pension dilemma

Nual

A friend has just been told she is to be made redundant in 2016. She will be just turned 60. She has no savings or other assets, always useless with money, but the good news is , she has two defined benefit pension schemes, both paying out unreduced at 65.

Looking at the new pension rules coming into force in 2015, would the following make sense to you pension gurus?

Pension from the current job will be around 8 k/ year in 2016. At a guess, transfer value at 60 would be around 200k ? The deferred pension is estimated at around 42k/year at 65, with a transfer value around 1m.

So she could transfer the 9k pension to a private one at aged 60, ( with IFA signoff) and then drawdown the 200k with a tax free lump sum of 50k for year 1 and then taxed income of 37k/year until aged 65 when she can draw her deferred pension ?.

The 1m pension pot looks as if it also might be worth transferring. At 65, a tax free lump sum of 250k would mean 6 years tax free income of 41k, plus the income from 750k invested - say 15k/year @2%, then drawdown an income of 40k /year (taxed) which should last until she is 91 including the income from the diminishing pot. And of course state pension from 66.

If she dies before 91 she can pass the remaining pot to her sons. Lifestyle means she is very unlikely to make old bones.

I haven't discussed this with her, just playing with figures in an attempt to cheer her up and show that the future could be OK financially. And no, 'a friend' isn't a euphemism - I wish it was!

xylophone

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/332714/pensions_response_online.pdf

Page 25 might be of interest.

https://www.gov.uk/new-state-pension/overview

HarryD

Are you sure she can transfer her defined benefits schemes?

Nual

The pensions are both with the Social Housing Pension Fund - not public sector

coyrls

Nual wrote: »

A friend has just been told she is to be made redundant in 2016.

Are you sure? That seems very long notice. How can her employer know that her postion will not be required so far ahead?

Nual

She is part of the senior management team and involved in the restructuring discussions which include her post going

kidmugsy

If she took the two pensions at 60 she'll sacrifice probably around 15% which would leave her neatly avoiding higher rate tax.

If she also gets a lump sum, that will help her bridge the gap until her State Pension kicks in. She can provide for the children by taking out life insurance.

If she's mutton-headed about money she'd be far safer with DB pension income than with having access to the capital.

xylophone

Are you sure she can transfer her defined benefits schemes?

http://www.thepensionstrust.org.uk/NR/rdonlyres/4A904237-873E-4B12-BD96-CB710274B0D1/0/SHPSDBAGuideforMembers0413FINALVERSION.pdf

It would appear so but from the link in my previous post it would seem that regulations after 6 4 15 will require her to take independent advice .

"For the majority of people, but not all, it will remain in their best interest to stay in their defined benefit scheme. In response to stakeholder feedback, the government will introduce two new safeguards to protect individuals and pension schemes: a new requirement for an individual to take advice, from a
professional financial adviser who is independent from the defined benefit scheme and authorised by the FCA, before a transfer can be accepted; and new guidance for trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values"

jamesd

By no assets, does that really include no home? I'm wondering if equity release to provide sufficient income for the next five years might be an option, then repaying the money with the lump sums at normal retirement date.

Transferring the smaller pot doesn't seem like an unreasonable solution if that isn't available. It appears that it should provide sufficient money to live on for the five years needed. Assuming she doesn't mis-manage the money and blow it quickly just because it's there.

Another option is to find out what the pensions would pay if she took them before normal retirement date. Assuming that xylophone's link is correct for her scheme, this is an option open to her for the current scheme from age 55. Usually a reduced lump sum and reduced income are available. That tends not to be a good idea for those with normal life expectancy but may be fine for her. Once the combination of income plus lump sum from the smaller pot has been used she could then do the same for the larger pot, closer to its NRD, so with less reduction. Trying not to do both at the same time to get as close as possible to NRD first. that's why I mentioned equity release also, trying to minimise reductions in long term income.

atush

Nual wrote: »

She is part of the senior management team and involved in the restructuring discussions which include her post going

It could be worth checking that if made redundant at 60 or older if she could not retire w/o any reduction? This is quite normal.

If made redundant, there would be a redundancy payment, the first 30K is untaxed. Which could tide her over. any over 30K could be put into a personal pension which could be again taken to tide her over.

Finally, she has a couple of years notice. During which she could try to live on the state pension, putting every other penny into a personal pension. Again this would help taking her DB pensions early or could provide a capital lump sum.

xylophone

Assuming that the first link in my post 8 is the booklet relevant to the OP's friend, while 65 is Scheme Pension Age, there appear to be various options (flexible retirement) etc for members.