Mum's pension - what to do?

kgall

Hello,

I have posted in other threads about how I am trying to help my parents out - in short my Dad went a bit crazy and lost all my parents savings and put them into debt. We have amazingly just about fixed the debt problems but now my Mum has been made redundant. Great timing! All the details are below. I don't know where to start. Any advice is very welcome!

Mum's age: nearly 59. She will lose he job at the end of April.
Dad is 61 and still employed.

Mum's severance pay:
£51,950.33. Apparently taxed at 40% on anything over £30,000 so £43,170.

Mum's pensions:
1. Local Govt Pension Scheme: £2,721.01 per year, no lump sum and apparently she has to start taking it now.


2. Teacher pension: £16,098.01 per year if withdrawn at 60 i.e. next year.

Tax free lump sum = £48,294

However, she has been told that she can take it now but will be penalized with a 4.5% reduction on both the lump sum and ever year.

She may get a few odd jobs but I can't see her getting full time work again. What should she do?

Thanks in advance.
K

jamesd

If her health is good it'll be better to use the severance pay to provide income instead of taking the teachers' pension before it's normal date.

From the LGPS and teachers pensions plus the state pensions she'll have more than £20,000 in guaranteed pension income so she'll qualify for Flexible Drawdown from a personal pension once those in payment go over £20k. Flexible Drawdown lets you take an unlimited amount out of a personal pension, not just the 25% tax free part. The rest is taxed as normal income whenever you take it.

Because she will quickly qualify for Flexible Drawdown she can benefit from paying any money taxed at 40% into a personal pension. Then she can use Flexible Drawdown to take it out, gaining from the tax relief. This can also be really good for any other money they have available, since it's easy to get tax gain on the money. It's also worthwhile doing this for money taxed at basic rate, so long as she doesn't leave herself short of money she needs access to.

While the Flexible Drawdown part has to wait until she's getting £20k, the 25% tax free lump sum can be taken immediately, so that gets back some of the money that she can use for income until the rest of the pensions start.

If others in the family have money and want to lend her money they can do things like getting repaid out of the teachers pension lump sum or 25% personal pension lump sum, while she can benefit from the tax relief. Limit is her taxable income in the year or £50k if lower or 3600 if not working at all during the year. She might be able to do some of that this year and some next to maximise the potential tax gain.

Once you start Flexible Drawdown you can no longer make any more pension contributions.

So general plan:

Make big contributions into personal pensions.
Take 25% tax free lump sum from personal pensions.
Wait until the work pensions and state pensions in payment take her over £20k of guaranteed income, then use Flexible Drawdown to take the money back out of the personal pension at whatever rate she likes.

Linton

Obviously we dont know all the details of your parents finances, but lets try a first pass.....

Looking at the long term:
When they get all their pensions into payment there should be a total of about £19K from your mothers pensions, £14K from State Pensions and I assume nothing from your father which makes a total of £33K at current prices. Is this sufficient?

From now till then:
I agree with James that your mother should not take her pension early, but rather they should use her severance, Local Government Pension, and Teachers Pension from its due date to help bridge the gap together with whatever other savings they have, the money your father brings in, and any part time work your mother may take on. Will this be enough?

I am not sure there is enough spare money around to put further money into pensions as James suggests. If there is would it really be enough to make the extra hassle of drawdown worth the effort?

Suggest you put together an Excel plan covering the years from now until they both get their state pensions.

atush

Completely agree. Perfectly said.

but I would say, you need to make sure your mother's money is seperate to your dad's and they have no joint borrowings/savings that he can get his hands on in case he has a relapse?

And can your dad save harder while he is still in work?

kidmugsy

kgall wrote: »

Mum's age: nearly 59. She will lose he job at the end of April.
Mum's severance pay:
£51,950.33. Apparently taxed at 40% on anything over £30,000 so £43,170.

No, it won't be taxed at 40%. £21950.33 is exposed to income tax but unless she earns enough to put her total taxable income above £41000 (approx) in tax year 2013-14, she won't have to pay at 40%.

At the moment, it looks as if her taxable income will be (i) April's salary, plus (ii) £21950.33, plus (iii) any income from "a few odd jobs", plus (iv) interest on savings, plus (v) eleven twelfths of "£2,721.01 per year" LPGS pension.

If you want to follow the (shrewd) advice that she fill up on personal pensions, then 2013-14 is the year to do it on a large scale because she can contribute 80% of [(i) plus (ii) plus (iii) minus any pension contribution taken off her April salary] and the pension provider claims back the other 20% from HMRC.

Suppose she does that: she's left with the tax-free £30k, which should see her through to the start of her teacher's pension, which in turn gives her a £48,294 lump sum.

Two other thoughts:
(a) she could also make a pension contribution in this tax year since she has earnings. Is there some way to borrow money to do so? e.g. free overdraft on a new current account?
(b) Has she got the official prediction of the amount and start date of her State Retirement Pension? That's a must, I'd have said.

Linton

I dont understand why going via the personal pension is really worth the effort.

Mum puts say £25K gross into a PP. The net overall gain comes from the tax savings on the Tax Free Lump Sum - 20% of 25% of that = £1250. You will need to take off any extra charges, especially if Flexible Drawdown is involved. In the overall scheme of things this is peanuts. Why not keep things simple and flexible by putting the money into an S&S ISA?

hyubh

kgall wrote: »

Mum's pensions:
1. Local Govt Pension Scheme: £2,721.01 per year, no lump sum and apparently she has to start taking it now.

There won't be any choice but to draw the LGPS pension indeed, however she will be able to buy a lump sum at a rate of £12 of lump sum per £1 of pension. Also, it might be an idea for her to enquire as to whether her employer's LGPS discretionary policy allows augmentation, i.e. using any redundancy pay above the statutory minimum to purchase extra pension. Not saying she should actually do that, but there's no harm in finding out whether it is an option.

sleepless_saver

Do your parents still have a mortgage and if so what are their plans for repaying it, as this could affect decisions about best use of lump sums.

kidmugsy

Linton wrote: »

I dont understand why going via the personal pension is really worth the effort.

...Why not keep things simple and flexible by putting the money into an S&S ISA?

Fair point. I'd better own up: if Dad is a daft spendthrift Mum might be wise to shelter money in a pension.

jamesd

Linton wrote: »

I dont understand why going via the personal pension is really worth the effort. ... Mum puts say £25K gross into a PP. The net overall gain comes from the tax savings on the Tax Free Lump Sum - 20% of 25% of that = £1250. You will need to take off any extra charges, especially if Flexible Drawdown is involved.

That's an extra £900 or so and given the income levels here it looks significant.

kgall

Thank you all so much for the advice. It brought a tear to my eye that so many people took the time to be helpful. I must apologise for teh very long delay in replying - I was due in hospital the day after last positing for a minor op which turned into a rather longer stay than expected and I am only now just catching up with things.

My mum has decided not to draw her pension early and won't be investing more into it. In many ways it was the easiest thing for her to do without too much downside. I have to say, I was slightly disappointed with a financial adviser she went to see who advised her to put her £40k redundancy money into premium bonds.

I am now looking at whether paying off the mortgage of investing the money would be best (bearing in mind there is also the lump sum to come through next year when her pension starts). But should I also be considering an anuity? (I don't really understand them).

Thank you all again.
K