Personal Pension from contracted out contributions

turbo

Hello, my husband contracted out of SERPS in tax year 1987/8 and contracted back in tax yr 2005/6. We have had a letter from his personal pension provider saying both non protected rights and protected rights pension is payable at age 55 (this December). (my understanding is protected rights can't be taken till state retirement age).The contributions made total £18000. Value is £28000. No pension amount given, just says they will write again soon.
Should he delay taking this pension. ?
I have asked for a state pension forecast but this will take a while. How do we tell if the pension to be paid is more than he would have received if he had stayed in SERPS.?
Could we be better off taking this pension and investing it ourselves?

Turbo

Emmamumof2

If you dont need the income when he reaches age 55 dont take it - you may need it more later, especially if he is still working now as you will have to pay tax on the income.

It wont matter whether what he will receive is more or less than he would have received if he had remained contracted in as the decision is made now, there is no going back, so it doesnt matter if it is more or less.

If he takes the pension you will only recieve 25% of it as a tax free lump. He could choose to invest this. He would receive the income net of income tax, so is he is a basic rate taxpayer, the pension will be taxed at basic rate before its paid to him.

If he is concerned with how the funds are invested in the pension plan he could seek advice regarding alternative funds available within the plan or consider transferring the pension, but this would only be worth considering if he did not need the income over the next few years.

turbo

Hello Emmamumof2, thanks for your quick reply. I am going to give the pension company a ring this afternoon. I agree it's best to leave it where it is.


Turbo

jamesd

Protected rights can be taken from age 55.

You should check with the pension company to see whether there are any penalties like a market value reduction if the money is taken later. Sometimes there are specific dates, like the designated retirement age, when there will be no MVR. This only applies if the money is invested in a with profits fund.

turbo

Thanks James, I will check the MVR. I don't think it's a with profits fund. The 2010 value is 40% higher than the 2009 value which is making me think it's better to leave it where it is. Husband would like to take it at 55 and invest monthly amount in shares or an ISA himself.

Turbo

dunstonh

Husband would like to take it at 55 and invest monthly amount in shares or an ISA himself.

Why cant he do that within the pension? If he takes out if out of the pension he reduces the death benefits and brings the money out of a tax free environment into a taxable one. If he wishes to play around with the retirement fund by investing in different things then nothing is stopping him from doing that.

jamesd

turbo wrote: »

Husband would like to take it at 55 and invest monthly amount in shares or an ISA himself.

Not a good idea, for two main reasons:

1. He can transfer it all to a more flexible pension and invest in shares himself within a pension if he wants to.
2. It's a pension and he can't get out more than a 25% lump sum anyway, the remaining 75% has to stay in a pension. Under drawdown if he doesn't want to buy an annuity. Since it has to stay in a pension anyway and since he can invest directly in shares in a pension, why do it?

It seems that a change of pension provider or pension product is what's really needed here. SIPPs are the standard way of doing what you described and places like SIPPDeal are set up to let him do it with direct share holdings. Or Hargreaves Lansdown if he prefers funds to shares.

If you're not using both of your S&S ISA allowances then that might be a reason to take the 25% lump sum from the pension now and leave the rest invested in a pension, in drawdown but not taking income. Then the 25% could be put into the S&S ISAs and continue to grow within that tax wrapper instead of the pension one.

Not all providers let you use drawdown but the remedy for that is a transfer.

turbo

Thanks dunstonh and jamesd. It's good to get impartial advice. We have until December to decide. I must admit I would like to keep it invested in the pension as we can manage without the income.

Turbo

jamesd

With the pension, if you were to transfer it, you'd also have the option of starting to take some income whenever you want to, while he could still do that share trading.

turbo

Thanks jamesd, my husband is very negative on pensions as we have lost so much through our Executive Pension Plan.

Turbo

dunstonh

turbo wrote: »

Thanks jamesd, my husband is very negative on pensions as we have lost so much through our Executive Pension Plan.

Turbo

Pensions dont lose money. They dont make money either. Its the investments you put inside of the pension that makes or lose money.

If you place the same investment inside an ISA, pension, investment bond or hold it directly then you get the same rate of return. Its only the tax and maturity process that is different.

Hence the comments as to not needing to take it out of the pension wrapper.

How did he lose money by the way? There is very little that has lost money over the long term? There is no point in doing any investments elsewhere if you dont understand why things can lose money or make money.