Pension

Molly126

My husband is 55 and has been told that he can withdraw the lump sum from his pension now, he is all for this but I am feeling rather cautious and say that he shouldn't and should wait until he retires possibly in about 10 years time. Anyone any advice as I am not very informed regarding pensions etc. Thankyou.

dunstonh

Anyone any advice as I am not very informed regarding pensions etc.

we cant give advice as we dont know your situation and its a regulated area. So, its just discussion and comment only.

Technically, you can draw on a pension from age 55 if you wish. However, it is not without consequence. Taking the 25% tax free cash is a once only decision. If you take it at age 55 but leave the rest of the pension invested and it goes on to double in value then you dont get a second bit of the cherry. You dont get another 25% even on the increase. Death benefits are also reduced. If he goes on to take the income at age 55 then really low annuity rates would be available compared to those taken at say age 65. The income is taxable income as well.

If the pension is an old one then there may be penalties if taken early. There may also be valuable guarantees that are lost by taking it early. If it is an occupational pension then there may be reductions put in place.

A general rule of thumb is that if you dont need the pension then dont commence it.

Loughton_Monkey

This needs treating with very great caution. You say 'has been told'..... For a start, we need a bit more background on this, maybe, to give you some 'informed comments'. Did this comment come from the employer in the form of "we think you should take your lump sum now.... " or from the employer "you can take your lump sum now....", or was it, perhaps, 'the man down the pub'?

You see he might have been told this on the general basis that all of us can legally start drawing our pensions from age 55 - whether working or not. It is possible under certain circumstances to take the 25% lump sum, but not the balance and leave the rest in to be paid from, say, age 65. But to do any of these things is not always (and not often) a good idea.

At the most basic level [leaving aside many more consequences] a pension primarily exists to support you at 'retirement' when the income dries up. To take, and 'spend' 25% of the value while still working does two things - (a) diminishes your ultimate retirement fund by 25%, and (b) pushes up your 'spending power' or 'lifestyle' while working to a level which you could well regret given the much larger drop in finances when you do retire.

Any argument that says 'well OK, I'll take it and invest it' generally holds no water, unless you (or more specifically) your husband 'knows' how he can invest it for the next 10 years to produce a better return than the pension growth despite losing the tax free status on the investment. [If he does know of such... please share it because I would be extremely interested!]

My comments apply whatever type of pension it is. If it happens to be a 'Final Salary' scheme, then the likelihood is that implications of taking it now could be even more severe and cause of huge regret later on.

jamesd

It depends on his situation and what he'd do with the money. Bad ideas include things like using it to pay off a mortgage. Paying off debts charging more than 12% could be a worthwhile idea if the money that was going to debt repayments was invested in the future instead. But for most debts the approach of using 0% credit cards is a better way to cut the cost while clearing them.

Good ideas include things like reinvesting the money in a stocks and shares ISA using the same sort of investments that the pension is using. If the pension pot might eventually reach £1.5 million in value doing it now can reduce the percentage of the lifetime allowance that is used and reduce possible future taxation. If there's a desire to retire before the state pensions start, taking the lump sum now and starting to take an income from the rest at the maximum allowed limit can be a good idea, because the limit is below the returns that can be expected from investments, artificially capping how much you can take out. Starting to take it out earlier can make the money available at the required rate. I'm assuming that the money taken out will be reinvested somewhere until it's needed. I'm also assuming that he won't buy an annuity with the other 75% of the pension pot but will leave it invested, which might require transferring the money to another pension provider.

Is this a workplace defined benefit scheme, like final salary or average salary? If so it's more likely than usual to be a bad idea to take it now, unless it's being well invested.

Loughton Monkey, you don't need to achieve a better return, just the same one. That's easy enough to do if you use the same investments and using the ISA allowance makes the tax difference effectively zero. Except for ongoing income, which could be contributed to another pension to get a second chunk of tax relief and second 25% allowance, giving a possible significant tax advantage to taking it early. For the various reasons given here I expect to start taking my pension pot at the earliest possible date, but probably just reinvest it until needed if I haven't yet reached the point where I can and want to retire early by then.

Cautious_Investor_3

jamesd wrote: »

Good ideas include things like reinvesting the money in a stocks and shares ISA using the same sort of investments that the pension is using.

Hi

I'm not sure why moving it into an ISA is a "good idea", not only does it use up your ISA allowance, but it also makes the death benefits significantly worse on the pension fund i.e. a 55% tax charge from April 2011 v a 0% tax charge on unvested funds.

Or are you saying that this is only a good idea if an individual is close to breaching the LTA?

I think the OP needs to give us far more information, this will make the replies easier.

For example:

1. How large is her OH's pension fund
2. When does he want to retire?
3. On what income does he want to retire?
4. What types of pensions does he have?
5. Why does he want to take the tax free lump sum?
6. What other assets do they have?

The Cautious Investor

Loughton_Monkey

jamesd wrote: »

Loughton Monkey, you don't need to achieve a better return, just the same one. That's easy enough to do if you use the same investments and using the ISA allowance makes the tax difference effectively zero.......

Well, semantics really. I generally would think that if 'doing nothing' means you get a result of "X", then if you are going to start getting involved in specific actions, paperwork, days of lost growth possibly.... then the only reason for doing it would be to get "X+".

And if we are talking of a lump sum so low (£10K-ish) that you could bung straight into a conveniently 'unused this year' ISA then it really defies logic as to why it would be 'good advice' to go into all this unnecessary complication...

Bigsmak

Molly126 wrote: »

My husband is 55 and has been told that he can withdraw the lump sum from his pension now, he is all for this but I am feeling rather cautious and say that he shouldn't and should wait until he retires possibly in about 10 years time. Anyone any advice as I am not very informed regarding pensions etc. Thankyou.

Find a local IFA and speak to them.

SallyG

How much would you charge per hour Bigsmak?
I'm looking for an IFA to discuss pensions but I'm afraid of not being able to meet the cost.

Bigsmak

SallyG wrote: »

How much would you charge per hour Bigsmak?
I'm looking for an IFA to discuss pensions but I'm afraid of not being able to meet the cost.

To be honest.. I would sit with you at first, probably for an hour or so and I wouldn't charge you at all. We'd look at your situation and then I'd go do some work taking into account all your situation and then let you know what I think.

If we did decide to do anything I usually get paid on commission, which comes from the provider. If you want to pay yourself we usually charge about £150 per hour. Most people want to go down the commission route.

What I would do is speak to your friends/family and find out if any of them have used an IFA locally and if they helped (or didn't help) and if they would recommend them to you. The best way to find someone is if someone you know already trusts them. That's how I get most of my business, you speak to brothers, sisters, workmates of people you help and it rolls on like that.

We are not scary and we are only trying to get you the best deal with your money. We try to take everything into account such as commission levels and the provider charges and work out if something is right for you or not.

i.e - Even though we would get a bit of commission from the provider, you will be better off in the long run than if we did nothing.

Cautious_Investor_3

Bigsmak wrote: »

If you want to pay yourself we usually charge about £150 per hour. Most people want to go down the commission route.

Forgive the semantic point put the client is "paying themselves" if they opt for the commission route i.e. commission comes from product charges which they ultimately pay.

The Cautious Investor

jamesd

Cautious_Investor wrote: »

I'm not sure why moving it into an ISA is a "good idea", not only does it use up your ISA allowance, but it also makes the death benefits significantly worse on the pension fund i.e. a 55% tax charge from April 2011 v a 0% tax charge on unvested funds.

It makes no difference to the death benefits for pension purposes in this case because there is a spouse who inherits 100% of the money without tax charge into her own pension, unless I've missed some change proposed for this.

Those who aren't a spouse could be provided for by life assurance, if there's a desire to provide an inheritance beyond what is inherited from the pension into possible pensions for other family members after her death.

Cautious_Investor wrote: »

Or are you saying that this is only a good idea if an individual is close to breaching the LTA?

I'm likely to suggest it in most cases of middle income levels where I see some prospect of retirement before state pension age. That's partly because the money once taken out of the pension can be drawn at as high a rate as required to keep income level between retirement, possibly forced, and state pension age. Where there's no requirement for that the recycling by making more pension contributions will increase the tax benefit.

Yes, it uses the ISA allowance, though I think that relatively few people will be using over £22k of ISA contributions for a couple each year.

Cautious_Investor wrote: »

I think the OP needs to give us far more information, this will make the replies easier.

Agreed.

Loughton_Monkey wrote: »

Well, semantics really. I generally would think that if 'doing nothing' means you get a result of "X", then if you are going to start getting involved in specific actions, paperwork, days of lost growth possibly.... then the only reason for doing it would be to get "X+".

And if we are talking of a lump sum so low (£10K-ish) that you could bung straight into a conveniently 'unused this year' ISA then it really defies logic as to why it would be 'good advice' to go into all this unnecessary complication...

It's over £22k a year for a couple, with no requirement to do it all in one year. Investing outside a tax wrapper can be used along with annual use of two people's capital gains tax allowances to protect most growth from tax when income isn't required.

The x+ is the substantial gain of having the money available for use when required, at whatever rate is required, something that can best be achieved by taking the lump sum and drawing an income from the remainder at the highest rate permitted, then investing both outside a pension.

The reduction of the GAD allowance in the proposed legislation is a substantial driver of this. So is recognising that people often retire and have to retire before state pension age and have to have the money available to draw on at whatever rate it takes to smooth their income.