Pension planning question

Workerbee999

Hi.

I am expecting to end up with a money purchase pension pot of £300k to buy a pension. I also have a deferred final salary pension, and my husband is also in a final salary scheme.. We are both 43 and 40% tax payers, and plan to retire at 55 with pensions of £20-25k each which will benefit from the age allowance.

We are also planning to save up £250 k once the mortgage is paid off in a few years time. We plan to then put the maximum in Isas each but I was also thinking of saving £100 k of it as extra payments into my pension. this would only cost me £60 k as it would be below the annual £50 k allowance .

Then, as this would take my pension pot to £400 k, I would be able to take the whole £100 k back out tax free as it would represent 25%

Is there any reason why this would not be a good thing to do?

thanks

jamesd

You will not be able to benefit at all from the age allowance because the age allowance is being abolished.

You're willing to invest and interested in pension provision. Are you making any mortgage overpayments? If yes, why aren't you planning to pay any mortgage overpayment amounts into the pension then use the lump sum from the pension to do any mortgage clearing? That gets you effectively 40% tax relief on your mortgage capital repayments, possibly the best investing deal around.

The £100,000 part of the question is a trade off. It's a good deal but it does mean that you have less immediately available capital than if you'd placed it in an ISA, VCT or invested outside any tax wrapper instead. I think you should do it but there is a trade off.

With a plan to retire at 55 one of the things you might plan for is how to increase your income from 55 until the state pensions start so you have a level income throughout. Because there is a limit on how fast you can take money out of a pension, either the GAD limit for drawdown or what an annuity will pay out, you'd need investments outside a pension to do this.

Because of the final salary scheme you should be aware that Flexible Drawdown allows taking out an unlimited amount of money from a pension pot if there is a combination of in payment state pension, work defined benefit (final salary say) and annuity payments that is at least £20,000. Any money beyond the 25% tax free lump sum is added to the normal taxable income each year. If either of you can get to this guaranteed income level if can greatly reward higher pension contributions because you end up not having the main pension restriction, the limit on how fast money can be taken out.

You wrote about buying a pension. I assume that by that you meant buying an annuity. At age 55 annuity rates are generally very poor. They start to get good sometime above age 75, when increasing death rates increase the cross-subsidy from those who die early to those who don't. You should strongly consider income drawdown at that age instead, aside from anything you might want to do in relation to Flexible Drawdown.

Workerbee999

Hi

Thanks for the advice.
Instead of overpayments, we shortened our mortgage term when we moved house, so don't currently have that flexibility. I understand your comments about putting in the pension instead, but I guess it's our personal choice that we want the security of being mortgage free first, with unstable economy and jobs market. We should be paid off in 5 years and then will be free to invest £3000 per month.

We will put the maximum annual amount each into ISAs as well, once the mortgage is paid off, and if I take out the £100k from the pension we could then continue putting that into ISAs even after we have retired.

The pension levels I mentioned hoping to get to (£20-£25k pm), do not include state pension, so I was thinking about buying a level annuity, so that I get a higher level up front first, and when it starts to drop in real terms hopefully the state pension kicks in. I need to think about the drawdown option as I don't know much about that.

I'm sorry, but I don't really understand your paragraph about Flexible Drawdown - please can you explain again?

Thanks again

GhIFA

Based on what you have said, you will have a final salary scheme paying in the region of £20-£25kpa, as well as State Pension. This is Secured Pension Income.

If your Secured Pension Income is in excess of £20,000pa then you can draw any other benefits through a flexible drawdown arrangment. You can take 25% of the flexible drawdown fund as tax free cash, and then drawdown income from the remaining fund however you choose (i.e. if you wanted to take the whole lot in one go you could) - any drawdowns taken from this remaining fund are taxable.

This option will be available to you as soon as you take your final salary benefits based on the figures you have given.

jem16

Workerbee999 wrote: »

I was also thinking of saving £100 k of it as extra payments into my pension. this would only cost me £60 k as it would be below the annual £50 k allowance .

Just a couple of points to remember on that.

You will only get 40% tax relief on the amount that is actually paying higher rate tax.

The £50k limit for tax relief is also lowering to £40k.

Workerbee999

I would be getting a pension of up to £25k including buying an annuity using the £300k pot I mentioned. So, does this mean I would need to buy an annuity to the amount that is needed to top up my deferred final salary pension so that combined they come to a minimum of £20k guaranteed income?

Would I need to be receiving the full £20k before I would qualify for Flexible Drawdown, ie if part of the £20k was to be made up of the state pension, would I have to wait until receiving that before I can drawdown, or is it enough to know that I would qualify for it, so could drawdown at 55?

Does all this mean that it is better not to take the final salary pension early at 55 as it reduces the guaranteed pension, and instead use up all other savings instead if possible?

I also found some paperwork from my defined contribution pension from a couple of years ago which said it currently did not offer Drawdown. Is this something it must offer in the future if it doesn't already?

thanks

Linton

Workerbee999 wrote: »

I would be getting a pension of up to £25k including buying an annuity using the £300k pot I mentioned. So, does this mean I would need to buy an annuity to the amount that is needed to top up my deferred final salary pension so that combined they come to a minimum of £20k guaranteed income?

Would I need to be receiving the full £20k before I would qualify for Flexible Drawdown, ie if part of the £20k was to be made up of the state pension, would I have to wait until receiving that before I can drawdown, or is it enough to know that I would qualify for it, so could drawdown at 55?

Does all this mean that it is better not to take the final salary pension early at 55 as it reduces the guaranteed pension, and instead use up all other savings instead if possible?

I also found some paperwork from my defined contribution pension from a couple of years ago which said it currently did not offer Drawdown. Is this something it must offer in the future if it doesn't already?

thanks

When you want to enter Flexible Drawdown you must be already receiving £20K of guaranteed income which can include State Pension, both basic and ASP/SERPS/S2P. You could previously have started normal Drawdown and can then convert to Flexible Drawdown when you meet the requirements.

If your current provider doesnt offer Drawdown you can transfer to someone who does.

Whether its better to use up your savings instead of starting a FS pension early would depend on the detailed figures and your balance of certainty vs flexibility vs wealth. You have lots of options here.

jamesd

Yes, you need to actually be receiving the £20k before you can use flexible drawdown. Even something as certain as the state pension can't be counted until you are receiving it (but you can take it then defer).

Some blend of when to take the DB pension and how much to buy in an annuity to get to flexible drawdown might end up being best. But it might end up best to use capped drawdown and wait until the state pensions start. Depends too much on the specific financial situation to write much more, though.

To say much more we'd really need to know just what the DC pension would pay at a range of ages and how keen you are on drawdown vs annuity purchase in general. Also depends on how much income you want before the state pensions start. If you can get to tht using capped drawdown it could easily be best to wait for state pension age before switching from capped to flexible drawdown.

If a DC pension doesn't offer drawdown the solution is to transfer. Not a block, just a limitation of a particular product.