Take pension early and carry on working

Running_On_Empty

Buying a new car with your pension lump sum is a bad idea. In ten years time you will no longer have the car and a very much reduced nest egg. Why not get an interest free car loan for the new car?
The thrill from a new car is fleeting while the contentment of a lump sum in the bank "Just in Case" goes on and on. Trust me, I know.

jamesd

malcolmfowler wrote: »

a 15% company contribution into money purchase scheme.

Use this money instead. There's no actuarial reduction so it's way better than the original plan. You may need to transfer out to draw on it.

malcolmfowler wrote: »

So my plan was to live off the pension and save all my salary. I.e. work for another year even though I don't have to and save everything tax free. For the sole purpose of creating a lump sum.

The work for a year plan is good, but not the taking DB early. Use borrowing or the DC/MP pot instead.

Some things you need to know about taking money from DC/MP pots:

1. This tax year, up to 5 April 2015, you can put a DC pension into capped income drawdown. You can take out a 25% tax free lump sum and about 6% of the rest, up to the GAD limit, as lump sum, taxable. You can continue doing the 6% indefinitely without triggering the annual allowance reduction I mention next. You can also do the same for new pots put into capped drawdown after 6 April 2015 provided you have already put at least one pot into capped drawdown before then - if you haven't, you can't use this case.

2. From 6 April 2015 if you take more than the 25% tax free lump sum from a DC/MP pot you will trigger a reduction of the annual pension contribution allowance from £40k to £10k and carry forward cannot be used to exceed this limit. But case 1 allows some of this and it becomes moot when you no longer plan to make pension contributions.

So start capped drawdown now, use borrowing and carry on paying in, then switch to the newly paid in money to live on, all to delay taking the DB pot for as long as possible, ideally to normal retirement age for the scheme.

Borrowing isn't bad, borrowing unwisely is bad. Your original plan is worse than borrowing and in this situation borrowing will save you far more than it costs.

malcolmfowler wrote: »

Should I get an IFA to help me?

If we haven't persuaded you yet that your original plan is a very bad one, you need that help and perhaps an IFA doing it in person will be more persuasive.

malcolmfowler

jamesd - thanks for your reply, I'm starting to get this now.

I have had a couple of IFA's visit in the past and they have looked at my pension scheme, saving etc and didn't offer much help. i.e. they said everything looked fine and my FS pension was generous and I was lucky to have it. At the time I hadn't planned early retirement. So my question is if I wanted an IFA to come round and do the maths then what should I be asking for or looking for when I speak to them? Is this an IFA's job or should I be consulting an accountant?
Thanks

patanne

Unless you were quite specific in requirements I don't think you would have got a different answer from any IFA. An FS pension is what every employee would like to have. You need to have said something along the lines of - I need an efficient way to fund a savings pot to fund the lump sum expenses in the future - or - I need an efficient way to fund the years from my retirement on my FS pension until my state pension kicks in.

And before you take what I say too seriously, I am very very amateur at this.

redux

patanne wrote: »

And naive answer in response is are you 100% certain that you will only live for 20 years. So you reckon you can get 5% return on your investments - guaranteed!! Please let us know -

If you want a guaranteed 5% next year, and a guaranteed 5% the year after, and so on, that is one thing, but the OP's situation might be slightly different, and there seem to be hints of considering potential gains on a lump sum over a longer period without needing the first tranche of income next year.

Looking back at pension and other investments from a few years ago, they've grown at on average between 7 and 15% a year, including spanning a dive in 2008. So a lump sum of £81k 12 or 15 years ago might be worth £200 to 500k by now.

I know little about the choice of investments in company pension schemes, but if there is one fund cautious to avoid drops in the short term it might not be the only choice for someone who is willing to take a longer view, so moving some out to invest elsewhere might be worth some consideration.

To clarify, I'm not saying this option is better, just that it might not be quite as bad as others are saying. My reading of other answers doesn't include any assumptions of gain from putting that £81k to work. Any gain there will mitigate the differences we are being given, as I suggested before, and even if it does only go up the 5% you mention that closes the gap quite a bit.

If the main motivation is to spend a substantial proportion though, obviously that balancing happens a lot less.

I'm an amateur at this as well, so there can easily be other angles I haven't considered properly.