Best way forward

carl1664

Hi all, I am an unemployed 57 year old, receive no benefits as my spouse works and have just found out that I have a preserved final salary pension with a transfer value of almost £183,000. I have a small annuity of £680 pa from a previous job.
I wish to take as much as possible from my transfer value in order to purchase a house, as we currently rent and that is £600 per month.
IF I were to transfer into a drawdown product now, could I transfer again into a flexible drawdown product in April 2015? As this would mean paying less tax, as my income would be spread over 2 tax years.
Thanks.

atush

Who is the pension with? Is the scheme funded? What pension would it pay per year indexed for life? Are you of good health?

Could you buy (with all costs incl moving, solicitor etc) without borrowing?

carl1664

Hi, thanks for the reply, the preserved pension is with the Co Operative Insurance Society and after taking a lump sum of £33,400 at age 60 I would receive a pension of just under £5,000 which has a small amount of indexation. I am in relatively good health. My wife is only 40 years old and earns £39,000 pa. I also have a small armed forces pension which will be payable at age 60, which is at present valued at £1590 pa.
We could buy without borrowing anything.

greenglide

So you want to give up an income of £5,000 per annum to save spending £7,200 per annum rent?

Doesn't sound a brilliant idea. Remember your significantly younger wife would likely do very well out of the survivors benefits.

kidmugsy

carl1664 wrote: »

... after taking a lump sum of £33,400 at age 60 I would receive a pension of just under £5,000 which has a small amount of indexation. I am in relatively good health. My wife is only 40 years old and earns £39,000 pa. I also have a small armed forces pension which will be payable at age 60, which is at present valued at £1590 pa.
We could buy without borrowing anything.

At age 60, then, you could have pensions of £5k + £1600 + £700 = £7300 p.a., all presumably tax-free.

With your lump sum available as a deposit (if needs be) and a mortgage based on the £7300 p.a. and your wife's £39k p.a., you could surely buy then. Is there a special reason to do it now?

carl1664

Hi again, thanks for the replies.
With regard to the survivors benefit, it is 50% of the deceased members pension. Also, I didn't mention we have four young children, for whom I am the main carer, child care costs in this area would come to over £600 per month.
I will receive a full state pension at age 65 as I have 38 years of National Insurance contributions. Also, we have had to move four times in the last 5 years as landlords wished to sell up, plus they can hike up the rent whenever circumstances dictate it.
The savings on the rent alone over a 25 year period (assuming no increases) amounts to £55,000 (rent minus pension) and if anything were to happen to me, my wife could afford the child care costs without worrying how to afford it.

kidmugsy

carl1664 wrote: »

Also, we have had to move four times in the last 5 years as landlords wished to sell up, plus they can hike up the rent whenever circumstances dictate it.

Fair enough. After subtracting the tax-free lump sum, the commutation rate for the rest of the pension would be 30, which is pretty good. The question is how to get at the rest of the money without a crushing tax bill. Suppose that this tax year you put it into Capped Drawdown; you get the 25% TFLS plus you can take the capped annual income, which is taxable. Then next tax year you can drawdown what you like, but it will all be exposed to tax, so after you've used your £10,600 personal allowance, it'll be 20%, then 40%, and even (do check the arithmetic) a bit at an effective 60% then 45%. The only practical way to avoid penal rates is to draw it down over several years. Alternatively, you could be rational about it and take out a joint mortgage, drawing down each year just enough to avoid higher rate tax, and overpaying the mortgage if that's what you'd like to do.

Or even better, drawing down each year just enough to avoid income tax altogether. By the time your SRP starts at 65, you'd probably have got much of it out tax-free. You could then reduce the rate of drawdown so that you continue to avoid income tax.

P.S. It's the possibility of completely avoiding income tax that could justify giving up all the advantages of a defined benefit pension.

SeekTruth

carl1664 wrote: »

...
I will receive a full state pension at age 65 as I have 38 years of National Insurance contributions
...

Have you checked when you will reach State Pension Age? (see https://www.gov.uk/calculate-state-pension)

If by 'full state pension' you mean the current full Basic State Pension of around £113 per week, then I agree.

If by 'full state pension' you mean the full amount under the New State Pension of around £148 per week then there may be a problem. In April 2016 your Foundation Amount (starting amount) under the new scheme will be calculated as the higher of 2 amounts:
1) entitlement under current scheme, so for you £113 possibly plus some additional pension;
2) entitlement under new scheme £148 (based on over 35 years of contribution) minus an adjustment for periods when you were Contracted Out of the state additional pension (SERPS/S2P).

You have an armed forces pension so I assume you were contracted out for that period, and quite possibly also for the Coop. So, it is quite possible (likely?) that your Foundation Amount will be less than the full £148ish. However, if this is the case, then additional years of NI paid or credited after April 2016 will increase your final pension. Will you be entitled to Home Responsibilities Protection (now called National Insurance credits https://www.gov.uk/national-insurance-credits/eligibility) after April 2016?

Can I suggest that you also answer the following questions (at least for your own benefit, not necessarily to publish the answers here).
1) If you do as you propose then what will your long-term secure pension income be as a couple?
2) If you do as you propose and you predecease your wife then what will her long-term secure pension income be?
3) If you do as you propose and you survive your wife then what will your long-term secure pension income be?

jamesd

carl1664 wrote: »

IF I were to transfer into a drawdown product now, could I transfer again into a flexible drawdown product in April 2015? As this would mean paying less tax, as my income would be spread over 2 tax years.

It is possible to enter capped income drawdown this year and change to flexi-access drawdown next year. You could take out a 25% tax free lump sum this year plus about 6% of the rest. Next tax year you could take out the remaining 69%.

With no income you would pay this much income tax through PAYE next year on the remaining £129,015 of income:

1. You lose your personal tax free allowance because your income is far enough over £100,000 to eliminate it all, which happens by the time you get to £120,000.

2. You pay 20% income tax on the basic rate band, the first £31,865 above the now-zero personal allowance. So £6,373 of income tax, £25,492 net.

3. You pay 40% income tax on the remaining £97,150. £38,860 of income tax, £58,290 net.

After the two years you have transformed the initial £183,000 into:

£45,750 tax free lump sum
£8,235 of taxable income within your personal allowance this year
£25,492 + £58,290 of net income, total £83,782
Grand total in your pocket of £137,767

Grand total of income tax paid £45,233

It really doesn't seem like a very productive idea to pay £45,233 of income tax to save £600 a month less ownership costs.

You'd also need to get an IFA to sign off on the transfer. That might be possible, maybe.

It's better to get a mortgage so you can take more time withdrawing the money from the pension and at least avoid paying higher rate income tax and losing your personal allowance. A smaller building society might go for say a five year or so mortgage that would let you do this. If not, ask local estate agents about local special circumstances lenders, who are generally individuals with money who are willing to do unconventional mortgage deals. You'd probably pay over 10% mortgage interest from such an individual but that could still be cheaper than the boosted income tax.

If you want to stay where you are you could also propose staged purchase to your current landlord, who might be willing to do a deal for a large initial payment then the rest over two or three more years.

You may well find that a landlord would agree to a deal like 10%, 20% or more rent reduction for paying say a year's rent in advance, which you could do with the lump sum. More might be possible if you paid for say three years and that would give you corresponding security of tenure.

On a technical note, flexible drawdown becomes unavailable next year, being replaced by flexi-access drawdown and it's probably flexi-access drawdown that you meant. You don't qualify for flexible drawdown because you don't have a currently in payment annual income of £12,000 or more.

atush

I think it could be worth you waiting for you pension for 3 years and buying then with the Lump sum and a mtg based on yours and the OH income.

What kind of a pension does your OH have? Have you checked your actual pension age as at 57 I think you will have to wait til at least 66? Have you checked the number qualifying years you have of Nics? get a SP statement to see.

If the child benefit is in your name, you are getting nics now, and will continue to until your youngest is 12. If you aren't, see about switching the parent who gets the CB.

Otherwise, should you find an IFA who would transfer the lot (not easy with a DB pension), I would NOT recommend paying 45K in tax.

I would take the TFLS for a deposit, and then DD up to your PA each year (except just 6% this year), using this to pay the mtg, and placing any extra income not required into a new DC pension for yourself (up to 2880 per year, grossed up to 3600 by TR) and you could overpay the mtg with the rest after you have an emergency pot of 6 months outgoings.

I agree moving with small children is a nightmare (I did it 3 times) so understand your need to find a home of your own. But dont pay 45K to the taxman for the privilege. You dont mention if you have any savings and investments now to help with a deposit for the house?

But get your skates on re the IFA today, as I think the armed forces pension is unfunded, and transfers may be banned soon?

xylophone

But get your skates on re the IFA today, as I think the armed forces pension is unfunded, and transfers may be banned soon?

It seems to be the deferred CIS pension that he wishes to transfer, rather than the army one?

Even at the moment, he may find that any "receiving" pension scheme will require him to show he has taken advice from an IFA concerning this transfer - it would seem that next year the government will insist on this.

https://www.gov.uk/government/collections/pension-schemes-bill-2014-to-2015

And as you say, it appears that transfers from unfunded public sector schemes

NHS
Teachers
Armed Forces
Civil Service
Police
Fire-fighters

will be banned.

LGPS is funded.