Draw down one pension then start another

Tom2023

Hi

I am thinking of taking my Final Salary pension later this year. I have plans for the TFLS but as I will continue to work I don't need the monthly payments. I know I'm lucky.

Because of my wages the monthly pension payments would be taxed at 40%.

Would it be possible to put the entire pension monthly payments into a new pension, avoiding all tax and when I finally do retire take another 25% TFLS?

jamesd

Yes.

It's unlikely to be the best financial choice but the alternatives would depend on what you would use the lump sum for. Taking out or increasing a mortgage would probably beat taking a defined benefit pension before normal retirement age.

xylophone

taking a defined benefit pension before normal retirement age.

The OP may be reaching the NRA for his scheme later this year?

Tom2023

I know cashing one pension in to take another is not a decision to take lightly. I'd be taking the pension 3 years early so taking a 20% hit all around.

However I plan to buy a flat with the TFLS and as I live in the South East that should increase in value by about 20% in those 3 years.

I will also have a 20% hit on the pension PA but I will have 3 year's worth extra in the bank to smooth that over.

Once the pension is crystalised I will no longer have to worry about what Chancellors or CEOs do when they need a little extra cash and I can really plan my retirement!

kidmugsy

Tom2023 wrote: »

However I plan to buy a flat ... and as I live in the South East that should increase in value by about 20% in those 3 years.

Interesting use of "should".

jamesd

Then don't do it. Your plan does not make financial sense. You're taking a 20% drop in income for life and there's no way that even a 20% property gain in the short term will be sufficient co compensate for that.

You're also doing it in an general area that is starting to show signs of price drops according to studies of RICS surveyors. Not an encouraging sign of good market timing.

Nothing wrong with buying property but you're not doing a good job of balancing the lifetime reduced income and market conditions with what interests you.

If you want to do this, instead of taking the pension early, accumulate enough capital for a deposit on properties in cheaper areas of the country. That would also give you increased potential for diversification with more than one lower value property and reduced potential CGT liability because less of the gains on each sale would be above your annual CGT allowance.

The cheaper non-SE property route would also leave you with more capital when you do reach normal retirement age, and a higher income to fall back on as a safety net. Both really good things to have when doing property investing.

xylophone

I had wondered whether you were reaching Scheme NRA later this year and so had decided to draw your pension, probably because you had reached the maximum 40/60. It appears that in fact you are considering drawing the pension early with a large actuarial reduction on both the lump sum and the pension for life.

It just doesn't seem to make sense to do this only to purchase a property (which will could cost you money in insurance, maintenance, voids etc) and in another pension where you bear the investment risk?

Tom2023

I've done the maths (I'm not comfortable putting the actual figures on a forum) and it doesn't look too bad.

I think the next stage is a good independent financial advisor so I can get a good second opinion.

Thanks to every one who said I should exercise caution.

TH1878

Tom2023 wrote: »

I've done the maths (I'm not comfortable putting the actual figures on a forum) and it doesn't look too bad.

I think the next stage is a good independent financial advisor so I can get a good second opinion.

Thanks to every one who said I should exercise caution.

Basing your calculations on capital growth of property is almost never a good plan.

Base it on the income you can expect to receive from the investment - if it compensates you for the loss in pension then it may be a good investment.

Tom2023

TH1878 wrote: »

Basing your calculations on capital growth of property is almost never a good plan.

I either buy the flat now or in 3 years time in which case unless the property market has turned on its head it will cost me at least 15-20% more.


I have just come across this on a .gov site...

If you took a pension using flexible drawdown
You don’t get an annual allowance after you take a pension using flexible drawdown - you’ll pay tax on all new pension savings.

If I can draw my entire pension and get an annual allowance that doesn't seem very fair.

Or am I misunderstanding something?

greenglide

This refers to the maximum you can pay into a pension - that "annual allowance".

This actually only applies until April when the new rules come in but you will still be limited to £10,000.

It isnt an "allowance" as in them giving you money!