Pension at 50 - help

swimminggoogle

I have an entitlement next month at 50 to receive a full pension from a previous employer of £12.5k. There is an option to reduce this to circa £7k with a lump sum of £9 for each £1 of pension given up.

It is possible to defer the pension by up to 10years or take at any time during this period. If this route is chosen a simple interest of 1/2% per month is added to the entitlement figure. The guaranteed part of the pension about £10k would receive a cost of living rise annually.

I currently work full time and plan to continue working for at least 5 more years and do not need to take the pension at this stage.

Taking the full pension now would mean paying a higher rate of tax on £8k.

I will have a second pension of about £3.5k at 62.5years.

It appears that the best option is to take the maximum pension with no lump sum but any advice on the best option to select would be appreciated.

EdInvestor

Are you additionally expecting to get state pensions and if so how much?

Do you have separate savings/investments, perhaps in ISAs?

swimminggoogle

I have been a taxpayer since 18 and would expect a state pension at 65 assuming sufficient years are worked. The pension scheme referred to was contracted out, but not certain what the implications of that are.

I do have a cash ISA with £21k and £30k on deposit with Icesave.

EdInvestor

You really need to get a state pension forecast via the link below, as one aspect of your decision relates to your tax situation after you've retired. Pension income is taxable, while various other sources of income (especially ISAs) may not be. You can lose quite a lot unnecessarily in tax if you have too much in the pension format. This would particularly impact the decision on the lump sum, of course.

https://www.thepensionservice.gov.uk

swimminggoogle

Thanks. Have completed form - ready to post.

exil

Anyway from my reading of your figures you'd be best leaving the pension where it is if you don't need the money now, treating it as a savings scheme.

swimminggoogle

I did a spreadsheet on this, but it showed that to replace the lost income would take quite a period of time to break even. May have not calculated correctly. Thank you.

JoeK_3

Swimminggoogle, there is no black & white answer to your question, as it is down to finances and personal preferances. You are absolutely correct in doing a spread sheet as it shows the financial position now and in the future.

There are many trains of thought on should I take it now or in the future and one train of thought is if I do take it now I can enjoy the benefits NOW, where if I delay taking the pension I could get an improved pension, if I live.

Don't make the decision on taxation alone.

Hope this helps

JoeK

EdInvestor

If you took the lump sum of c50k and then recycled it and the 7k annual pension into your ISA you would after 5 years have a total of 84,000 (plus investment growth) of which at least 40k would be in the ISA.

So your income would be

Pension 7,500
Investment income on 50k 2,500*
Investment income on ISA 2,000
Total 12,000
(It should be more than this as we have ignored 5 years growth on the money.)

However, only 7.5k of this income would be taxed.Thus in 5 year's time you should have more income, and much more capital from the money extracted from the pension which can be passed on - or used for other expenditure later when further pensions kick in. Plus you will pay less tax now on your salary while working.

*If you invest the 50k in shares or equity funds and are a basic rate taxpayer, then dividends come with no further tax to pay and CGT allowance on realised gains is c.9k a year, so no need to pay tax there either.ISA can be used for lower risk property and bond funds.Cash can be saved in index linked National Saving Certificates which are tax free, thus the full 7k maxi ISA allowance can be devoted to protecting investment income.

Andy_L

9/1 at the age of 50 is an abysmally low rate though

EdInvestor

I agree. Mind you how many company pensions pay out a full pension at 50?