Drawing Barclays Final Salary Scheme whilst paying HRT

MikeFloutier

Hi,

I'm 58, married and have my own business and am just in the 40% tax bracket. The only pension I have is a Barclays Final Salary scheme; I worked for them for 21 years.

I'm now in a position where I NEED to draw down my pension to get at the £50k tax free lump sum.

Naturally my concern is that, if I do this, I will be paying 40% tax & some NIC on the residual pension, and this at a time when I don't need the income (I plan to continue working for quite some time).

Could you please give me some idea of my options here.

Many thanks.

Mike

molerat

You will not pay NI on the pension income. Put more money into a pension to reduce your tax liability.

MikeFloutier

Thanks Molerat, is this likely to be better than transferring my final salary pension to a new scheme OR should I look carefully at a comparison?

jem16

MikeFloutier wrote: »

Thanks Molerat, is this likely to be better than transferring my final salary pension to a new scheme OR should I look carefully at a comparison?

Very unlikely that transferring a final salary pension would be in your best interests. An IFA would be needed for such a transaction.

Loughton_Monkey

As posted in literally hundreds of threads here, moving a FS scheme has become 'almost illegal' because it can only be done when a 'professional' signs off to say it is 'best advice' for you. Since transferring such a scheme is usually extremely expensive to you, no-one in their right mind would sign this off.

Rather perversely, I wouldn't mind guessing that a "dire need" for the lump sum "now", for someone who had no rational means of finding it another way, might qualify as sufficient justification to recommend such a transfer [IFA's please comment?].

However, were you to go down this route, I would suggest that this would be by far the most 'expensive' £50K you have ever obtained.

Given that I, too, had a FS scheme with exactly 21 years service, I looked back over actual regular valuation figures, and calculated what I would have lost had I taken the pension when its value was £200K [i.e. enough to give a £50K lump sum]. My calculation shows that I would have 'lost' in the order of £15K to £18K per annum for the rest of my life. Instead, I left it to normal retirement age.

I strongly recommend you either reconsider your 'need' or try to fund it some other way.

MikeFloutier

Thanks, the Barclays scheme normal retirement age is 60 so I've only got 18 months to go. In my case this equates to less than £1000 per year loss of pension by cashing in early.

I was already aware of this, my main question was concerning my wish to avoid paying high rate tax on a pension that I don't need yet.

Since leaving it with Barclays is not an option as it would stagnate and I couldn't get the lump sum I thought my only other option was to transfer it.

However another poster suggested investing it in a new pension until I need it, this way I could clawback some of my high rate tax.

This seems to give a lot of advantages.

magpiecottage

Before jumping, you need to consider not simply the issue of whether a transfer is worthwhile but also how much your pension will be reduced for taking it early.

In addition, what is the commutation rate? These are typically LOWER than the true actuarial value - which advantages the scheme at your expense.

Would it be preferable to borrow the money for now and repay it out of your pension later?

MikeFloutier

My word this is a minefield.

I've considered all your points and I've decided to take a £100k mortgage to enable me to buy the house we are looking at.

I will repay a lump sum of £50-60K from my tax free lump sum AND then invest the residual pension in a new pension whilst 40% relief is still available. If the relief is reduced I will probably simply use it to reduce the interest on the mortgage which will be an Offset mortgage.

The only decision I still have to make is WHEN I take my pension/lump sum.

I have just received a figure for an immediate pension (one year and seven months prior to my Normal Retirement Date) and am waiting to receive the "reduction calculations" used to arrive at this figure to infer my likely pension due at my NRD.

The problem is that this is complicated by the fact that my ex-employer was Barclays who will, on 1 Oct 2012, be having to introduce Pension Auto-enrollment; at which stage they plan to out-source the Pension Administration.

In their letter to me, Barclays say they, "...anticipate implementing changes from 1 October 2012. As a result you may wish to take this into consideration when selecting your retirement date as your final retirement benefits may be higher than those shown."

On face value this seems to be saying that it's best to wait until after 1 October 2012 (all other things being equal) BUT I have read that the burden on companies of implementing Auto-enrollment may lead to the dilution of existing scheme benefits.

What do people think?

mgdavid

if they are outsourcing the pensions admin then you will likely get carp service for at least 3 months from 1st October and maybe longer. I'd be tempted to take it from 1st September then it's just a simple pension-in-payment for them to transfer to the outsouce company, harder to !!!! that up!

jamesd

MikeFloutier wrote: »

My word this is a minefield.

Right. And you were planning to step on as many mines as you could, doing yourself the maximum possible damage.

MikeFloutier wrote: »

I've considered all your points and I've decided to take a £100k mortgage to enable me to buy the house we are looking at.

That's your only need? You want to pay down some of a mortgage by taking the pension early? You're not about to go bankrupt or something, in a job where that means you'd lose your job immediately? That's the sort of reason that might make it worth taking the pension early, a major financial catastrophe that can only be averted that way.

MikeFloutier wrote: »

I will repay a lump sum of £50-60K from my tax free lump sum

It does not make any sense to take a pension early for this purpose. It'll cost you a fortune. Look at your own estimate:

£1,000 less a year (plus annual increases) for the rest of your life. Life expectancy for males aged 60 is something in the high 80s, so that'll cost you more than £28,000.

And you'll probably get a bad commutation rate that means you'll pay through the nose to get the lump sum as well.

MikeFloutier wrote: »

The only decision I still have to make is WHEN I take my pension/lump sum.

The answer in financial terms will be easy: at the normal retirement age. Anything else will cost you far more than you can possibly hope to save on the mortgage cost. At a commonly offered bad commutation rate or 12:1 you'd need to be paying more than 8% plus inflation in mortgage interest to even have a hope of breaking even. But that's without allowing for the additional loss from taking the pension early.

MikeFloutier wrote: »

On face value this seems to be saying that it's best to wait until after 1 October 2012 (all other things being equal)

Waiting until scheme normal retirement date and taking the minimum possible lump sum is the course that is likely to put you in the best possible financial position. You can use the higher income to overpay on the mortgage if you like.

MikeFloutier wrote: »

BUT I have read that the burden on companies of implementing Auto-enrollment may lead to the dilution of existing scheme benefits.

That is where a company has relatively few employees in the current pension scheme and will face having many more after auto-enrolment. Benefits that have already been accrued can't be affected by this so there is no real chance of it having a significant effect on you.

MikeFloutier wrote: »

What do people think?

That your initial plans were foolish and asking here has saved you a lot of money if you act as suggested.

If you want to engage in some profitable financial trickery you could pay your normal higher rate income into a personal pension. Then take a tax free lump sum and use that to pay off part of the mortgage. Next step depends on pension values:

1. If your guaranteed income from the work pension and the state pension after you take it exceeds £20,000 you could use flexible drawdown to take out all of the pension pot. The part above the 25% will be taxed as income in the year in which you do this and from the moment you use flexible drawdown you are prohibited for the rest of your life from making contributions to any pension scheme. This sort of thing can pay if you stop working and are no longer a higher rate tax payer, so you get 40% relief on the way in and 20% tax on the way out. Otherwise see 2.

2. If your guaranteed income that you are already receiving isn't at least £20,000 you can use capped income drawdown to take an ongoing income and use that to pay more off the mortgage or make more pension contributions. This pension income is taxed as usual, though no NI on it.

This effectively gives you tax relief on your mortgage equity payments and it's just about the most efficient way going to pay off a mortgage.

If you'll continue working after normal retirement for the bank pension you can do really well using this approach, paying the pension income into a new personal pension to get the tax relief and lump sum.

You could also look into slow stoozing, using 0% for purchase credit card deals for all normal spending and leaving the money you spend in the mortgage offset account. Repay the card from the offset account at the end of the deal. Free money from a bank that lets you save mortgage interest is hard to beat.

MikeFloutier

Many thanks James, that all makes sense, I am glad I asked.

The only thing I didn't quite understand was Capped Income Drawdown. My Barclays pension is a Final Salary Scheme. I was planning to use the residual monthly pension income (about £10,000 pa) to pay into a new pension (probably a cash SIPP - due to my age, 58) whilst 40% relief is still available. If relief is reduced to 20% I would use it to benefit my offset mortgage.

Would Capped Income Drawdown apply to my situation? If so how would it work?

Thanks again!