What to do with pension lump sum

dzug1

jem16 wrote: »

I assume you will lose 5% p.a. by taking it early? Taking it now loses 40% on tax. Have you worked out what is better in the long term?

No - I think what OP is saying is that because he is being made redundant they are waiving the 5% pa deduction for going early

jem16

dzug1 wrote: »

No - I think what OP is saying is that because he is being made redundant they are waiving the 5% pa deduction for going early

No I realise that.

However if he leaves it till age 55 when he is planning to retire/partly how soon is that before his normal retirement date? Can he retire at age 60 with reduction or is it age 65?

Orwell

I can take it now at 50 with no reduction for early payment. None. That's part of my redundancy benefits (a bit like Fred Goodwin). I would get exactly the same main pension if I waited for 5 or 10 years until normal retirement age in the scheme (60).

That applies to the main scheme, not any converted AVC which has the conversion rate adjusted for age. For me it is a 4% conversion from capital to extra pension.

So it's sort of a given that I will take the main pension shortly. The decision is purely about whether to leave the AVCs invested (with a max 25% tax free later), take them out entirely tax-free now, or convert them to additional pension (the latter could be deferred with the risk that the conversion rates falls further).

EdInvestor

Orwell wrote: »

In other words - what's best? £4,000 p.a. (LPI to 5%) or £100k tax free now?

Assuming your 100k also grows at 5% p.a ( or less given that it can be tax free),the pension will catch up with the cash when you are 75.

Does that help?

You can use the 100k to stock up you and your wife's ISA to top up her pension and also your additional cash reserves (try N&SI index linked certs, usually a good deal for HRTs) and you can stash away 15k pa pp. Including your new 10k annual ISA allowances, it will only take you a couple of years to get all that protected.

To be realistic, what you say about workers over 50 is absolutely right.You should be Ok for income with the pension if (when) it ahppens to you, but you won't have nearly enough in cash to deal with any Bank of Mum and Dad issues.Also your wife would not be that well off if you keeled over as state pension won't kick in for quite a while.

So I would still say take the cash, regardless of the tax issues (which also favour taking the cash).

jamesd

I agree that it looks sensible to take the main pension now, given the lack of age reduction. So long as you're paying 40% tax you can just pay it into a personal pension and get tax relief on it if you don't need the income.

For the AVCs I doubt that taking an annuity is worthwhile. Lump sum, full use of S&S ISAs for you and your wife and maybe pension contributions for your wife to increase her pension if there's a prospect that you might hit higher rate income tax in retirement or of her not getting 10k in taxable income from other sources. Assuming your whole ISA allowances are available that's 20,400 a year, about 20% of the capital, so you'll probably have most of the money inside the tax wrapper within a reasonable timeframe.

For the money outside ISAs you can use investments that produce mainly capital growth and can sell and buy a related investment to use your CGT allowance each year and avoid accumulating a large gain. So buy one emerging markets fund, sell to use the CGT allowance, buy another emerging markets fund to stay invested in the same sector.

Looks likely that you can end up with good tax free growth on the lump sum and avoid the potential of taxable income on it later, as well as reducing the chance of age allowance reduction affecting you.

I also assume that from next April you will be barred from taking the lump sum or pension on it because the minimum age increases to 55. If so, that's another reason for taking the lump sum now and moving it into ISAS as fast as you can.

tocsin

Orwell,

I am in a fairly similar position (worked in IT, 50 - well, 51 yesterday) and given a generous early retirement offer a few months ago. I don't expect to work in IT for any big companies, but do have a few alternatives in mind. And the pension means that money from these alternatives is not the main driver!

To minimise the tax effects, and as I didn't really need the lump sum portion of the retirement offer, I put the bulk into a SIPP (and as much of the rest as possible into ISAs for 2008-9 and 2009-10). I've received the basic rate refund, and will be claiming the higher rate refund as soon as practicable.

A lot depends on how much cash you need over the next few years - there is a short window for those aged 50-54 to get a 25% lump sum back from SIPPs (min age increases to 55 next April), but generally once invested in a SIPP the money should be regarded as "lost" to long-term pension provision - where the investments are still under your own control.

So the main pension decision is (I think) a no-brainer, and the AVC is a cost-benefit calculation on (a) cash needs over the next few years, and (b) longevity...

Hope that helps a little!

Orwell

Cheers.

I understand that HMRC don't allow recycling of tax-free lump sums back into pensions these days. Otherwise that would be a possible option of having cake and eating it.

jamesd

Orwell, you're allowed to recycle up to £17,500 (1% of the lifetime allowance whatever that is, currently 1.75 million) and can do it for a spouse regardless of that. You can also continue previous contribution rates and will be able to get tax relief on contributions of up to 3600 gross each year for life even with no earned income.

I suggest that you take the lump sum before considering this further, since the anti-recycling rules only apply if you pre-plan the recycling, not if you take a lump sum and then decide to make additional contributions with it. The HMRC pages I referred you to have much more detail about the rules.

From the income numbers it appears to me that you're likely to be better off overall not recycling much but instead using maximum ISA allowances to get non-taxable income that won't push you into age allowance reduction.

jamesd

I should add that in this case the limit for recycling would be £30,000. That's because even if the 1% of lifetime allowance is exceeded and the recycling was planned before getting the lump sum and was more than normal contributions that were being made, it still can be up to 30% of the lump sum amount before it is caught by the anti-recycling rules.

Orwell

My conclusion is to do a bit of each - take £2k extra income and £50k lump sum. That kind of covers my bases and means I can't make totally the wrong choice at least!

It will be interesting to see the tax rules in 15 years time - they are certainly not the same now as they were 15 years ago.