Should mum cash in a small pension?

Lu_Lu

my mum has a very small private pension which is worth around £3500 after tax. She is tempted to take the cash now as she is 60 and it would help her to pay off some debts and do a bit of work on the house.

She doesn't have any other private pensions and will be attempting to live on the state pension when she retires. So whilst the money might be of benefit now it may not be worth enough when she does retire.

She's asked for my advice but I know so little about pensions and the new rules that I have no idea how to advise her.

I know you're not financial advisors but wondering if anyone with a bit more pension savvy might have some ideas?

NorthernMonkey1

If she is paying a high rate of interest on the debt, (>10%) then this is greater than any return she would hope to get on the pension.




If this is the case, then cashing in and paying of debts is probably a good idea

xylophone

If your mother is working, does her employer not provide a pension?

Re new state pension https://www.gov.uk/new-state-pension/overview

Your mother can obtain a statement.

With regard to the private pension, she is aware that after taking the 25% tax free lump sum, the balance is taxable as income in the year that she takes it?

She may need to reclaim overpaid tax.

http://www.moneymarketing.co.uk/news-and-analysis/pensions/hmrc-unveils-new-forms-to-reclaim-tax-on-pensions/2020182.article

sandsy

Is this private pension already in payment then?
Is it from a final salary scheme or from an annuity income purchased with a personal pension pot?

Lu_Lu

NorthernMonkey1 wrote: »

If she is paying a high rate of interest on the debt, (>10%) then this is greater than any return she would hope to get on the pension.

If this is the case, then cashing in and paying of debts is probably a good idea

I think one of them is a credit card about to come out of a 0% deal and the other one is a loan for getting some work done on her house, buti suspect this is at 0% I'd have to check with her.

xylophone wrote: »

If your mother is working, does her employer not provide a pension?

Re new state pension https://www.gov.uk/new-state-pension/overview

Your mother can obtain a statement.

With regard to the private pension, she is aware that after taking the 25% tax free lump sum, the balance is taxable as income in the year that she takes it?

She may need to reclaim overpaid tax.

http://www.moneymarketing.co.uk/news-and-analysis/pensions/hmrc-unveils-new-forms-to-reclaim-tax-on-pensions/2020182.article

I believe that as she is on minimum wage she has opted out of the workplace pension. The figure I've quote above is after she has paid tax on it. The whole of the pension is only worth just over 4k at the moment.

sandsy wrote: »

Is this private pension already in payment then?
Is it from a final salary scheme or from an annuity income purchased with a personal pension pot?

It's a dormant scheme she paid into 20 years ago and then stopped contributing to so its just sat with a company, not being paid to her at all.

Thanks for your replies!

xylophone

I believe that as she is on minimum wage she has opted out of the workplace pension.

And thereby loses an employer contribution?

https://www.gov.uk/workplace-pensions/about-workplace-pensions

If she paid into a workplace pension and thereby reduced take home pay would she be entitled to working tax credit?

She should get a state pension statement to help with planning.

jamesd

One thing she could do is defer her state pension. It will be increased by 5.8% for each year she defers. So she could use this money to allow some deferring for part of a year to get a pro-rated increase.

Before deciding to do that it's necessary to work out whether she will be entitled to means tested benefits, because if she is, the higher state pension would reduce her entitlement to those benefits.

xylophone has made important points about pensions and working tax credit. Pension contributions reduce income for WTC calculations. So she might not only be not getting any employer contribution, she may also be losing effectively free contributions if her own money paid in is topped up by WTC. She could easily end up with effectively free pension contributions to get her more pension money to take later.

sleepless_saver

jamesd wrote: »

One thing she could do is defer her state pension. It will be increased by 5.8% for each year she defers. So she could use this money to allow some deferring for part of a year to get a pro-rated increase.

Before deciding to do that it's necessary to work out whether she will be entitled to means tested benefits, because if she is, the higher state pension would reduce her entitlement to those benefits.

xylophone has made important points about pensions and working tax credit. Pension contributions reduce income for WTC calculations. So she might not only be not getting any employer contribution, she may also be losing effectively free contributions if her own money paid in is topped up by WTC. She could easily end up with effectively free pension contributions to get her more pension money to take later.

A lot of the advice in this thread makes perfect sense usually but not so much for the OP's mother who is 60, has virtually no pension provision apart from state pension, is on minimum wage and, I assume from OP's post, does not have a partner.

There is little benefit to her in starting to put money into a pension at this late stage. She won't get much for it and it could stop her being entitled to benefits which would make her later life a lot more comfortable (this assumes benefits still exist and that her state pension is below the qualifying level for pension credit or its replacement).

It's really not clear that she has enough money to defer if she has debt which needs to be paid off and presumably little/no savings. As her state pension age is after April 2016 the potential benefits of deferring are a lot less than they are now. Plus for pension credit she would be treated as if she had not deferred so could end up a lot worse off during the deferral period. It all depends on the actual figures of course.

If she is on minimum wage and getting less than about £12k a year it will be worth her while applying for working tax credits anyway whether she contributes to a work pension or not.

jamesd

That's why I included cautions about benefits checks. It is possible that there is little to gain from pension contributions and that the pension pot could be exhausted in paying off debts. However, I do think it's worth encouraging checks of these things, because there is the potential to improve her income.

Lu_Lu

Thank you all for taking the time to reply. I'll look into the workplace pension thing with her more but I think she believes it's too late to start contributing now as she plans on retiring as soon as she can afford to. Perhaps inputting into a pension for the next 7 years will be a good thing anyway.

Although she is earning min wage she does a lot of hours and so it above the threshold for WTC and doesn't claim any other benefits. She did get WTC in her old job but these stopped in 2013.

I'm thinking she maybe needs some proper financial advice but she doesn't see the benefit from such small amounts and can't afford to pay for an IFA at the moment. No, she doesn't have a partner at the moment and her elderly mother lives with her. She does have a property and worst case will be selling the house to help fund her retirement, although that won't last long.

atush

In your mothers case, it could be worth her taking the pension to pay off debts, but I have a few concerns.

Has she gotten a state pension forecast? If so hwo much will she get? I can't help but feel if she is in debt now, she will be in even worse debt trying to live within her means going forwards, esp once on state pension.

If she does take it, she must really join her Workplace pension to get a little somethign extra later on. Esp as there is free money going in from the employer. If she cant afford to pay the 1% of her salary into the pension , she can't afford to live ont he SP and therefore cant retire.

when she reaches SPA, and if isn't on any benefits at the tinmes, she should probably (unless health poor) try and defer her SP for a few months/year so ti will be larger? Otherwise, I can see her being forced to work well into old age if a job is available.