Advice for mother about to retire

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
15 replies 1.5K views
skipinoz88skipinoz88 Forumite
8 Posts
Many thanks for any help given here,

Situation: Mother in mid 60's who is shortly to retire

No mortgage, very active and in good health
Current Income : £20,000
State pension future estimate, - aprox £7000 pa
Savings: £15,000
Income from lodger: £4200 pa
No private pension

She has been deferring the state pension for 4 years and has built up a lump sum payment of aprox £19000 - She wants to take this, I can't convince her otherwise, She wants to go on holidays and enjoy life while still able, she has already booked trips to the far east etc.

Future income needed to maintain current lifestyle - £9600pa

I am looking for advice now on how best to manage lump sums and to deal with tax situations.

My advice to her has been, take all savings and stick them in a SIPP, keep them in cash and get the 20% tax relief.

Start claiming the state pension, take the lump sum and stick it in the SIPP. Then immediately defer for the last time the state pension, let that build up increasing at 10% while living off SIPP withdrawals and staying inside the personal allowance of £10500.

Is this strategy appropriate? Does anyone have any other ideas?

Also is deferring for a second time allowed once you have received a lump sum?

Many thanks again for any help or ideas
«1

Replies

  • McKneffMcKneff Forumite
    38.5K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    Quote.She has been deferring the state pension for 4 years and has built up a lump sum payment of aprox £19000 - She wants to take this, I can't convince her otherwise, She wants to go on holidays and enjoy life while still able, she has already booked trips to the far east etc. Quote

    The bold is what your mum wants to do with her money, she is obviously a grafter and has earned her retirement, personally I hope she has a ball, spends it on trips, toy boys, holidays and wastes the rest of it.


    Anyone of us could die at any given moment, that's all I can say. I have lost two close members of family in the past couple of months, husband and wife, they had all these plans for retirement and saw none of it.


    I learned a lot from that.
    make the most of it, we are only here for the weekend.
    and we will never, ever return.
  • xylophonexylophone Forumite
    38.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    Once your mother has no earned income, the maximum amount that can be put into a pension is £3660 gross (£2880 net).

    Rental income does not count as earned income.

    Is the lodger under the rent a room scheme?

    https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme

    From the point of view of tax, might your mother be better off by not taking her deferred pension until the new tax year?

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

    http://www.hmrc.gov.uk/manuals/pommanual/paye94090.htm

    Regarding interest on your mother's savings for the new tax year.

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293747/Fact_sheet_template_-_10__tax_9.pdf
  • kidmugsykidmugsy Forumite
    12.7K Posts
    Tenth Anniversary 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭
    skipinoz88 wrote: »
    Also is deferring for a second time allowed once you have received a lump sum?

    Yes, but the second time you take your deferral reward it has to be as extra pension; you don't get two bites at a lump sum.
    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

    That would suit you, if not her, pretty well.

    skipinoz88 wrote: »
    Situation: Mother in mid 60's who is shortly to retire

    No mortgage, very active and in good health
    Current Income : £20,000
    State pension future estimate, - aprox £7000 pa
    Savings: £15,000
    Income from lodger: £4200 pa
    No private pension

    She has been deferring the state pension for 4 years and has built up a lump sum payment of aprox £19000 - She wants to take this, I can't convince her otherwise, She wants to go on holidays and enjoy life while still able, she has already booked trips to the far east etc.

    Future income needed to maintain current lifestyle - £9600pa

    My advice to her has been, take all savings and stick them in a SIPP, keep them in cash and get the 20% tax relief.

    Start claiming the state pension, take the lump sum and stick it in the SIPP. Then immediately defer for the last time the state pension, let that build up increasing at 10% while living off SIPP withdrawals and staying inside the personal allowance of £10500.

    Is this strategy appropriate? Does anyone have any other ideas?

    If her earnings in this tax year equal £20k, then she can usefully contribute to a SIPP 0.8 x £20k = £16k, which is about the same size as her savings. Yippee! If she wants to she can then withdraw 25% tax-free, i.e. the Pension Commencement Lump Sum, and bung it into (say) interest-bearing current accounts at TSB, Nationwide, Lloyds, Santander ..... To avoid tax, she would not yet withdraw any money from the other 75%. And she wouldn't take her State Retirement Lump Sum until next tax year, when she can arrange to be a non-taxpayer.

    In tax year 15-16, the trick is to keep her taxable income below £10,600. To calculate how much to take from her SIPP you'll need to know whether she's using the Rent a Room allowance against the lodger's rent. (And if not, why not!)
    http://www.hmrc.gov.uk/manuals/pimmanual/pim4001.htm

    and also how many weeks SRP she will have drawn before the second deferral.

    Anyway you must ensure that she stays clear of that £10,600 because if she goes £1 over she'll be exposed to 20% tax on her SRP lump sum. She can then use the whole £5k p.a. tax-free allowance for interest on her savings too: she should complete R85 forms for her banks/building societies. (Granted, she'll get nowhere near £5k p.a. interest).

    She can't bung her SRP lump sum into the SIPP in one go; she can add £3600 gross p.a. = £2880 net. Between 15-16 and 16-17 she will presumably have withdrawn all the tax-exposed money from her original SIPP capital, while accumulating £7200 gross in new (uncrystallised) capital. In all this SIPP-maneouvring she needs to keep the charges down, so she'll need to check the charges for the different providers (i) now, for the savings, and (ii) next tax year, for the contributions under the new rules. Be alert to wrinkles: when I say "she will presumably have withdrawn all ..." you might find that you can keep charges down by making that "virtually all" rather than "all".

    UPDATE: my typing was interrupted by lunch, which is why there's so much overlap with xylophone's.
    Free the dunston one next time too.
  • xylophonexylophone Forumite
    38.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    my typing was interrupted by lunch, which is why there's so much overlap with xylophone's.

    Tsk, tsk, so much over indulgence at this time of year....:D
  • Thank you so much for your replies and clear links.

    To McKneff: I am doing all of this research to ensure my mum gets to keep as much money as possible and is able to do all she wants in retirement. She brought me up as a single mother, worked throughout my childhood(refusing to take benefits) and I hope she spends the lot before she dies (including all equity in the house), I am not interested in any of it. I agree life is short and she should take trips, I am trying to ensure she has a comfortable income for the rest of her life, which means trying to get her state pension increased in-case the lodger moves on.

    To Xylophone and Kidmugsy: your help has been invaluable and thank you for taking the time.

    Current plan : All savings not needed for trip into low cost SIPP £16000 in this tax year.
    -Start state pension next tax year 15/16, take lump sum put into high interest account. Minus £2880 which goes into the SIPP for 15/16 tax year.
    - Immediately defer for 2nd time state pension, which will increase at 10% pa
    - Take 25% tax free from SIPP into savings account.
    - Draw down on savings/SIPP as needed making sure not to go over £10,500 allowance.
    - Use the rent a room scheme, don't charge more than £81pw so as not to then have to fill in self assessment form.
    - Take state pension again when needed after 2/3 years

    Does this plan seem like a good one, which is as tax efficient as possible? any other ideas?

    Again thank you
  • xylophonexylophone Forumite
    38.2K Posts
    Part of the Furniture 10,000 Posts Name Dropper
    ✭✭✭✭✭
    high interest account.

    Interest rates are better on certain current accounts.

    http://www.moneysavingexpert.com/savings/savings-loophole?_ga=1.128943307.632060106.1405012823

    If your mother is prepared do do the initial admin, she could open a Santander 123 account, a TSB Classic Plus, a Lloyds Club account and even a Nationwide Flexdirect ( although the preferential rate on this one is only available for a year).

    Don't forget to check out the information on tax and savings in the next tax year see link in previous post.
  • edited 30 December 2014 at 4:59PM
    patannepatanne Forumite
    1.3K Posts
    edited 30 December 2014 at 4:59PM
    Have you tried asking how much extra she would get per year taking it as extra pension. I assume she is looking at approx £4k per holiday Australia, China, Japan, New Zealand, South Africa etc. Please get her to check that she can't get enough from the extra pension to pay for these rather than a lump sum, which is not the best deal.

    Having the extra state pension should also fund the cleaner, gardener etc for when those becomes a struggle, without needing to tighten the belt too much. It does all seem to be working out what is best for both the current you and the future you doesn't it?

    Another thought is that the basic state pension is currently going up each year by more than the interest on savings accounts, although this could well change soon.

    Have the figures been checked recently as £19k does not seem enough for 4 yrs deferment of a £7k pension as that is not even the amount that would have been paid even before interest.
  • kidmugsykidmugsy Forumite
    12.7K Posts
    Tenth Anniversary 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭
    skipinoz88 wrote: »
    Current plan : All savings not needed for trip into low cost SIPP £16000 in this tax year.

    YES. If I were feeling cautious, I might start with some modest "pilot" amount, and top it up with heaps more as soon as I'd heard the March budget statement, just in case that changed my views.
    skipinoz88 wrote: »
    Start state pension next tax year 15/16
    ESSENTIAL. Do no sooner.
    skipinoz88 wrote: »
    take lump sum put into high interest account. Minus £2880 which goes into the SIPP for 15/16 tax year.
    Immediately defer for 2nd time state pension, which will increase at 10% pa
    10.4%. Hurray!
    skipinoz88 wrote: »
    Take 25% tax free from SIPP into savings account.
    Draw down on savings/SIPP as needed making sure not to go over £10,500 allowance.
    IT WILL BE £10,600, but don't cut it close.
    skipinoz88 wrote: »
    Use the rent a room scheme, don't charge more than £81pw so as not to then have to fill in self assessment form.
    YEP.
    skipinoz88 wrote: »
    Take state pension again when needed after 2/3 years
    Yes.

    For what it's worth: all my SIPP experience has been with Hargreaves Lansdown. I've found their service excellent, and their charges bearable. You could use them as a "base case" to which to compare their competitors.
    Free the dunston one next time too.
  • LintonLinton Forumite
    14.1K Posts
    Part of the Furniture 10,000 Posts Name Dropper Hung up my suit!
    ✭✭✭✭✭
    Has your mother asked for your advice? If she hasnt and is mentally capable is it any of your business?

    Taking a deferred state pension as a lump sum is financially a bad decision, all other things being equal. But in her case all other things may not be equal.
  • Thanks again to everyone for the help, I will show her this thread so she can make any decisions she wants to.

    To Linton: Yes she asked as she was unsure about the lump sum and whether or not to take it. I looked it up, told her the options and found she also had extra personal allowance that could be used up every year and this is what I was seeking clarification over.

    I agree though, how she decides to spend her money is not my business.

    Best wishes and happy new year to all.
This discussion has been closed.
Latest MSE News and Guides

A guide to council tax bands

Lower your band & save £1,000s

MSE Guides

Cinema MoneySaving tips & tricks

Including year's 2for1 movies for £1

MSE Deals