before tax so you get immediate higher rate tax relief as well as basic rate, all paid into the pension in effect. You can then choose what to do with the money in the pension. You're over 50 so one option is to immediately take up to 25% as a tax free lump sum. You then choose what to do with the remainder. Given your age an annuity isn't likely to be the financially best option so you could instead leave the money invested and perhaps take some income from it, if desired. You can choose how risky the investments should be - there's a very broad range, from UK government bonds through emerging market funds, so you can hit any desired risk target.

Instead of asking your employer to pay directly into a pension you could take the money from them (after paying NI and income tax) and put it into a pension, then claim back the higher rate tax relief in the new tax year. You can also take 25% tax free lump sum from the pension. This would give less total in the pension to produce an income but more tax free cash from the combination of higher rate tax rebate and 25% pension commencement lump sum.

You can vary the last two paragraphs by putting in only the part of your income that would have higher rate tax paid on it, keeping all the basic rate income.

You should also consider your situation after getting the normal retirement pension because it's possible to optimise that for tax efficiency with advance planning.

Without knowing more about your situation, other savings and investments and how much you want to live on it's not possible to give really good suggestions. Much better for you to see an IFA and get that personal analysis and plan so you have really good information to use to make the decision.

superloopy_2

Thanks for that ....but i've only got till Monday to decide so no time to arrange IFA i'm afraid. I'll just have to go with gut feeling, maybe i'll not bother to go and use the time between now and whenever the next opportunity arises (if ever) to educate myself.

jamesd

So, say more about your other savings and investments and how much money you need to live on in the way in which you want to live. That'll help to narrow down your options.

superloopy_2

Hi again ... well now. The original question centred upon whether my lump sum package would be taxable or not given that i'm being released on 'compulsory early retirement terms'. I'm still no clearer on this unfortunately. If it is the case that i would be taxed then i stand to lose some £18k if i do not make arrangements to ring fence, by whatever means, the amount over and above what i understand to be the tax free element of £30k. Does this sound right? As regards finances ... mortgage of around £30k, fixed payments. No problem there as spouse works and covers most major commitments. Little in the way of savings, around £5k stashed somewhere (dont ask me where) and to be quite honest the annual pension payment of £20k should do me just fine so i think i really need to consider the offer. But ... what is holding me back is this 'is it taxable or not' question. If it is ... then have i any options and at what stage of the proceedings do i need to act to ensure that i minimise any tax liability? For example, can i take the full lump sum and then make my own private arrangements and claim tax benefits or do i need to ensure that this is all done beforehand by only asking for the first £30k to be paid direct to me by the company? Unfortunately this has all come about rather suddenly and i have to decide within 24hrs. Any pointers or even gut feeling appreciated ... without prejudice http://images.moneysavingexpert.com/images/forum_images/icons/icon12.gif

jamesd

Given the situation you've outlined I'm inclined to say accept and ask the company to pay any money above the basic rate tax band (including part of that lump sum) into a personal pension for you.

For minimal tax (including NI) liability you need to get the company to agree to pay some into a personal pension and you need to do this before they pay you any money (other than the ongoing 20k). If they won't do that then you'll be taxed on some of it and have until the end of this tax year to pay into a pension, then can reclaim the higher rate tax at the start of the new tax year.

They clearly want you to accept so they should be interested in making this as efficient for you as possible and throwing in some of the NI that they save by using the pension approach.

Then get an IFA to sort out the pension, investments inside it and do a general financial review to get things nicely optimised for you.

superloopy_2

Thanks for the information ...you're a star !!

I've reflected on the decision all day and had come to a similar conclusion as to whether to accept the offer. Who knows ... i may not be in a similar position for another seven years . I've put up a couple of questions relating to the tax liabilities (the majority of the lump sum being retirement related its possible that it IS tax-free) and will hold out for a reply until the very last moment when all papers need to be signed and delivered .... many thanks.