Drawing Barclays Final Salary Scheme whilst paying HRT

jamesd

Happy to. If you post them and I don't comment please send me a private message with the thread link. Sometimes I miss things that haven't been updated for a while.

Dilly

MikeFloutier wrote: »

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.

I have a simular situation re a bank pension , 40% tax bracket and continuing working. There were no bebifits to me in deferring it at age 55 when it was due. So I place it each month into a SIPP and get 40% tax relief on it. Plus I get pension increases each year, more than if I had deferred it
I would say take your 50K out and the remainder of the pension place in a SIPP until you need to draw it

MikeFloutier

Hi James,

I've just received my "current full actuarial early retirement factors" from Barclays. Thinking about all you've said I'm sure the best bet will be to take it all as a pension with no tax free lump sum - they will even let me add my Barclays AVC pot to my pension pot where it will get a 66.67% spouses pension thrown in.

Ok, the figures for taking my pension at Normal Retirement Age (having applied the 0.891 factor mentioned above) are as follows:

1. Assuming I take the maximum Tax free lump sum of £70,000 I would have a residual pension of £10,576pa which would be taxed at 40%.

2. Assuming I take it all as a pension it would be £14,595pa.

The pension is subject to an annual increase of the RPI normally limited to 5%.

Please let me know if you need any further information.

Many thanks!

PS. A thought occurred to me regarding the £100,000 10 year off-set mortgage (50% repayment/50% pension) I am about to enter into. Since:

1. I am considering investing my Barclays pension in a new pension BUT I will probably keep this in cash, and

2. I can "earn" at least 4% net on my cash by simply keeping it in a "off-set savings account - ie. reducing the mortgage interest.

I could wait until my "savings" reach the £50,000 "pension contributions threshold" and then pop it into my Hargreaves Lansdown cash SIPP (currently earning 2% for 3 month deposits) thus reclaiming my 40% tax and gradually saving enough for the 25% TFLS to repay a substantial portion of my mortgage in 2022.

I guess the risk of waiting for the £50,000 limit to be reached is that the 40% relief is stopped before I get there.

RetirementAngel

The pension you commute from Barclays will probably have pension increases guaranteed. If the pension increases were 3% then, £3000 lost at age 60 is worth over £80,000 so taking 50,000 cash from the Barclays scheme may not be brilliant value.

I think you were put off considering the transfer from the Barclays scheme a little too quickly. As you are close to age 60, then the transfer value might be reasonable. After age 59, the right to transfer will be lost so I would look at this option if I was you.

If you transferred the pension to a personal pension, you could take the maximum lump sum and leave the rest of of invested. The maximum lump sum might be better than £50,000. It is worth getting a transfer quote and having a look at it. For example if the transfer value was say £300,000 then you could take £75,000 as tax free cash.

An IFA will probably want around £1000 to sign a transfer recommendation so you will need to factor that in. Your pension is probably worth c£300,000. I seriously think you should find a proper adviser and get this looked at professionally. I mean it's not as if you'll be doing your own conveyancing (or will you?)


Good luck and let us know how you get on.

jamesd

Looking at the numbers, the cost to get the £70,000 is 14595 - 10576 = 4019. 4019 / 70000 * 100 = 5.74% interest equivalent, plus inflation. 17.4:1 commutation rate which is better than many government schemes but not the sort of 22+ level that it takes to make it quite a good deal to take a lump sum.

So easy bit first: you're not going to get 5.74% plus inflation guaranteed for the rest of your life anywhere else other than by not taking that lump sum. Call it between 7.74% and 8.74% assuming 2-3% inflation rate.

This effective interest rate makes it pretty clear that having a mortgage to get a lump sum will beat taking the lump sum from the pension, because you can pay the mortgage interest and more out of the higher pension income.

Keeping the money in the mortgage offset account doesn't help much - that's only saving you something like half what you're losing in effective interest rate, though the effective rate is taxable so the difference isn't as great as it starts.

Why are you considering transferring the pension? It'll be hard to get the equivalent of 7.74-8.74% guaranteed for life from alternative ways to invest the money. It looks likely to be a bad idea to transfer it, you're unlikely to get that rate plus the extra benefit of a spousal pension. Though income drawdown would provide a 100% spousal pension it still wouldn't really let you match that sort of effective interest rate.

What else can you do with the AVC pot? Some older schemes might let you use that as the lump sum, without affecting the main pension. What extra pension does the AVC buy you? The spousal pension part is something largely ignored so far, it's an extra benefit of the pension income that more ends up going to your spouse after death.

Say you take all of the pension as income. That's £14,595. The current full basic state pension adds another £5,587 a year. That'll take you to £19,182 a year of guaranteed pension income even before the additional state pension is allowed for. This means that you aren't limited to only capped drawdown, you could use flexible drawdown instead, assuming you get over the £20,000 threshold for it.

Flexible drawdown lets you take any amount you like out of a pension pot, no 25% cap. 25% tax free, rest added to your normal income for the year and taxable as income. Which means that you'll have a very powerful tool at your disposal if you use the higher income from the Barclays pension to pay into another pension, since you can get the tax relief and then take out all of the money. Though to avoid higher rate tax you'd wait until not working and take money only up to the higher rate limit each year. As soon as you go into flexible drawdown on any pension pot, you and any employers are prohibited from adding any money to any pension pot, for the rest of your life. If the money went in at 40% and out at 20% that's a nice tax gain even on the 75%.

£14,595 a year into a personal pension would build up a nice pot quite quickly.

Why is there a £50,000 "pension contributions threshold"? There's a £50,000 cap each year.

Don't plan assuming that 40% tax relief will go away. It's unlikely to.

MikeFloutier

Hi James,

Many thanks for all this information I really feel as though I'm getting somewhere now.

My plan now is:

1. Take my Barclays Pension as a monthly income with no TFLS - having said that I am able to take my AVCs as a TFLS of £11,000 so I may do that in Feb 2014 when I'm 60 if the need is there. Alternatively I'll simply roll them into my main Barclays pension.

2. I'll save this income in a Nat West Off-set account until 5/4/xx each year, so reducing my mortgage interest, this short term gain would represent 4%pa net.

3. At each tax year end I would put that year's "Off-set pot" into my Hargreaves Lansdowne Cash SIPP, reclaiming the 40% tax I had paid it (allocating this to 3 month fixed term deals they are offering, typically at 2%pa - I don't want any risk!)

4. My £100k Nat West Offset Mortgage would be structured as £50k capital repayment/£50k pension.

5. When I really stop working, ie. no chance of high rate tax, in 2022 (Mortgage repayment date) I would put my SIPP into Flexible Drawdown, repay the £50k portion of my mortgage from the 25% TFLS, leaving me to take the rest flexibly at standard rate tax.

Does that make sense?

++++++++++++++++++++++++++

Just to clarify your queries:

1. I don't intend to transfer my pension.

2. You said,

Keeping the money in the mortgage offset account doesn't help much - that's only saving you something like half what you're losing in effective interest rate, though the effective rate is taxable so the difference isn't as great as it starts.

I'm guessing you are comparing using the TFLS on my Barclays pension to Off-set the mortgage WITH leaving it in the pension. What I'm talking about here is putting my taxed pension income temporarily in my offset arrangement so gaining 4% net for a year prior to reclaiming my 40% tax via the SIPP.

3.

Why is there a £50,000 "pension contributions threshold"? There's a £50,000 cap each year.

I had this "bright" idea that I could save my pension income in the offset arrangement until it reached £50k then make a transfer, at that stage, to my SIPP, so earning 4% net on the whole £50 for several years.

What I missed was the fact that I wouldn't have paid anything like enough tax in the year of the SIPP transfer to be able to reclaim the high rate tax -doh!

jamesd

As a basic plan, yes, that makes sense.

I don't really think that leaving money in a pension for ten years while only using cash deposits would be sensible, though.

MikeFloutier

Hmmm, was wondering about that. I guess that my feeling was that, at my age, I should be avoiding risk.

What sort of thing do you think I could be thinking about?

jamesd

I do have one other thought for you on tweaking. If you were to pay the money to the new pension monthly, 25% of tax relief would be added about a month later for the basic rate tax. Tell HMRC about the estimated pension contributions on net and grossed up with basic rate relief and they will adjust your tax code to reflect that, getting you the tax relief as you make the payments. So no real need to use the offset account and do it once a year, you can get the tax relief sooner by not waiting.

Ten years is plenty of time for taking investment risk. Even more so because this is investing regular payments.

After deciding to use investments it's a case of picking which ones. A mixture of global excluding UK tracker, UK managed fund, Emerging markets managed fund and strategic bond fund and some cash is perhaps a decent way to start.

MikeFloutier

Very many thanks James, I think that just about wraps it up.

I've now got 18 months or so before my pension kicks in to start learning about investing; I get the HL newsletter, as an existing SIPP holder, so I'll start off by not throwing that straight in the bin.

You have been so helpful and have made what was a very daunting area very clear, much appreciated!