Pension Poser :(

sunnysmiler

I am sure this has been asked many many times and sorry if it has. I am at that time in life when i am lucky to have the chance of taking my pension at 50 from the MPS as I was a coal miner. Apart from the obvious choices I have of 1. leaving it, 2. taking a NO LUMP SUM and having a better weekly pension. 3. Smaller Weekly pension and BIG lump sum.

Obviously i am working full time but have no money behind me so thinking of taking the bigger lump sum to get a house etc plus i do have another decent private pension with another company 8 years to come at 60 anyway.

So basically ....

What are the general pitfalls ?

Does this law change to pensions in April make any difference to my decision to take in now in March ?

What actually do I get Taxed on The weekly amount ? The Lump Sum ? or both ?

Thanks again and any help or advice is greatly appreciated.

Alan

david78

Hi Alan,

The Mineworkers Pension Scheme seems to be a defined benefit scheme.

http://www.mps-pension.org.uk

There is some useful information on the website above. Basically, your lump sum would be tax free. You would pay tax on the pension payments at your highest marginal rate (the highest rate you current pay in your job, unless the extra income pushes you into a higher tax band).

The changes from April 2015 are not really relevant.

kidmugsy

I assume that the Lump Sum is the tax-free lump sum available to people putting a pension into payment: you'd want to check with them.

Then you should calculate the lump sum divided by the corresponding decrease in annual pension. Then come back and tell us the answer of this so-called "commutation rate". The main pitfall is that the answer might be disappointingly low (e.g. 10 - 12). But perhaps it won't be. You also need to know whether the reduced pension plus your other pension will be enough to live off at 60, or whether you will need some other income to bridge the gap until your State Retirement Pension begins.

The new laws don't matter directly for "defined benefit" pensions of your type. They might matter for your other pension, though, depending what type it is. Is it "defined benefit" too i.e. does it pay out a pension directly related to your wage and years of service? Or is it "defined contribution", whereby you've accumulated a pot of capital in the pension fund?

The tax will be imposed only on the weekly or monthly payments. There is sometimes a bit of hassle if HMRC give you an emergency tax code, but in the end they will manage to pay you back any excess tax taken.

kidmugsy

david78 wrote: »

You would pay tax on the pension payments at your highest marginal rate (the highest rate you current pay in your job).

Not so. The pension payments are added on to his current income and taxed accordingly. If they were to push him into the higher rate tax bracket he'd have a bit of 40% tax to pay. Mind you, that's easily avoided just by making an extra pension contribution, but perhaps not for much longer.

david78

Yes. I thought that was what marginal rate meant.

Will edit the post to make it clearer.

RichandJ

david78 wrote: »

Hi Alan,

The Mineworkers Pension Scheme seems to be a defined benefit scheme.

http://www.mps-pension.org.uk

There is some useful information on the website above. Basically, your lump sum would be tax free. You would pay tax on the pension payments at your highest marginal rate (the highest rate you current pay in your job, unless the extra income pushes you into a higher tax band).

The changes from April 2015 are not really relevant.

Thought I remembered this question from a thread a while ago. The commutation rate is dire - 9:1. Even the MPS admits it, see link below.

http://www.mps-pension.org.uk/lump-sums.htm

sunnysmiler

Thank you very much for the informative information thus far it has been very enlightening. Its good to know the pension changes dont really effect my decision

So it looks like the Commutation rate is 9:1 and another couple of things I should add are if i take no lump sum my Percentage of Allowance used is 12.62% and if I take Lump sum only 9.67% is used I would also add i am self employed and still working so be interesting to know if that has any bearing and if so what ?

Also from what i can glean of what people say obviously it looks like if I take the lump sum with the smaller weekly amount and still definitely working then i am getting taxed on a smaller amount is that right ?

Thanks again Alan

AlanP_2

Others may be able to offer more on allowance question but it sounds to me as if the percentages quoted relate to the Life Time Allowance (LTA) which is currently £1.25m for pensions.

Total pensions worth >£1.25m bring with them additional tax issues.

So they are saying that MPS pension is worth either 9.67% or 12.62% of that £1.25m.

I would hazard a guess that unless your other pension, and anything you are putting into pension saving from self employment, is significant you (like the majority of people) won't be affected by the LTA.

Putting the Lump Sum to one side anything else that is paid out by the pension is subject to tax in the same way as other income, so yes if you take the LS and a lower weekly/monthly pension you will pay tax on the smaller amount.

The issue that throws up though is that you will be receiving the lower ongoing pension amount for potentially 40 years, and maybe longer, if you are 50'ish now (taking no account of any health issues that we know nothing about).

You may be better off in the long run taking the higher ongoing payment and paying more tax now in the expectation of a higher post-retirement income.

Swings and Roundabouts comes to mind.

You could probably take some, but not all of the maximum 25% tax free LS to help with house purchase etc?

The permutations will depend on your income, housing costs, other savings & how long you plan on staying at work.

Is there an "other half" that has income and future pension that need to be considered as well, or any dependants?

Linton

When the 9:1 commutation rate is described as dire, that is underplaying the situation. A fair rate could be 3 times that. So you need a very good reason not to go for 100% pension even after taking tax into consideration.

kidmugsy

david78 wrote: »

Yes. I thought that was what marginal rate meant.
.

It isn't. But the idiot who wrote Osborne's budget statement for him in 2014 misused "marginal", and the Treasury continued to misuse it, so now Lord alone knows what people mean when they say it. It's shameful that Osborne didn't catch it and correct it. All that education wasted!

sunnysmiler

Thanks again all,

Alan P, There is no significant other half but there are two children I have had in the past 14 and 18