Considering taking lump sum on Pension

Wings

Wife has just reached retirement age, with one of her Personal Pensions, offering her the chance of taking a 25% lump sum payment of 20k, plus 4870.00 per annum pension, or no lump sum but 6500.00 per annum.

This is just one of many pension policies, and together with investment income from BTLs, she will not only always be a higher rate tax payer, she will possibly never have need for the pension income.

Deciding on whether to take the lump sum, I have calculated the differences of the annual pension payments, net of the present higher rate of tax is 1200.00 per annum. So dividing the same into 20k, means she has to live for 17 years or mean to break even, by not taking the lump sum payment now.

Taking into account both inflation, present buying power, increase in tax rates, bank interest rates, possibility she might not either have the good health to enjoy the monies or survive for 17 years.

Whilst investment rates are presently low, it still appears to me to be better “a bird in the hand, is better….”, to take the lump sum now and a reduce pension, have I missed considering any other factor in the equation.

Linton

If she doesnt need the income and has no immediate need for the lump sum why not defer the pension? If it's sensibly invested, it should continue to grow in a tax free environment and should she die early before taking the money the pot will pass to yourself. Another advantage of doing this is that when she does take the pension the lump sum should have increased in value.

dunstonh

Wife has just reached retirement age, with one of her Personal Pensions

Surely it is your wife that reaches her retirement age. Not the pension. The pensions just have an example age set up to give an indication of benefits at that age. It doesnt mean you have to take them at that point. She can just tell them to put a different age on the pension and they will leave her alone until then.

she will not only always be a higher rate tax payer, she will possibly never have need for the pension income.

So it seems like taking the pension is not a good idea (Linton covers it above)

Whilst investment rates are presently low,

Actually they are not. Of course, once a day has gone by, that day is never repeated. So, you look forward not backwards. However, the last couple of months have been pretty good.

it still appears to me to be better “a bird in the hand, is better….”, to take the lump sum now and a reduce pension, have I missed considering any other factor in the equation.

What you suggest means bringing the money out of a tax free environment into a higher rate tax one. It reduces the death benefits and serves no purpose. The investment options in modern pensions are the same as ISAs and unwrapped investments (modern platforms have around 17,000 investment options). So, if you want to invest in something different, you can do it within the pension. The money in a pension is also outside of the estate for IHT purposes

If anything, your wife should be perhaps considering placing more into a pension as she is a higher rate taxpayer. If you think of the pension as a tax wrapper rather than a "pension", then the benefits are not always linked to income in retirement but can be used for other things.

atush

I agree with the above posts. I would not start a pension you do not need, and would not take a lump sum unless you could shelter it from tax (thru ISAs and NSI etc).

And in any case, I would not buy an annuity if none was needed as rates are too low- I would go for drawdown and leave it until you need to drawdown as at least this way some is left behind to either you or your family is she predeceases you.

Wings

Thanks for all the replies, so basically don’t bring the pension monies into a tax environment, instead let the pension pot build up, for others to pay the tax and reap the benefit, all of course at my/our expense.

I have never quite understood why an unwanted expenditure is made, in order to claim a taxable allowance, seems not to different to taking one’s pension, don’t enjoy 60% of your pension because the balance of 40% you were pay in tax.

jamesd

She could take the lump sum and income, say with income drawdown, then reinvest the pension income into another pension. Then she can later take a 25% tax free lump sum from the new contributions. That'll get more of the money out of taxes than leaving it in the pension does.

She can put the lump sum into ISAs if she's not already using the limit for that. If she doesn't need the lump sum capital she could recycle that into another pension, subject to some limits that you should ask about if it's of interest.

Will the value of the guaranteed income from the other pensions and the state pensions reach at least £20,000 a year? If yes she could later go into flexible drawdown and take out the pension capital at whatever rate she likes, with no caps. It's taxed as income in the year she takes each amount, so she could then as a basic rate tax payer top her income up to just the threshold for higher rate tax to get money out of the pension if she wanted to.

There's no requirement to buy an annuity. She can just leave the money invested then, if her income is high enough for flexible drawdown, take it out as fast as she likes.

Guaranteed income for this purpose mostly means the state pensions, workplace defined contributions schemes and annuities. BTL rental income or investment income doesn't count.

dunstonh

so basically don’t bring the pension monies into a tax environment, instead let the pension pot build up, for others to pay the tax and reap the benefit, all of course at my/our expense.

If you are doing nothing with it then how would that differ to it sitting in an ISA or a savings account?

I have never quite understood why an unwanted expenditure is made, in order to claim a taxable allowance, seems not to different to taking one’s pension, don’t enjoy 60% of your pension because the balance of 40% you were pay in tax.

£50,000 into pension costs £40,000. Higher rate tax relief gives you back another £10,000. So, £50,000 invested has cost you £30,000. In the interim you get tax free growth and it is outside of your estate if you die (paid tax free to beneficiary as a tax free lump sum).

Ignoring growth, if you made it to 75, that £50,000 can then be commenced with 25% taken as a lump sum. So, you get paid £12,500 as a tax free lump sum. So, the money lost to the pension is £17,500(50k minus 20k tax relief minus tax free cash of £12,500). However, you still have £37,500 in the pension. If you then died and the beneficiary decided to keep the pension and take the income then its taxed under income tax (20% typically unless higher rate). Or it can be taken as a lump sum minus a 55% tax charge. So, on the remaining value and ignoring interim growth again, that would be a tax of £20,265. Therefore leaving the person with £16,875. Virtually giving them back your net effective pension contribution (after tax relief and 25% tax free cash taken out - and that ignores tax free growth)

If you leave the net effective amount in a savings account and its charged IHT on death, you end up with less. (17,500 * 40% goes in tax leaving them £10,500)

Pension gives them £16,875. Savings gives them £10,500

In the examples above I left out growth. The more it grows, the better it gets for pension. If you are unfortunate to die before 75 having not commenced the pension, getting the full value paid out with no tax at all is good tax planning. Even if you are not around to see it!!

joetheminer

Before this thread runs out of steam I would love to know where the OP got the ££ offer they mention. I am considering taking my 25% cash of just over 20k but the best PA quotes I can get are a lot lower than those mentioned by the OP.
Maybe it is enhanced?