Final Salary lump sum time to rethink?

First_past_the_post

I have been visiting this forum for quite some time now and I have learnt so much so thank you to all contributors. I didn’t envisage posting a question because I thought my own circumstances were pretty straightforward. I am a deferred member of a final salary pension and this will provide the majority of my retirement income. NRA is age 60, I will be 59 in a few months and am planning to quit work next March. My intention was to forego the lump sum and take the full pension amount. The lump sum is of course attractive and with a commutation ratio of around 17.1 this seems reasonable these days. However I am mortgage and debt free and my wife has built up little pension in her own right. So on a survivor basis half of the full pension has seemed the sensible option. In terms of the full pension, £20k annum or lump sum option of £93k with £13k annum. This will be supplemented by my current pension, again FS at a reduced £3k per annum and lump sum of £8k, NRA65. We have savings of £120,000, mostly in ISA. My wife’s retirement income will be below the tax PA till she draws the state pension in 10yrs. So with all the pension changes that are taking place should I rethink?

atush

In your case sitting on a pile of cash/investments, if you are of good normal health and have a spouse i'd be inclined to take the larger pension w/o a LS.

What type of ISA are your savings in? If cash, consider moving some (within the ISA) to S&S isas. Look at income funds, and good long Dividend paying investment trusts. Income will remain steady/grow while the underlying investments can move up/down but that should not affect you if you draw income.

In the mean time, in the next year (or in fact right now and use some of your spare cash) open a personal pension.

Place money up to your income (less current pension contribs) in the pension. Use this pot to give you a 25% TFLS and the 75% to draw on later when needed.

jem16

First_past_the_post wrote: »

So on a survivor basis half of the full pension has seemed the sensible option.

Have you checked the rules? Often the survivor's pension is based on the full pension. Worth checking.

In terms of the full pension, £20k annum or lump sum option of £93k with £13k annum.

That doesn't look like 17:1. You are giving up £7k of pension to get £93k lump sum which is around 13:1. Personally, unless you need the money to spend, you are better off with the higher pension. With £120k savings I can't see a need for extra cash.

So with all the pension changes that are taking place should I rethink?

None of the pension changes affect Defined Benefit pensions so not an issue.

atush

But you could take advantage of the nwew freedoms if you open a PP now?

jem16

atush wrote: »

But you could take advantage of the nwew freedoms if you open a PP now?

Yes of course but I assumed the OP was having a rethink about his current pensions.

kidmugsy

atush wrote: »

Place money up to your income (less current pension contribs) in the pension.

I think you meant "earnings" rather than "income", atush.

OP, contribute the max to a pension for your wife: she will be able to withdraw it tax-free in the years before her state pension starts. Quick now, her 14-15 opportunity is about to vanish.


P.S. jem's quite right about checking. In my own case forgoing my lump sum wouldn't have got my widow an extra penny of pension. What did was "allocation": you should check whether your scheme offers it.

For illustration:
http://www.nhsbsa.nhs.uk/Documents/Pensions/Allocating_part_of_your_pension_to_a_named_dependant_factsheet_(V1)_08.2011.pdf

First_past_the_post

Have you checked the rules? Often the survivor's pension is based on the full pension. Worth checking.



Jem 16, Interesting point, I have now checked and you are right, in the scheme rules it’s worded ‘in addition to any of the above options’. So my basic premise of trying to do the right thing for the survivor was correct but my thinking was flawed and it makes no income difference. Thanks for pointing it out.
But you could take advantage of the new freedoms if you open a PP now?



Atush my savings have never worked as hard as I have. And I do recognise there is scope to do more. As said these are savings rather than investments so this is something I will investigate further. What are the main rules around contributions into a PP, both my wife and I contribute 7% into our company scheme. I am a higher rate taxpayer.

jem16

First_past_the_post wrote: »

What are the main rules around contributions into a PP, both my wife and I contribute 7% into our company scheme. I am a higher rate taxpayer.

You are able to contribute up to 100% of your earned income up to a maximum of £40k which is the annual allowance. You will need to deduct the amount you already contribute to your company pension.

From your point of view, as a higher rate taxpayer, you will gain more advantage as you can claim 40% tax relief - assuming you are into the higher rate tax band by enough. If you're only going to pay basic rate tax in retirement you will have gained.

Your wife's really works the same. If she will have some of the personal allowance still unused she would get 20% tax relief going in and 0% coming out.

First_past_the_post

P.S. jem's quite right about checking. In my own case forgoing my lump sum wouldn't have got my widow an extra penny of pension. What did was "allocation": you should check whether your scheme offers it.

Kidmugsy the scheme did offer 'The joint pension option' and 'The cash sum and joint pension option' however since 2012 the pension statments no longer include them. I will be requesting a new statement soon so will enquire further.

coyrls

jem16 wrote: »

You are able to contribute up to 100% of your earned income up to a maximum of £40k which is the annual allowance. You will need to deduct the amount you already contribute to your company pension.

From your point of view, as a higher rate taxpayer, you will gain more advantage as you can claim 40% tax relief - assuming you are into the higher rate tax band by enough. If you're only going to pay basic rate tax in retirement you will have gained.

Your wife's really works the same. If she will have some of the personal allowance still unused she would get 20% tax relief going in and 0% coming out.

You will need to deduct the amount you and your company already contribute to your company pension. Although you can carry forward any unused allowance from the previous three years.

jem16

coyrls wrote: »

You will need to deduct the amount you and your company already contribute to your company pension.

To clarify;

Only your contributions need to be accounted for in relation to 100% of earnings and tax relief.

If needing to consider annual allowance then both employee and employer contributions need to be considered.

Although you can carry forward any unused allowance from the previous three years.

Again for clarification;

This only applies to the annual allowance of £40k. You can't carry forward tax relief.