Maximising moribund pension fund

oldguy9519

Hi All

I have 3 pension pots -
1 Defined benefit (15 years in USS)
2 Defined contribution (about 110k, actively adding about 10k per year gross)
3 Defined contribution (about 100k, inactive since 2010, with transfer penalty of about £12k. Value is not increasing much).

Employer has offered to put in a large (£50k) lump sum this financial year to my active pension and reduce salary 2015/16 tax year to minimal amount, i.e. close to zero.

I'm tempted to cash-in the moribund fund, take 25% tax free and pay regular tax on the rest (approx. 80k) and live off this for a while and pay off rest of mortgage. I can use annual allowance from previous years to cover the approx. £50k input this year.

Does that sound like a crazy plan? From what I can see it will boost my active pension considerably, I'll get £25k tax free and then pay about £24k tax on the rest. Plus the moribund pension will be managed more effectively. Any thoughts?

atush

Is no3 a withprofits pension?

When can you take it w/o reduction?

Linton

Not enough info....

How old are you? When do you want to retire?

A DC pension will grow according to the things it invests in. So why is your moribund pension not doing better? What is it invested in? Could you change the investments, or if suitable ones arent available from the pension provider move it elsewhere? For example you could look at transferring it to your active DC pension if the choices are better and the charges lower.

How much do you need to live on? Taking out excess cash from the moribund pension at a high tax rate seems a bad idea.

Does the £50K include a generous employer contribution beyond the salary you are giving up? Note that your employer will need to pay you at least the minimum wage, so a little way from being "close to zero".

oldguy9519

Linton wrote: »

Not enough info....

How old are you? When do you want to retire?

A DC pension will grow according to the things it invests in. So why is your moribund pension not doing better? What is it invested in? Could you change the investments, or if suitable ones arent available from the pension provider move it elsewhere? For example you could look at transferring it to your active DC pension if the choices are better and the charges lower.

How much do you need to live on? Taking out excess cash from the moribund pension at a high tax rate seems a bad idea.

Does the £50K include a generous employer contribution beyond the salary you are giving up? Note that your employer will need to pay you at least the minimum wage, so a little way from being "close to zero".

Thanks for the reply.

56, not planning to retire for another 5-6 years or so. I agree taking out the cash at 40% rate seems bad, but I was hoping for a better home for it (e.g. ISA, paying off mortgage and using what I would have paid to invest elsewhere). Only reason I'm looking at this is

(a) the low returns on pension 3,

(b) the 12k penalty i'm quoted for moving to the active pension (or anywhere else for that matter)

Didn't realise about the min. wage aspect.

The other options appear to be leave alone, or move pension 3, take the hit and hope for better returns to compensate (seems unlikely to me).

dunstonh

How is your employer paying £10k above the annual allowance?
How is paying a contribution in this tax year going to reduce your effective income in the following tax year?

Linton

oldguy9519 wrote: »

Thanks for the reply.

56, not planning to retire for another 5-6 years or so. I agree taking out the cash at 40% rate seems bad, but I was hoping for a better home for it (e.g. ISA, paying off mortgage and using what I would have paid to invest elsewhere). Only reason I'm looking at this is

(a) the low returns on pension 3,

(b) the 12k penalty i'm quoted for moving to the active pension (or anywhere else for that matter)

Didn't realise about the min. wage aspect.

The other options appear to be leave alone, or move pension 3, take the hit and hope for better returns to compensate (seems unlikely to me).

Anything you can hold in an S&S ISA you can also hold in a pension. So moving it outside the pension environment seems pointless. Can you give more details on the moribund pension- most DC pensions dont charge you to leave beyond minor admin charges. And I would have thought that getting it released as cash was pretty close to transferring it and so should be subject to the same penalties.

oldguy9519

dunstonh wrote: »

How is your employer paying £10k above the annual allowance?
How is paying a contribution in this tax year going to reduce your effective income in the following tax year?

I thought the annual allowance could be carried over from previous years?

I'm foregoing my normal salary next year, so only income would be from any pension I decide to take (or not).

atush

Is Pension 3 in a with profits pension fund?

oldguy9519

atush wrote: »

Is Pension 3 in a with profits pension fund?

Hi @Atush Don't think so, not based on its lack of growth, but would ned to check paperwork later.

atush

Do check as it sounds as if it could be.

Linton

oldguy9519 wrote: »

Hi @Atush Don't think so, not based on its lack of growth, but would ned to check paperwork later.

You should check whether there are any guarantees. Old WP pension funds often had guarantees, some remarkably generous. In those cases the value of the fund could lie more in the guarantee than in any published investment return.