Contracted out years joke

lazer

jamesd wrote: »

A 10k occupational pension lump sum means that at least one of them was contracted out for many years and this is something that would be reducing that person's state pension, because the occupational pension would be paying it. That is, if it's a defined benefit one, like average or final salary.

If the occupational pension is not final or average salary it's worth saying more about just what it is. A lot of people just throw money away by buying an annuity when there are way better options available.

Do be sure that they know that pension contributions are a way for them to get free money from the government. Pay in £2880 net, tax relief even if no tax paid increases that to £3600 in the pension. They can then take out 25% of the 3600 tax free, £900, and pay income tax when taking out the remaining £2700. Assuming income tax is due on all of the £2700 because the full personal allowance has been used that'd be £2160 after tax. So pay in £2880, get out £3060, a gain of £180, or 6.25% of the amount paid in, over just a few weeks. The £2880 bit is for a person with no earned income. The Virgin Stakeholder pension is a good one to use for this because it has no charges.

Someone with a job can pay in the whole amount of their pay in the first year. If they take out any of the 75% they are limited to £10,000 a year or pay, whichever is lower, in later years. So it might pay to delay taking out the 75% part. You can't do this 25% only with the Virgin one.

A person who reaches state pension age before 6 April 2016 can get their state pension payment increased by 10.4% for each year they defer claiming it, or defer it after claiming. Can only defer after claiming once. For a person in normal good health it's a great deal. Funding this is a good use for lump sum money.

Its not final salary, it defined contributions - so no they weren't contracted out.

She works 30 hours a week on minimum wage so there isn't much available money for making contributions.
Will look into the deferring pension

jamesd

Defined contributions increase the options nicely because the rest of the pension pot is also available to fund new pension contributions for the quick gain and the deferring of the state pension for the longer term gain.

xylophone

Re deferring state pension

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

Your mother might wish to defer her state pension and put the private pension into drawdown?

http://www.thisismoney.co.uk/money/pensionfree/article-3007319/How-deferring-state-pensioncould-boost-retirement-income.html

She could use the 25% tax free lump sum in place of her earnings for the first year and leave the balance to grow in the drawdown scheme - if possible, she might wish to continue to contribute to the pension as above?


After a couple of years, she could bring her state pension into payment and top it up by drawing from the pension scheme?

PensionWise https://www.pensionwise.gov.uk/

lazer

xylophone wrote: »

Re deferring state pension

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/372517/dwp024-102014.pdf

Your mother might wish to defer her state pension and put the private pension into drawdown?

http://www.thisismoney.co.uk/money/pensionfree/article-3007319/How-deferring-state-pensioncould-boost-retirement-income.html

She could use the 25% tax free lump sum in place of her earnings for the first year and leave the balance to grow in the drawdown scheme - if possible, she might wish to continue to contribute to the pension as above?


After a couple of years, she could bring her state pension into payment and top it up by drawing from the pension scheme?

PensionWise https://www.pensionwise.gov.uk/

Thanks - the 25% lump sum would only be £2,500 so wouldn't replace the full earnings.
Not really much point in putting a £10k pension into drawdown, we are thinking about cashing it all in (I will review the tax situation but i think we should be ok, 25% tax free, and my Dad's £2k allowance can potentially be transferred to her, the remainder will be subject tax but hopefully not all of it, as she is taking a few months off unpaid this tax year so won't have used her full personal allowance.

This lump sum will then be spilt some used to enjoy retirement and some invested in S&S ISA or bonds of some kind, but £10k isn't much in savings when you have a house and a car, its emergency savings really which is why she is not keen to use it to replace earnings or buy additional penison etc.

I will review it properly before we make any decisions on what to do, although i did suggest deferring the pension before but she wasn't keen on the idea, says she would rather have the money now when she is young enough to enjoy it, than later when she is maybe not as healthy and not as able to enjoy it.

I am investigating all options for her to make an informed decision.

xylophone

I misunderstood your previous post when you mentioned

We are considering using the lump sum from the occupational pension to buy the extra amounts but as the lump some is only about £10k

I had thought that you meant that the pension commencement lump sum was £10,000.

The situation then is that your mother earns £10140 per annum (increasing in October when MW increases) and does not pay tax?

How long does your mother intend to continue to work?

As she is on a low income, it doesn't seem to make sense to pay any more in tax than she has to?

If she were to put the private pension into drawdown but defer the state pension until she stops work, she could take the tax free lump sum ( and add that to savings) and only as much of the pension as would keep her a non tax payer? The tax free personal allowance is likely to increase again in the new tax year.