Appreciate feedback...

Nationwide8

...........

Linton

Do you know how much pension you would get if you took it later - say 5 years later?

kidmugsy

Nationwide8 wrote: »

My Public sector pension can be taken at 54....will give me about £600 a month..

At 54 hopefully will have £70,000 cash in savings,the interest ( 3-3.5 % ) from which will be used to boost monthly income until my state pension kicks in at 67...

You won't easily get 3-3.5% p.a. on all of it. Your first move might be to open high-interest current accounts at Nationwide, TSB, Lloyd's group (and maybe Santander). Complete R85 forms for the accounts as soon as you are in a tax year when you expect to pay no income tax. That/those will be your instant access money.

The other thing to consider is contributing to a personal pension of some sort while you are still earning enough to justify the contributions i.e. in this tax year and next. That, I suggest, could usefully take the bulk of your savings. Then you can withdraw money tax-free using the new flexibility, probably beginning in April '16 when your occupational pension will be less than your annual allowance against income tax. (For '15-'16 that allowance will be £10,500 unless Mr Balls changes it after the election: Lord knows what it will be in '16-'17 - perhaps about the same.) If you get it right you could end up with zero taxable pension income, and interest income on your accounts that won't be taxed because of the new £5k p.a. 0% tax band for the interest going to people on low incomes (starting April '15). If you end up with surplus income to begin with, recycle some income into further pension contributions (you are allowed £2880 net = £3600 gross per annum even if you have no earnings in a tax year). Keep using pension flexibility until you start your State Pension, or until Mr Balls or someone else puts a stop to it.

The attraction of the pension contributions this year and next, from your point of view, is that every £80 you contribute is transformed into £100 by the £20 tax relief that the provider claims for you, and you expect to take that £100 out again tax-free once you are retired. If you are determined to take no investment risk on that money, you can just leave it as cash in your pension fund. It'll earn next-to-no interest but the £20 boost will more than compensate for that.

You should also get a forecast for your eventual state pension, and take some action if you look likely to fall short of the 35 years of contributions.

kidmugsy

Aha, Linton's question is shrewd. I urge you to answer it.

PeacefulWaters

Nationwide8 wrote: »

I do but another 5 yrs is not something I can do...various health problems...life's too short.

What savings do you have if you don't take the pension yet?

(and do you have a terminal condition or was that just a phrase you were using?)

Linton

Nationwide8 wrote: »

I do but another 5 yrs is not something I can do...various health problems...life's too short.

The point I was moving towards was whether the extra pension you would get by delaying would be worth more than the savings you lost by not having the pension for the first few years.

Since you mention bad health - if your health really is bad enough to seriously reduce your life expectancy it may be worthwhile transferring your DB pension for an enhanced rates private sector annuity. Transfering out of a DB pension is normally a bad idea but serious ill health could justify it.

No matter what you do, you are not going to be able to rely on taking more than around 3.5% without also taking the risk of depleting your £70K. Also you have the risk of inflation for 13 years that will reduce the value of the £70K. The high interest rates being paid at the moment on some current accounts must be loss making for the banks, their objective being to gain customers, not make profits. So they cant in my view continue into the indefinite future.

kidmugsy

Nationwide8 wrote: »

Kidmugsy....I know at the moment I can earn 3-4-5 % in various accounts ...maybe up to £35,000 in those...are you saying the other £35,000 in a private pension ??
...can I put that amount in one in one go and for every £80 I would get £20 added so £35000 becomes £43,750 for me to draw out as and when...

That's the idea. Your maximum gross contribution in a tax year is £40k, or your earnings, whichever is smaller. But you must first subtract the increase in value of your final salary pension in that tax year. (I'm not sure how you find that latter bit out, but perhaps someone here could tell you.)

So, suppose for illustration that you have a capacity to contribute £30k gross for 14-15, and £15k gross for 15-16 (since you'll stop earning half way through that tax year). £45k gross = £45 x 0.8 net = £36k net, which is the sum you'll actually hand over.

But note Linton's point: it might be worth considering living off the tax-free withdrawals from that private pension for a few years, and then start your bigger occupational pension after you've run down the personal pension. It will depend in part (I suggest) on how much capital you want to retain to deal with emergencies. For example, it might be that if you delayed drawing your occupational pension for five years it would be (say) about 30% bigger, so that £600 p.m. becomes about £780 p.m. i.e it's about £2160 p.a. bigger. That's equal to the annual amount that you were hoping to make in interest payments, and the extra pension would run until death, and be index-linked, whereas the present madly favourable interest rates on current accounts may vanish quite soon. And you would still be left with half your capital. This strategy removes your vulnerability to the vanishing of these irrationally high interest rates.

kidmugsy

Nationwide8 wrote: »

Got it...I think but maybe not...where does the 0.8 come from..

Because the basic rate of income tax is 20%.

Nationwide8 wrote: »

Again having no idea about personal pensions .. do they run until death like a occupational pension ? And is your investment in them at no risk ?

Under the "drawdown" system, the pension fund exists until you've drawn it all out, or until death if that comes sooner. Your investment risk depends on what you invest in. If you are going to draw all the money out in four or five years, and are very risk-averse, you could leave it invested just in cash. If you were young and looking at the long term, you'd probably want to invest it in a fund of equities.

To get the hang of it, I suggest you look at the website of Hargreaves Lansdown, one of the best known providers of SIPPs (Self Invested Personal Pensions). If there's anything you don't understand, ask here, or give them a call.

I should mention that you can't start drawdown from a SIPP until you are 55, so you'd need to add that to your considerations. You've got quite a bit to think about, but you've got months to ponder it. If you want to make a pension contribution for this tax year you've got to act by April 5th.

PeacefulWaters

Nationwide8 wrote: »

Approx £4O,000 ....why ??

You stated "At the moment I can live off £600 a mth and the interest from £70,000". So you could last a few years on your savings and then draw a much bigger lump sum and pension income as it runs out.

Yes a phrase but certain life events other than what you said can concentrate the mind..

They do. And I'm just throwing an idea out there for consideration.

Do the maths. Understand any increased reduction if you start drawing the pension as a deferred member (rather than an active member). You might be surprised.

And I get retiring at 54. It's my target.

kidmugsy

Nationwide8 wrote: »

... if I delay taking my occupational pension it increases by roughly 3.5% a year

One way to look at that is to say it's a bit disappointing; the other is to say that it means the penalty for drawing early is rather modest. Your problem is how to bridge the gap to the start of your state pension. I now tend to the view that a good route is to combine starting your occupational pension early - because it's early on in the rest of your life that you are potentially short of income - with the personal pension ruse which so much reduces your vulnerability to the vanishing of those irrationally high interest rates. So you'd have your occupational pension, plus you would draw out from your personal pension each year just enough to fully use your Personal Allowance (against income tax). That would give you more income than you need, which you could recycle into further pension contributions, or invest in an ISA, or whatever.

Nationwide8 wrote: »

It's a very attractive option to have a large sum of money (£70,000) completely under your control for you to move around or to draw on as much or as little as you wish...

Indeed it is; but the new flexibility of pensions means that your pension money will be completely under your control once you've reached 55.

kidmugsy

Nationwide8 wrote: »

What's the shortest time you can be tied Into a PP ?

After you're 55, nil. You can draw it immediately. Normally a few weeks go by before the tax relief arrives in your pension, but since you'll have finished contributing some months before you are 55, that won't matter.

Nationwide8 wrote: »

25% profit on a PP ...
How much do fees/charges erode ...?

Nobody knows what the charges will be next year, but you can look up Hargreaves Lansdown's current charges. It's a competitive market so providers can't just jack up fees arbitrarily.

If you are settled on taking your occupational pension early, then there's no particular need to bang every penny available into your personal pension. Just contribute enough to let you use your personal allowance from ages 55 - 59 (say) and then revisit the question of what to do next. But if you do do that you'd have to accept that such an opportunity might not recur.