Pension being wound up by PIC

simpywimpy

Received a letter saying hubbys pension has a value of 140k. Its in a scheme that is due to be wound up but we want to wait until April and take the money to pay off the mortgage.

After asking for an upto date valuation and telling Mercers that we dont want them to buy an annuity with it on our behalf, they have sent it back to the Pension Insurance Corporation. They in turn have sent us a valuation and the transfer forms for us to transfer the fund to our own choice of provider.

There is no mention of the 25% drawdown that is currently available so not entirely sure what the options are from them.

What we dont want to do is transfer to another scheme and then not be able to take the full amount out come April.

Anyone know what the procedure is?

Hubby is 61

dunstonh

Received a letter saying hubbys pension has a value of 140k. Its in a scheme that is due to be wound up but we want to wait until April and take the money to pay off the mortgage.

Sounds like a pretty crazy idea. That is going to be one hell of a tax bill to pay.

There is no mention of the 25% drawdown that is currently available so not entirely sure what the options are from them.

If you are going to transfer it, it will the the receiving scheme that pays the money.

What we dont want to do is transfer to another scheme and then not be able to take the full amount out come April.

You may have to if the existing scheme wont offer it.

Thrugelmir

simpywimpy wrote: »

What we dont want to do is transfer to another scheme and then not be able to take the full amount out come April.

Then you need to select the right provider\product when effecting the transfer. I assume that you are aware of the tax implications of what you are proposing to do.

simpywimpy

I realise that only the first 25% is tax free.

Is the transfer value (which is what they quoted) the same as the CETV that seems to be mentioned frequently?

Linton

simpywimpy wrote: »

I realise that only the first 25% is tax free.

Is the transfer value (which is what they quoted) the same as the CETV that seems to be mentioned frequently?

If you take the rest as well in one go it will be taxed as income which will put you into the higher than higher tax band.

simpywimpy

really? I was told he would be taxed at his current level of 20%.

dunstonh

simpywimpy wrote: »

really? I was told he would be taxed at his current level of 20%.

No. It is added to his income in the year it is taken.

It will put his income into higher rate tax and see a reduction in his personal allowance (partially or totally depending on his other income). This effectively gives income between £100k and £120k, a 60% tax. The bulk of it will be 40% tax. How much does he currently earn a year?

jamesd

simpywimpy wrote: »

Is the transfer value (which is what they quoted) the same as the CETV that seems to be mentioned frequently?

A CETV refers to a defined benefit pension. If this is a defined benefit pension then yes, this would be the transfer value.

simpywimpy wrote: »

I realise that only the first 25% is tax free.

The plan to take the money at once and pay off a mortgage seems extravagantly wasteful. Do you really have money to burn? He's going to lose most or all of his allowance for the year (starts at £100k income, is fully lost at 120k) and pay 40% income tax at least on most of the money. He'll also have his annual contribution limit to pensions reduced from £40k to £10k for life.

Given that he's at least 55 years old now, being 61, he could instead put any pension pot into capped income drawdown, which has to be done before 6 April 2015, transfer to that, take out a 25% tax free lump sum and take out about 7.5% of the remaining 75% year using capped income drawdown. This will save massive amounts of income tax, far more than any credible mortgage interest rate, and avoid having his pension contribution allowance reduced. At any later time he could convert to flexi-access drawdown and take the lot, provided he's willing to accept the drawbacks of that.

If he was to wait until after 6 April before doing anything, the capped income drawdown option is no longer available for new setups. Instead he could only take out the 25% tax free lump sum before triggering the reduction in annual pension contribution allowance. Putting any personal pension pot of any size into capped drawdown before then avoids that, establishing a base that he can transfer money into later.

Not buying an annuity is a good choice. Income drawdown followed by deferring the state pension will pay more if it really is buying an annuity. Given his age it would pay about 5.8% for the first year, increasing with inflation, a little less the longer he defers. This is way above mortgage interest rates and lasts for life, not just the life of a mortgage, making this also a better idea than taking a huge tax hit instead of waiting to do things efficiently.

There's a huge loss here for just not being willing to be patient and do things efficiently. Even if the lump sum was going to be taxed at 20% instead of 40% it wouldn't make any sense to pay 20% instead of paying mortgage interest for a few years.

He probably has even better options, because there are restrictions on recycling pension commencement lump sums that do not apply to winding up lump sums, allowing recycling of the 25% tax free lump sum into new pension contributions. He can then use that to pay off the mortgage over time after a second chunk of tax relief. For pure basic rate situations this results in a tax gain of 6.5%, above the usual mortgage interest rates.

jamesd

Maybe you can tell us more about your and his whole situation? The people here are pretty good at coming up with the most efficient ways to get things done, to maximise value for money.

simpywimpy

Its extremely confusing

Ive had a look at drawdown calculations on h-l.co.uk . It says he can take 35k cash and will give him 7400 income.

Would we be allowed to transfer his sole pension pot into two separate pots for both of us? (I am 50 this year)

Linton

simpywimpy wrote: »

Its extremely confusing

Ive had a look at drawdown calculations on h-l.co.uk . It says he can take 35k cash and will give him 7400 income.

Would we be allowed to transfer his sole pension pot into two separate pots for both of us? (I am 50 this year)

The h-l data is for pre-April 2015. After then you can take as much income as you want.

You cannot transfer a pension from one person to another. You could of course use the income from one person to pay into a pension for another up to that persons maximum contribution limit but that's not the same thing.