To Take 25% lump Sum or Not?

Ystrad_Lad

I'd be grateful for some advice on the following predicament.

I'm 52 and currently working. In 2 years my contract ends and I then intend to become self employed but at a much lower salary. I have a personal pension with Standard Life and an old company pension.

I want to take the 25% lump sum from both pensions (but not take the pension yet) and use it to reduce my mortgage. The spare cash from the reduced monthly mortgage payments will then go into AVCs with my current employer. I'm in a final salary scheme, 4% employer contributions and 6% my contributions. My net pay is below the higher tax threshold and I also pay 15% of net pay to the CSA.

My reasoning is that I would be better off doing this because not only would I get tax relief on the AVC contributions but pension contributions are exempt from CSA calculations.

Both pension providers tell me I can have the lump sums now but I have not had a clear statement about deferring the pension.

Does this make sense? My FA is ambivalent.

EdInvestor

More info would be needed on the old final salary pension. Taking the lump sum very early might seriously reduce the eventual pension.

On the Standard Life one, effectively you're saying you'll take a 5-6% return by paying off the mortgage, as opposed to a potentially higher return by leaving the money invested.

Can you afford to do that? Standard Life now has some excellent funds, and you may be wise to think about reorganisg that pension and leaving the 25% TFC still invested. If the pension is in With profits, don;t do anything until after you've got your DM windfall of course, and check on any guarantees.

What does your FA propose?

dunstonh

An independent would have no problems guiding you although a tied agent would. Plus the advisor would need to be authorised to deal in drawdown which virtually rules out all tied advisors and some IFAs. So, that fact you call the advisor "FA" suggests its a tied advisor and that would explain the response you are getting. Thats what happens when you see a salesman rather than an advisor.

The other thing is that what you want to do changed quite significantly on 6th April and we are all still getting to grips with the changes.

The old company pension could be worth far more leaving it where it is rather than transferring it to a money purchase scheme. That would need some calculations done. The Standard Life pension may or may not have enough in it to make it worthwhile. Another thing that the advisor may be cautious on is that the FSA has issued warnings on doing income drawdown on funds less than 100k due to higher risks involved. Whilst a few non-authorised individuals on this board seem to ignore the risks, it is something which advisors cannot do.

Last point is why are you contributing to an AVC? AVCs still have the occ scheme link (note, some trustees will overule the link but not all) and if there are no incentives from the employer to pay into the AVC, then you could be putting the money personal pensions which could offer greater investment potential or buy added years, if that option is available.

Ystrad_Lad

Thanks for the info - lots of things I hadn't taken into account!

EdInvestor: The Std Life pension is with profits and currently stands at about £98k including about £40k protected rights. I've already been advised I'm going to get 369 DM shares. Why do I have to wait until the shares are issued? My FA is in fact an IFA, he seems to think it might be beneficial because of the extra benefit of the 15% CSA saving but warns that the new simplified rules since A-day are anything but!!!

Dunstonh: The old company pension has a transfer value of £41k with a growth rate set at RPI. It is no longer linked to final salary. The GMP calculated at age 65 is £200pa. (Yes £200pa)
I'm paying AVCs into a Clerical & Medical Fund linked to my present company pension which is final salary. I was advised that this would be more beneficial than a private pension as the admin costs are lower (I'm not really sure if that is true!). I guess it's because it was easy to arrange- just a form sent to the payroll dept.

EdInvestor

I've already been advised I'm going to get 369 DM shares. Why do I have to wait until the shares are issued?

Perhaps you don't. But perhaps you'd better check?

It's almost certainly not sensible to take the lump sum from the final salary pension.But is it sensible to take it from the Standard Life one?

DH says this:

Another thing that the advisor may be cautious on is that the FSA has issued warnings on doing income drawdown on funds less than 100k due to higher risks involved.

The reason he says this is that in order to take the 25% TFC you need to put the fund into something called "income drawdown".But th e alleged risk of this is a red herring, as you would not be taking anything else out of the fund (as an income) at this stage, would you? You would reinvest it until later, right?

Moving to income drawdown usually involves transferring the money to a SIPP. Unfortunately there is a bit of a problem as you can't yet transfer the PR part of the fund into the SIPP.This will be allowed from next year when SIPPs are regulated (and possibly from October), but it's not allowed now.So the idea doesn't really work at the moment. I would suggest you wait until this delay with the PR fund is resolved.

To be honest half the advisors out there haven't got their heads around the new regulations, and half the lifeco staff haven't either.Give it six months and they might be a bit more on the ball. :rolleyes:

I would agree that it's better to avoid the AVC route as it is very inflexible ( no tax free cash by right , can't take the money separately from the f/s scheme unless trustees allow it).You could consider putting more into the SL pension - have a look at the other funds outside WP that Standard life now offers - there are some excellent top rated ones. All their pensions are on new low charges, so no need for concern there.Don;t put any more money into WP.

Ystrad_Lad

That's right, I only want the lump sum at the moment. Everything else will be re-invested.

Thanks again for your response.

Regards

aj3001

Just a quick note, you do not have to take 25% TFC, it is possible to take a lower sum of money and leave the rest to buy an annuity, your best option to reinvest is TFC and OMO

Ystrad_Lad

Sorry to be a pain, but what is TFC and OMO?

Dave_P161

Ystrad_Lad wrote:

Sorry to be a pain, but what is TFC and OMO?

TFC = Tax Free Cash and OMO = Open Market Option

Ystrad_Lad

Thank you.

Ystrad_Lad

I've now convinced my IFA that it's a good idea using these figures;

I've considered the position in 12 years time when I'm 65 and I'm only taking part of the lump sum with no protected rights, the balance will go into a SIPP.

Take £15k lump sum now which costs me 12 years at say 5% ie £27K, use it to pay off part of the 12 year mortgage which saves me about £20k. As a result of this part of the exercise I stand to lose about £7k.

The reduced mortgage repayments frees up about £136pm net which grosses up to £205pm when I include CSA and tax reliefs.So paying this into a new pension, £205pm at 5% for 12 years gives £40k.

Overall I'm about £33k better off in 12 years time.

OK guys, your turn to shoot me down!