Drawing pension eary??? can anyone give any advice??

sitcom321

my husband sent off for details of drawing a pension early, he is 57 and working full time and has been paying into a pension with his current employer for the past 5 years or so, he was made redundant about 16 years ago from British Aeropspace after working there for 16 years, they have sent him information for drawing his pension early. we are not very well up on finances and would appreciate it if some of you could let us know the pro's and con's of the details below. we are thinking of taking option 2, if we do decide to take it do you think option 2 is the best option??? putting the lump sum in a high interest account.

would he be taxed on the pension as he is still working full time?

if he deferred the pension until his normal retirement age would he get a lump sum normally or just a pension?

hope someone can help us. thanks

here are the 4 options we have been given

Option 1 Full pensionoption

Your pension £5269.54pa

Spouse’s pension (payable on death after retirement)



Option 2 reducedpension option, exchanging part of your pension for a tax free lump sum

Your pension £4228.18pa

Tax free lump sum 318,496.32

Spouse’s pension 9payable on death after retirement)£2623.37pa



Option 3 steppedpension option

N.B. if you choose this option, your pension will be reducedat state pension age by £2,611.23pa plus pension increases awarded between retirementdate and state pension age

Your pension £6,805.03pa

Amount of step up included in the above £1,535.49pa

Spouse’s pension (payable on death after retirement)£2,634.77pa



Option 4 reducedstepped pension option after exchanging part of your pension for a tax freelump sum

NB if you choose this option, your pensionwill be reduced at state pension age by £2,611.s3pa plus pension increasesawarded between retirement date and state pension age.

Your pension £6,782.22pa

Amount of step up included in the above £1,535.49pa

Tax free lump sum £710.40

Spouses pension (payable on death after retirement£2,623.370pa

Gary_zero

Please be aware that there is a 4% per annum penalty up to retirement age Thats 32% less than he would recieve at 65 but this is probably on the paperwork. He would be taxed on his pension at the full rate having used his allowance at work. I don't think the tax free lump sum in option 2 is correct about 20K would be my estimate?

dzug1

I'm not sure what you intended to type as the lump sum in option 2 but that can't be right surely? Is that 3 meant to be a £ sign?

His pension will be taxable whether he is earning or not - unless he stays below the tax threshold

If he continues to defer the option for pension only/pension plus lump sum would almost certainly still be available - both would probably be a bit higher too.

Mistral001

sitcom321 wrote: »

Option 2 reducedpension option, exchanging part of your pension for a tax free lump sum

Your pension £4228.18pa

Tax free lump sum 318,496.32

Spouse’s pension 9payable on death after retirement)£2623.37pa

I assume that was a keyboard fumble and it should be:

£18,496.32 and not 318,496.32

as dzug1 has pointed out

Linton

I assume:
- the 318496 in option (2) should be £18496!!
- option(1) does provide a widows pension.
- all pensions increase with inflation

If you put the £18496 into bank savings you would receive around £800/year before tax in the best 4 year fixed rate deposit account. This income would not increase with inflation. Option (1) gives you an extra £1040/year before tax and I assume this is increased with inflation.

But of course under option (2) you do keep the lump sum of £18496. Though if you spent it you wouldnt get the interest income, so perhaps only of use to your heirs.

Checking the other 2 options is more difficult and so I havent done it. However, I would assume that Option(1) is the best financially unless you have some over-riding need to go for something different.

Unless you really need the money now I would strongly suggest you look very carefully at whether taking the pension early is really worth it. You may find that the early pension options are not generous.

As to the question about taxes - pension income is taxed exactly the same as income from employment.

sitcom321

Mistral001 wrote: »

I assume that was a keyboard fumble and it should be:

£18,496.32 and not 318,496.32

as dzug1 has pointed out

oops!!! yes it should be £18,496.32

sitcom321

Linton wrote: »

I assume:
- the 318496 in option (2) should be £18496!!
- option(1) does provide a widows pension.
- all pensions increase with inflation

If you put the £18496 into bank savings you would receive around £800/year before tax in the best 4 year fixed rate deposit account. This income would not increase with inflation. Option (1) gives you an extra £1040/year before tax and I assume this is increased with inflation.

But of course under option (2) you do keep the lump sum of £18496. Though if you spent it you wouldnt get the interest income, so perhaps only of use to your heirs.

Checking the other 2 options is more difficult and so I havent done it. However, I would assume that Option(1) is the best financially unless you have some over-riding need to go for something different.

Unless you really need the money now I would strongly suggest you look very carefully at whether taking the pension early is really worth it. You may find that the early pension options are not generous.

As to the question about taxes - pension income is taxed exactly the same as income from employment.

thanks for this, could you just explain a little more why option 1 is best financially

Mistral001

Incidentally, since the tax free lump sum is usually 25% of the pension pot that would make the pension pot. £73,985.

That means that the pension of £4228.18pa is fairly good as far as I can see.

However it will not go up as far as I am aware and might not be worth all that much in 9 years time when he is 66 and retires and has no income apart for state pension.

sitcom321

we are not intending spending the lump sum but investing it in high interest account/isa account. I am just unclear on pensions really, if when he gets to retirement age would he still get a lump sum or would he just get a pension?? albeit I do understand it will get higher the longer he leaves it. my husbands thinking is anything could happen between now and the next 7 years before he retires and 18k would be a nice sum to put away now plus also the pension he would receive. if he left it for the next 7 years would he honestly get a lot more

sitcom321

Mistral001 wrote: »

Incidentally, since the tax free lump sum is usually 25% of the pension pot that would make the pension pot. £73,985.

That means that the pension of £4228.18pa is fairly good as far as I can see.

However it will not go up as far as I am aware and might not be worth all that much in 9 years time when he is 66 and retires and has no income apart for state pension.

we will be saving the £4228.18pa as well as the lump sum and he will also get a fairly decent pension from the firm he is working at now, its all very confusing trying to decide what the best thing to do is,

Gary_zero

sitcom321 wrote: »

if he left it for the next 7 years would he honestly get a lot more

Yes he would there are penalties because he is drawing the pension for an extra 7 years