redundancy pension query

pgjohno

Hi i am being made redundant after 25 years i have decided to take my pension now but would like to work for two more years.I am 58 my pension would be around 6000 per year plus lump sum of £10000 can i put that pension somewhere to shelter it from tax.

thanks for any comments

kidmugsy

Is it a final salary pension or a defined contribution pension?

pgjohno

Hi kidmugsy its a final salary pension I am losing 3.6 per year but I thought I would take it now as me and my wife want to to retire at 60 and she has good pension.

Your_Hero

pgjohno wrote: »

Hi kidmugsy its a final salary pension I am losing 3.6 per year but I thought I would take it now as me and my wife want to to retire at 60 and she has good pension.

Leave it where it's at until 60 then. Is this the normal retirement age at 60?

pgjohno

Hi YourHero no the retirement age is 65 but this 3.6 loss rate is going to change after this redundancy towards 5 percent per year

Your_Hero

pgjohno wrote: »

Hi YourHero no the retirement age is 65 but this 3.6 loss rate is going to change after this redundancy towards 5 percent per year

In future, you should mention all the facts in your OP.

You need to also consider that if you defer your pension, it is revalued every year in line with inflation or a fixed rate. As you've been there for over 25 years, and most likely a contracted-out DB scheme, you will have GMP rights within it which are also revalued every year in line with inflation or a fixed rate.

These maybe actually outweigh the 1.4% increase (3.6% to 5%) in actuarial reductions and so likely to be better left where it is until 60.

atush

I agree I would wait 2 years to take it.


But, should you take it, and not actually need the income, put the 10K into a S&S isa (or boost your emergency cash reserves) then put the income from the pension into a new DC pension which you can take at 60 when you retire. 25% tax free, then up to your PA each year. Putting any excess income not required into your S&S isa.

kidmugsy

pgjohno wrote: »

i have decided to take my pension now but would like to work for two more years.I am 58 my pension would be around 6000 per year plus lump sum of £10000

In a way the best trick to shelter it from tax is just to avoid taking it until you stop work at 60. If you take it at 58 but continue earning, the £6k p.a. will be taxable income, so if your earnings exceed £10k p.a. you'll pay tax on the whole £6k. Whereas if you draw it at 60 (assuming you can) then £6k is less than the personal allowance so it should be tax-free (except maybe for the first year, depending on your earnings in that year). Eventually your State Retirement Pension will begin and then presumably a part of your income will be taxed.

Alternatively, draw the final salary pension at 58 if that's the only convenient age on offer. Contribute the income from it into a personal pension of some sort for two years. That way the tax you will have paid gets rebated to the pension provider. Then draw your personal pension out once you've finally stopped work, taking out just the amount each year that lets you avoid tax. Effectively you are avoiding tax, but at the cost of the charges of the provider.

atush

Yep, what I said lol.

mark55man

I think kidmugsy nailed it

You take the pension early given the lower actuarial reduction means it is "free money" compared to taken it later on 5%

You stick the income into a DC pension (new or old) reclaiming any tax that you pay (BR or HR) on the way. Then when you stop working you have a pot of which you can take 25% tax free and the rest at your marginal rate (but try not to pay HR)

If you need the income early then you will have to pay tax and you will need to calculate if in this circumstance its better for you - especially given that there are complexities around GARs.


For example when my DB scheme was closed I could choose whether I wanted to become fully deferred (and be awarded CPI increases) or "partially deferred" and have my pension in line with any increases in my FS. Because of complexities with the internal structure of the scheme, my FS would have had to increase by significantly more than CPI to be worth it. A similar thing may apply to your scheme and you should take advise (if you are being redundant you should be able to get the company to pay for that advise)