What do I do with my Pension Pots?

Marco_Polo

I will reach retirement age in January 2015 but intend to carry on working at least for a further 12 months probably more. I pay income tax at the marginal rate of 40%. My mortgage will be paid for by using a lump sum from a final salary pension but that means that I will also have to start taking the annual pension payments from that fund which will obviously be taxed at my marginal rate. I have a company pension scheme which I will continue contributing to and I will defer taking my State pension. From previous employment I have 3 pension pots which have £6,900, £15,500 and £21,000 in them. I want to know what is the best thing to do with these pots. I don't need to take any lump sums out but could do to take advantage of the 25% tax free allowance but what do I do with the balance.?What do you think is my best option?

kidmugsy

Is there any objection to just waiting until you are a 20% taxpayer before you do anything? Or just waiting indefinitely so that one or more people eventually "inherit" them at more favourable tax rates?

Marco_Polo

No objection to waiting for either of those events if that is the best option. I just wanted to be sure that I consider all the options. I am not clear on how much you are allowed to take as a lump sum from pension pots when there is more than one, and what would happen to the balances. Would it be a worthwhile option to take a lump sum and buy ISA's, for example?

kidmugsy

Marco_Polo wrote: »

No objection to waiting for either of those events if that is the best option. I just wanted to be sure that I consider all the options. I am not clear on how much you are allowed to take as a lump sum from pension pots when there is more than one, and what would happen to the balances. Would it be a worthwhile option to take a lump sum and buy ISA's, for example?

I suspect that many people in your position would transfer all three into one provider, just for the simplicity that affords. They might then take the 25% lump sum (£10850) to pop into an ISA (or into a spouse's pension, say), and then leave the rest of the fund until it will be subject to just 20% tax. Or less. If you were to die before age 75 then the balance of the fund would go to beneficiaries who could draw it tax-free. That at least is what Mr Osborne hopes to pass into law. How long that law would survive is anyone's guess.

There are other tricks you could play. You could take the whole of the smallest pot under the "small pots" provisions, and increase you pension contributions to cancel out the 40% tax on 75% of it. If you were really fly, you could split the other two until you had two more pots of less than £10k each, and repeat the trick. Whether you have the time to devote to such games is up to you. The advantage is that you would therefore be building up a future right to more Pension Commencement Lump Sum.

atush

I think you have a few things to think a bout.

No1, as a 40% taxpayer, dont take any DC pensions (above and beyond any 25% TFLS) until you are a 20% rate payer. dont take s DB pension early/reduced.

If you are paying 40% tax, do pay into a personal pension at least enough to-1- take advantage of any employers contribs and 2- to take you back down to basic rate tax.

brewerdave

Why would you take your final salary pension in January if you are still working? Can you not defer?Is it purely so that you can clear a mortgage? Seems crazy to pay 40% tax on an income that you don't need currently

Marco_Polo

I agree - I don't really want to take the lump sum which will trigger the annual pension but I need it to pay off my offset mortgage. My other savings do not come to enough to pay it off. The only other alternative would be to downsize and take the equity that has built up in my house, but I don't want to move. To minimise the amount of tax payable on the annual pension, I will take the maximum lump sum possible.

kidmugsy

Marco_Polo wrote: »

I need it to pay off my offset mortgage.

Why are you paying your mortgage off? They are dead cheap at the mo'.

greenglide

In which case could you not pay as much of the DB pension as possible into a personal pension so you can get the tax relief going in and possibly only 20% coming out?

I am paying my LGPS pension into AVCs with my current scheme so I get NI savings (it is salary sacrifice) but I don't earn anyway near the HRT threshold.

Marco_Polo

kidmugsy wrote: »

Why are you paying your mortgage off? They are dead cheap at the mo'.

It's due for repayment being at the end of the agreed term.

kidmugsy

Marco_Polo wrote: »

It's due for repayment being at the end of the agreed term.

So remortgage. There's no need to pay it off, is there?