Pension Plan winding up - should I cash it in?

Smitherz78

Hi All,

I have recently received an e-mail from the Pension Plan of a company I used to work for. The company was taken over by HP several years ago, after I finished working for them. HP have now decided to Wind Up the old company's Pension Plan and have given me 3 options.

1. Transfer the pension in to the HP Investment Scheme.
2. Transfer it to a pension arrangement of my choice
3. Cash it in now for a lump sum.

Details about the pension:

Current Value - £5,880.56
Current Estimate at retirement - £ 11,500ish giving an annual pension of £420ish

Some details about myself:

I am 35 and currently work for the NHS and have been paying in to the NHS pension for 10 years (Old pensions can not be transferred in to this).
I have a mortgage (13 years left to pay) of which we owe about £48,000.
I have no other debt.
We are currently saving for an extension on the house.
We have 2 children under 5.

If I as take option 3 (the lump sum) after tax I would receive about £4,998.47. So instantly loosing nearly £900.

I'm seriously tempted to take the money to put towards our house extension. However other people have told me to use our savings plus this money to pay off the bulk of the mortgage.

What do people think the best option is here?

mgdavid

fora start I guess we need to know all about the HP investment scheme ...

Smitherz78

mgdavid wrote: »

fora start I guess we need to know all about the HP investment scheme ...

mgdavid thank you for your quick reply. I will be able to select my options in the HP scheme however I will go in to the default option

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Default fund

The default fund is designed for members who are less confident about making an investment decision and require assistance in making their choice. This fund has, with the Trustees input, been designed to offer members a good balance between risk and return that should meet the needs of the majority of members. Lifestyling towards a level pension will be automatically enabled, however members will be reminded of their lifestyle choices six years before retirement. It is important to note that the Trustees will continue to monitor, and if necessary, update the default fund.
#########

There are a lot of options all available to view on www hppension co uk (with the dots in the spaces) although I wouldn't be confident in any other fund than this without financial advise.

PennyForThem_2

I would advise NOT cashing in or transfering if you can to your present scheme

Why? I worked for HSBC Bank for about 5 years in the 70's. I contributed to pension scheme. Not much as I was like junior of the juniors bank cashier. It is now worth £1600 per annum.

Not a lot but it is steady and will increase with inflation. It MAY have been worth moving it to my present pension scheme. If you have that option ask advice from IFA and yes, you will have to apy but I have found it is worth paying.

magpiecottage

If you worked for a bank you probably had a defined benefit.

However, it sounds as though the OP has a defined contribution entitlement - i.e. a pot of money earmarked for them. if so there may be better options for it.

However, at 35 if they take cash from the scheme it will almost certainly be treated as an unauthorised payment and they will be taxed very heavily on it, so it is likely to be better to keep it in a pension arrangement of some kind.

I agree they should seek guidance from a whole of market adviser - one with the G60 ot AF3 qualification from the Chartered Insurance Institute.

They should also be wary of suggestions that they invest in some esoteric product such as carbon trading or foreign property.

jem16

magpiecottage wrote: »

However, at 35 if they take cash from the scheme it will almost certainly be treated as an unauthorised payment and they will be taxed very heavily on it, so it is likely to be better to keep it in a pension arrangement of some kind.

Not when it's a lump sum from a pension wind up. In this case 25% of it is tax free and the rest is taxed as normal income.

However I still agree that it's better to take the full value of the transfer.

mania112

You have the NHS pension and hopefully will be a contributing member until retirement.

In this case your capacity for loss is quite high, so feel free to invest in a moderately speculative fund in another pension.

Option B.

EDIT: The only other consideration is - although you'll have to pay tax - this is your only chance to covert this money into savings for your home extension. You would therefore be forgiven (if you need forgiveness!) for election for the cash sum.

atush

I'd go for 2, over 1.

do NOT rec 3.

Because, you may want to retire earlier that your NHS retiral date. Which will be easier if A, you have other personal pensions and B you have S&S isas alongside Cash ones.

kidmugsy

Smitherz78 wrote: »

If I as take option 3 (the lump sum) after tax I would receive about £4,998.47. So instantly loosing nearly £900.

No, you're not losing anything of the sort. Whenever your pension is cashed in you'll have to pay tax on the benefits. (The only exception I know of is if you die before you cash in: then your spouse can get the money tax-free.)

So: pay the tax now or later? I say now - when you are at retirement age there's every chance that tax rates will be higher than they are now, and that the Tax-free lump sum will have been reduced.

This still leaves you with a choice. (i) Invest the money to mimic a pension investment e.g. in a Stocks and Shares ISA. (ii) Pay down some of the mortgage - but you've not told us the interest rate you're paying so there's nothing I can say about that. (iii) Spend it - on a house extension or whatever else you fancy.

Your shout.

jamesd

Taking a winding up lump sum is almost always the best option. It's an easy way to increase the value of the pension pot.

1. 25% is paid to you tax free, even if you are not yet 55 years old.
2. 75% is taxed as normal income.

If you pay the 75% into another pension scheme you get your normal tax relief and accumulate a new 25% tax free lump sum entitlement. A nice bit of extra tax relief from doing nothing more fancy than taking the money and paying it in to another pension.

You can also recycle the 25% tax free lump sum portion. Same new 25% tax free lump sum entitlement.

Take both and recycle both at 20% income tax rate and you end up with this:

£5,880.56 total, £1,470.14 paid out tax free, the rest is £3,528.33 after tax. Total of £4,998.47 between them. Pay that into another pension pot as new contributions and you get 25% added to provide the 20% basic rate tax relief, increasing the value in the pension pot to £6,248.08.

So, looking at your options:

1. HP transfer. Leaves only £5,880.56 in the HP pension.
2. Transfer elsewhere. Leaves only £5,880.56 wherever you transfer it to.
3. Take the winding up lump sum and make pension contributions. Leaves £6,248.08 in the new pension.

So it's easy. You end up with an extra £367.52 in the pot just by taking and recycling the lump sum. An extra 6.3% added to the pot.

jamesd

Smitherz78 wrote: »

However other people have told me to use our savings plus this money to pay off the bulk of the mortgage.

Some people don't understand the value of money or how interest rates and investments work.

Mortgage interest rates are low and it's easy to get more in investment returns than any halfway decent mortgage interest rate. Paying extra money off a mortgage makes you poorer, compared to investing it. It's a good choice mainly for those who have such low risk tolerance that they would only ever use savings accounts. But here you have a pension and are considering more pension use, so you're demonstrating that you do not have such a low risk tolerance.

What will the house extension do to the value of the house? Will you ever realise that gain or will it be only ever on paper until the time you die? Funding an extension that increases the value of the property by more than the cost of the extension might be a good use of either the tax free portion of the winding up lump sum, or possibly even all of it.

Will the extension delay you moving home, thereby saving you moving costs and helping with some possible gain that way?