Help needed with Pension options please

confusedofchingford

Hi All

My hubby has a small income from self-employment which is just under the tax threshold therefore currently does not pay Income Tax.

He will be 65 in October and will be entitled to the standard State Retirement Pension.
There is also a Standard Life (Serps Opt out) pension due then with a current value £34,376.36, which will pay £1070.00 yearly, if left untouched. This is made up of a Pension with Profits Fund 85.3% and Pension Millenium with Profits Fund 14.7%

He intends to carry on working for the time being. We are aware that with this additional income he will be liable for Income tax.

I am currently working full time and will receive MyCSP pension in Aug 15, the latest pension forecast at June 14 was £3,230.65 pa with a tax free lump sum of £9,706.45. I am paying into a Local Authority Pension scheme which has 11 yrs to go to my retirement.

We have a number of credit cards debts and one loan, I have very recently managed to get most of the cards on interest free, one is until March 2017, one until Sept 2016 with the rest at June 15 but there are two currently at 16% and 20% value £4, 031.98. Total amount outstanding £19,417.07. Monthly payments to all cards and loan total £505.00. We are also carrying an approved overdraft of £2,200.00 which has interest of £30.00 pm (Barclays L)

Our mortgage will be fully paid July 17, currently paying £1105.00 per month, current balance £38,000.00. I have tried to get a better rate but as the period left is so short and with my husband currently close to retirement I have not been able to improve on this.

Thank you for sticking with me so far. My questions are (for October 14 onwards):

I am thinking we should take the 25% tax free and pay off the highest rate card. Standard Life has advised that we need to change this pension to another product which allows income drawdown so we can then withdraw the 75% after the law changes April 15. This product change, they say, must be timed for Oct 14(but she did mention something about if we do it too early we may lose any final bonus payable) as once the pension payments start we are ‘locked in’.

It was suggested we will be buying a SIPP.

As for the tax payable what tax rate will be used against the 75% in April 15? The Gov. website says ‘at your highest rate in the year in which you take it’. So, with part time earning and retirement pension already being received in April 15 the tax payable for a small part of this lump sum would be at 40%, as he would be over the lower threshold, is this right?

I don’t think it would make sense to defer his Retirement Pension as we could use this income towards the cards with interest free ending in 2015.

Any thoughts and advice would be gratefully received.

Your_Hero

confusedofchingford wrote: »

Hi All

My hubby has a small income from self-employment which is just under the tax threshold therefore currently does not pay Income Tax.

He will be 65 in October and will be entitled to the standard State Retirement Pension.
There is also a Standard Life (Serps Opt out) pension due then with a current value £34,376.36, which will pay £1070.00 yearly, if left untouched. This is made up of a Pension with Profits Fund 85.3% and Pension Millenium with Profits Fund 14.7%

He intends to carry on working for the time being. We are aware that with this additional income he will be liable for Income tax.

I am currently working full time and will receive MyCSP pension in Aug 15, the latest pension forecast at June 14 was £3,230.65 pa with a tax free lump sum of £9,706.45. I am paying into a Local Authority Pension scheme which has 11 yrs to go to my retirement.

We have a number of credit cards debts and one loan, I have very recently managed to get most of the cards on interest free, one is until March 2017, one until Sept 2016 with the rest at June 15 but there are two currently at 16% and 20% value £4, 031.98. Total amount outstanding £19,417.07. Monthly payments to all cards and loan total £505.00. We are also carrying an approved overdraft of £2,200.00 which has interest of £30.00 pm (Barclays L)

Our mortgage will be fully paid July 17, currently paying £1105.00 per month, current balance £38,000.00. I have tried to get a better rate but as the period left is so short and with my husband currently close to retirement I have not been able to improve on this.

Thank you for sticking with me so far. My questions are (for October 14 onwards):

I am thinking we should take the 25% tax free and pay off the highest rate card. Standard Life has advised that we need to change this pension to another product which allows income drawdown so we can then withdraw the 75% after the law changes April 15. This product change, they say, must be timed for Oct 14(but she did mention something about if we do it too early we may lose any final bonus payable) as once the pension payments start we are ‘locked in’.

It was suggested we will be buying a SIPP.

As for the tax payable what tax rate will be used against the 75% in April 15? The Gov. website says ‘at your highest rate in the year in which you take it’. So, with part time earning and retirement pension already being received in April 15 the tax payable for a small part of this lump sum would be at 40%, as he would be over the lower threshold, is this right?

I don’t think it would make sense to defer his Retirement Pension as we could use this income towards the cards with interest free ending in 2015.

Any thoughts and advice would be gratefully received.

You will need to find a provider who can accept income drawdown, but you won't be able to "drawdown" in October 2014. You can transfer it across and get ready to do it after April 2015. You need to beware that you may lose certain benefits/guarantees by transferring it.

If your husband is earning just under the income tax threshold, and assuming this does not change come October 2015, then 25% of £34,376.36 is tax free, i.e. £8594.09. The remaining £25,782.27 will be taxed as earned income for the year at 20% by the pension provider and you will receive £20,625.82. Therefore in total, you could draw £29,219.91 net.

If he starts to draw the BSP at 65 in October 14, this may be an issue. His total income before the pensions would be £10,000 (assumed self employed income) + state pension (BSP, some SERPS, S2P). The taxable income from the pensions will be £25,782 so he will be close to the HRT threshold as you said. But you do not need to draw ALL the pension out in one go. He can draw majority of it out, and then wait until next April to take the remaining small amount too.

atush

He could consider deferring his pension for one year. If he does it in Oct, I believe he will still get the current rate of 10% uplift, so this would mean paying less tax now, and getting his SP boosted by 10% for taking the following year?

kidmugsy

confusedofchingford wrote: »

There is also a Standard Life (Serps Opt out) pension due then with a current value £34,376.36, which will pay £1070.00 yearly, if left untouched. This is made up of a Pension with Profits Fund 85.3% and Pension Millenium with Profits Fund 14.7%...
This product change, they say, must be timed for Oct 14(but she did mention something about if we do it too early we may lose any final bonus payable) as once the pension payments start we are ‘locked in’. ....It was suggested we will be buying a SIPP.

...I don’t think it would make sense to defer his Retirement Pension as we could use this income towards the cards with interest free ending in 2015.

i) It makes no sense to pay 40% tax, and it'll be easily avoided.

ii) The point about the date at which he should transfer to a SIPP is partly that his pension investments are in with profits funds, which typically you want to realise on the right day exactly. Once you've chosen a SIPPP provider (for a modest sum like yours I've found Hargreaves Lansdown to give an excellent service) you need to ensure that the two firms know exactly what you want to achieve.

iii) I suggest that your husband would then want to take the Tax Free Lump Sum; he might also want to enter "capped drawdown" which will let him take some taxable income from the fund in 14-15. (HL will presumably give him an estimate of how much that will be.) Then in 15-16 he can drawdown more (or, depending on the detailed arithmetic, all) of the remaining money at 20% tax.

iii) Don't rule out deferring his State Retirement Pension, either this year or, if it suits better, suspending it at a suitable time in the future - it is a very profitable trick.

iv) From his Standard Life pension/SIPP he should end up with £8594 tax-free (or more if there's a terminal bonus not included in the current value) plus £20625 after 20% tax has been deducted. That total of £29219 is comfortably enough to cover your card debts and your overdraft, and leave money over. That becomes especially true once you get your own civil service lump sum and pension.

v) In fact, you could be looking at a bit of surplus. The options then would be (a) Enjoy some expenditure, or (b) Overpay on the mortgage, or (c) Leave some money in the SIPP to draw out tax-free once he's finished working, or (d) Defer his State Retirement Pension for a while because it will give the unbeatable investment return of 10.4% p.a. index-linked. It would be attractive for him to have a bigger state pension when he's finished work because it will use a larger part of his personal allowance i.e. you'd expect him to get it tax-free. It would also be a way of replacing some of the pension he'll have given up to clear your debts. It's worth thinking about.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/299286/dwp024-apr-14.pdf

confusedofchingford

Hi Your Hero

Thanks for your quick reply. Sorry but can I ask a few questions?

Can I still access 25% in October 14 and then move the money over to an income drawdown for the balance in April 15?

Second para in your reply, did you mean Oct 14? If it is Oct 2015 why will we need to wait until then?

You say we can draw the majority out to leave him under the HRT and then take the rest after new tax year in April. How can we do this if income drawdown does not allow this unti April 15 as per your first para.

Sorry but I am really struggling with this at the moment.


Thanks for your patience.

kidmugsy

confusedofchingford wrote: »

Can I still access 25% in October 14 and then move the money over to an income drawdown for the balance in April 15?

I'd guess that the best way is to move the whole lot over to the SIPP, and withdraw from there. But Your Hero may well know more than me about this.

confusedofchingford wrote: »

How can we do this if income drawdown does not allow this unti April 15 as per your first para.

See http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm09103530.htm

confusedofchingford

Hi Atush and Kidmugsy

I was compiling and sent my response Your Hero before I saw your replies , my internet is a bit slow at times.

Many thanks for your time and trouble, I can see a way forward now. Thing is, we have lived with these debts for so long and finally we can see an end to them but I want to get it right.

I thought that the 10% 'profit ' achieved by dererring the state pension would not work for us as it would be outweighed by the credit card interest charges but I realise by deferring it will have a beneficial effect on the tax payable in relation to the lump sums.

Will certainly look at HL.

Thanks again.

atush

the 10% was in relation to his STATE PENSION not his DC pension pot. That is the money you would use to pay off your debt. Ie the tax free lump sum followed by some of the rest.

Deferring his state pension, would mean he has more tax free income available from t he DC pension, and you'd pay less tax on it.

How much are all your debts combined? If you pay them off using pension funds, will you be able to not run up debts in future?

Go back and re read all the replies and then ask questions.

confusedofchingford

Hi Atush
I did read the responses before I posted my comment and I did understand the 10% referred to the state pension (no need to shout), perhaps I did not make this clear. What I was trying to say was what I did not consider before was taking the lump sum in instalments and/or deferring the state pension so to keep below the 20% tax bracket.

As you know the reason people post questions on this forum is to
get advice from the responders like yourself who clearly have expertise in this area. I am sure I am not alone in struggling to understand the responses particularly when you use abbreviations -
Kidmugsy: 'BSP, some SERPS, S2P', and yours 'DC pension'.

Anyway thanks again and I may be back pestering you all again once I have digested your responses but I hope I can work it out from here.

kidmugsy

confusedofchingford wrote: »

Kidmugsy: 'BSP, some SERPS, S2P', and yours 'DC pension'.

Not guilty, m'lady.

atush

S2p state second pension, DC pension is defined contribution pension as opposed to your state pension (SP) or a DB or Defined Benefit pension (also referred to as a final salary pension).

I did not shout at you, but cross posting as you did can be confusing and your reply sounded confused.

Basically, deferring his SP will mean it is increase b y 10.4%. Say it would be 140 per week. After it would be 154.56 per week plus any annual increase for inflation. This is a big jump.

In the meantime, his personal allowance of 10K would not be used by SP so he could get not only 25% Tax free, but use his personal allowance ie he could draw down 10K more w/o paying tax on it.

One thing you will need to check is, does the Serps pension have a valuable guarantee attached to it such as a GAR (guaranteed annuity rate) or GMP (guaranteed minimum pension). These are valuable and would be lost if the pension is transferred to a SIPP or other pension that allows drawdown.

Of course, if your debts are at a high%, it could be better to pay them off even if you lose the guarantees. but without knowing more details such as your interest rates and emt of debt, and if there are guarantees and what they are, we can't say.

There used to be a sticky here with all the abbreviations but it got merged and no one can find it easily anymore.