Drawing pension whilst still working

reheat

I'm 60 and still working, earning close to the 40% tax threshold, so to keep things simple let's say I'm earning £41,450 pa, so about £3454 pm.

I pay 7% into my pension, which amounts to approx £193 I pay each month, after the 20% tax relief.

I am about to start drawing an annuity of £3288 pa, so £274 pm gross. The main reason for this is to access my 25% cash, as I need it to assist with a house purchase. Note I did consider SIPPs, but my pension FA convinced me that for me that would not be a good option.

I have two choices I'm considering for the pension payments:-

1) Plough back into my company pension scheme, so that until I retire I effectively don't receive the pension payments, and don't pay tax on them.

2) Use the pension payments so we can afford a bigger mortgage, and effectively plough a bit more into a house.

But with option 2 I'm out of my depth - cannot suss if my pension payments would get taxed at 20% or at 40%. If it's 40% then I won't do it - not going to give the taxman near on half of it.

I'm currently investigating if my company has a salary sacrifice option for paying into the company pension, as I believe this would get me further below the 40% threshold.

Any thoughts on this please?

atush

Why do you need to buy an annuity/take income?

You can access your 25% LS w/o the need to take income, leave the rest invested to grow in drawdown (w/o draving down). Plus you'd get a higher annuity amt if you bought one when you were older.

Or you can recycle the income into your work pension if you don't need it.

OPT no2 is probably not the best ideal use of pension money IMHO.

Dilly

Any amount of income you receive over the 20% 'allowance' will be taxed at 40% regardless of the source being salary or pension, so you need to take that into consideration
I am interested to learn why your adviser did not recommend a SIPP? As the other poster says taking a lump sum and leaving the rest invested sounds a sensible option, especially if you do not require the income

kidmugsy

Dilly wrote: »

As the other poster says taking a lump sum and leaving the rest invested sounds a sensible option

Or, perhaps even better, take the lump sum and also do income drawdown, then recycle that income into new pension contributions. That way you'll avoid 40% tax and build up a new tax-free lump sum.

There are rules that restrict recycling of lump sums but there are no restrictions on recycling income (except the usual rules about maximum contributions per annum, and so forth).

xylophone

If the OP's main pension plus state pension will take him over the secure income threshold a Sipp with flexible drawdown might be a good idea?

http://www.hmrc.gov.uk/incometax/relief-pension.htm re pension tax relief.
http://www.pensionsworld.co.uk/pw/article/salary-sacrifice-win-win-scenario-1234841

jamesd

reheat wrote: »

I'm 60 and still working, earning close to the 40% tax threshold, so to keep things simple let's say I'm earning £41,450 pa, so about £3454 pm. ... I am about to start drawing an annuity of £3288 pa, so £274 pm gross. The main reason for this is to access my 25% cash, as I need it to assist with a house purchase. Note I did consider SIPPs, but my pension FA convinced me that for me that would not be a good option.

Was the pension FA an IFA? Why was a SIPP considered, was it in preference to an ordinary personal pension or just because you thought SIPP was the term for all personal pensions? Why annuity rather than income drawdown in some other pension, or just leaving the 75% invested to continue growing until retirement?

You're pretty young to be buying an annuity. Even more so to be doing it now when by the time you reach a more normal retirement age there's a good chance that quantitative easing will have ended and annuity rates will be higher for both that reason and because you're older and perhaps in less good health.

You don't really seem to have any need of an annuity to produce income so I'm concerned that you're buying one unnecessarily at a time when rates are uncommonly bad, locking in those rates for the rest of your life.

Some pension providers might not allow income drawdown or might not allow taking the lump sum without also taking an annuity. Their support people might say "you can't" when they really should be saying "our product doesn't let you, but other products might". The solution for that is easy: transfer to one who does. After checking for any guaranteed annuity rates or other uncommon benefits.

reheat wrote: »

I have two choices I'm considering for the pension payments:-

1) Plough back into my company pension scheme, so that until I retire I effectively don't receive the pension payments, and don't pay tax on them.

If you did do this you would benefit from the extra 25% tax free lump sum being accumulated. If this is a salary sacrifice scheme you would also benefit from reduced employee NI and maybe some employer NI. But I have reservations about whether this will be sufficient to compensate for the drawbacks of taking an annuity at this age. Much easier if you were using income drawdown and not locking in annuity income for life.

reheat wrote: »

2) Use the pension payments so we can afford a bigger mortgage, and effectively plough a bit more into a house.

A mortgage lender would want to know about planned income into retirement if the mortgage term lasted that long. Taking an annuity now may well reduce the amount you can borrow by reducing the anticipated retirement income.

reheat wrote: »

But with option 2 I'm out of my depth - cannot suss if my pension payments would get taxed at 20% or at 40%. If it's 40% then I won't do it - not going to give the taxman near on half of it.

Pension payments are normal taxable income and are taxed at source under PAYE, though they are not subject to NI, just income tax. The pension income would raise your taxable income and could cause you to pay higher rate tax.

reheat wrote: »

I'm currently investigating if my company has a salary sacrifice option for paying into the company pension, as I believe this would get me further below the 40% threshold.

Whether it is salary sacrifice or not has no effect at all on whether you go below the higher rate threshold or not. Salary sacrifice is a good thing but that is not one of its advantages. The saved NI is.

reheat wrote: »

Any thoughts on this please?

Don't take the income if you don't need it. Unless you want to use income drawdown to recycle the income into more pension contributions. For an annuity to do that you're both too young and it's the wrong time for that to look like a good idea.

dunstonh

A SIPP is generically placed as a product meant for experienced investors or those making use of multiple tax wrappers through a fund supermarket. You can get inexperienced investor funds through a SIPP but it may not be the best option.

An FA means the adviser has restrictions. It may be that they dont have a SIPP as part of their product range (most FAs do not). They are typically only available (with advice) through IFAs or those with only small restrictions. Many FAs (probably most) are not able give advice on drawdown. IFAs have to. So, again, it may be that you were put off by an FA because they could not do it.

Or maybe it was the right thing if you dont have the tolerance of risk or capacity for loss that can occur.

reheat

The crucial requirement is I need to access the 25% income from this particular pension fund. Due to redundancy having to relocate to expensive area, and need to boost the house-purchase fund.

FA specialises in pensions, and not all financial matters, so used to be called IFA but not allowed to now due to specialism and recent laws. But clarifies to be a "whole of market" pensions FA.

He advised against SIPP due to my fund being below their minimum of 100K they deem to be viable, combined with fact I feel my pension options are much too limited to take any significant risks, given less than 5 years to retirement.

He mentioned that although annuity rates would be higher at 65 than at 60, there are other pressures tending to push them inexorably down, not least of which the increasing average longevity and better healthcare. But this was in the context of a life annuity (which is the option I've gone for), versus a fixed term annuity, and the overall driver of me wanting the 25% lump sum now.

reheat

jamesd wrote: »

Whether it is salary sacrifice or not has no effect at all on whether you go below the higher rate threshold or not. Salary sacrifice is a good thing but that is not one of its advantages. The saved NI is.

Surely salary sacrifice would mean my taxable salary would be lower, and so further below the 40% threshold? If this was not the case then how could my NI be lower?

reheat

atush wrote: »

OPT no2 is probably not the best ideal use of pension money IMHO.

I think you are probably right.

reheat

xylophone wrote: »

If the OP's main pension plus state pension will take him over the secure income threshold a Sipp with flexible drawdown might be a good idea?

http://www.hmrc.gov.uk/incometax/relief-pension.htm re pension tax relief.
http://www.pensionsworld.co.uk/pw/article/salary-sacrifice-win-win-scenario-1234841

Thanks, but I'm not drawing state pension at this time.