Pension question for my mum

matty2767

Hi guys

I wondered if you could give me a few pointers so that I can guide my mum please?

She is 65 and (I believe) reached state pension age last year, when she deffered it.

She is still working and earns about £12k/yr

She has two private pension pots £6k and £7k in.

She owns her own home and doesn't have a mortgage. I don't think she has any savings.

She appears well in her health but has some issues with her mental stability and it is difficult for me to understand what she plans to do in the future. I just get the answer "how long is a piece of string".

Initially what I wondered was if deferment of the state pension was the best thing to do, especially as her private pensions were so small. Maybe it would be better to have, and pay the SP into a private pension??.

Secondly, she is getting hung up on how small her pension is likely to be. Which, being honest, isn't going to be that great. Are there any tips you can give me to look into?

Sorry is all a bit vague.

Thank you

Matt

kidmugsy

The Extra Pension she could get from the deferral is, in general, very good value. But if your mother can expect to receive state "benefits" in retirement then it would be wise to understand how they can interact with the Extra Pension. There's not much point getting an Extra Pension that gets cancelled out by lost benefits.

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

LHW99

If your mum reached her SPA before April 2016, then deferring State Pension gets her an uplift in income equivalent to ~10% per year deferred (I think) when she finally takes it. So her deferring is a good idea if she doesn't need the money now.

grey_gym_sock

how much was her statement pension entitlement (before deferral)? the basic state pension (for people who reached the date they could draw it before 6 april 2016) was c. £119 a week (providing she has at least 30 years' NI contributions), but she probably has some additional state pension on top of that (if she has been employed).

is she spending about £12k a year now? if so, her state pension will increase by 10.4% for each year she defers it (not compounded), so how long would she have to defer to increase it to £12k, when it could replace her earnings?

i'm not saying that's necessarily the best strategy - just an idea.

the point that, if she retires on a low state pension, there are means-tested top-ups available, is more relevant if
a) it turns out that her current state pension entitlement is low; and
b) it's not realistic for her to keep working for much longer.

badmemory

If she is already 65 then I think she must have been deferring already for about 3 years, which even with only a basic state pension would take her up to the amount where pension credit is unlikely. (Equal to the new state pension). Her best plan is to get a pension statement. If I am right about the 3 years, then even if she has no additional state pension to include, her deferred pension will now be worth £8000 a year. It is a very good deal.

xylophone

If she retires and draws her state pension, she will be expected either to draw her private pensions to assist with her support or if not, to have them treated as notional income.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/417473/pension-flexibilities-dwp-benefits.pdf

http://www.ageuk.org.uk/Documents/EN-GB/Factsheets/FS48_Pension_Credit_fcs.pdf?dtrk=true

kidmugsy

badmemory wrote: »

If she is already 65 then I think she must have been deferring already for about 3 years, which even with only a basic state pension would take her up to the amount where pension credit is unlikely. (Equal to the new state pension). Her best plan is to get a pension statement. If I am right about the 3 years, then even if she has no additional state pension to include, her deferred pension will now be worth £8000 a year. It is a very good deal.

The £8k is less than the Personal Allowance vs income tax (currently £11k) which suggests a further idea. Could she afford to contribute to a personal pension of some sort? For example, could she use the tax-free lump sums from her existing pensions?
That will lead to a further tax-free lump sum in due course, and the possibility of drawing down taxable pension in future that will be taxed at 0% because she can ensure that her income will fall below the Personal Allowance.

If eventually she plain ends up without enough to live off in comfort in retirement, then it might be worth considering an equity release mortgage. With this type of mortgage you don't pay back monthly, you let the debt roll up until you die, or until you leave your house to enter long term care. Typically the house is then sold, the debt repaid, and the balance forms part of her estate. Nowadays these mortgages come with a "no negative equity guarantee". I have no experience of these mortgages myself, but I can see a case for sacrificing part (or even all) of the value of the house at death in return for some comfort in life.

Conceivably it might even be worth considering equity release to enable bigger pension contributions. I believe you can only get these mortgages through an adviser, so this latter idea could be analysed by the adviser I'd think.

grey_gym_sock

kidmugsy wrote: »

The £8k is less than the Personal Allowance vs income tax (currently £11k) which suggests a further idea. Could she afford to contribute to a personal pension of some sort? For example, could she use the tax-free lump sums from her existing pensions?
That will lead to a further tax-free lump sum in due course, and the possibility of drawing down taxable pension in future that will be taxed at 0% because she can ensure that her income will fall below the Personal Allowance.

it's a valid point that some tax relief on pension contributions could perhaps be picked up. but i think the way you're combining that with the state pension (i.e. drawing from a personal pension as a top-up to the state pension) isn't the best approach ...

a top-up of £3k a year from pension pots of £13k or so will only last a few years.

probably the best way to boost her pension permanently is to defer the state pension for as long as possible. meanwhile, she can fund her living expenses first (while she's working) from her earnings, and then (after stopping work) by drawing from her private pensions (25% of which is tax-free, and the rest taxable - but with the personal allowance - currently £11k - available to cover that once she's stopped work). £13k from existing private pensions could fund another year of so of deferment.

now, anything extra she can contribute to private pensions - even by taking the lump sums from the existing private pension in order to put it back into a pension again - will be boosted by tax relief, giving her a little more cash, letting her defer state pension a bit longer. IMHO, that's probably the best way to use this tax relief.

If eventually she plain ends up without enough to live off in comfort in retirement, then it might be worth considering an equity release mortgage. With this type of mortgage you don't pay back monthly, you let the debt roll up until you die, or until you leave your house to enter long term care. Typically the house is then sold, the debt repaid, and the balance forms part of her estate. Nowadays these mortgages come with a "no negative equity guarantee". I have no experience of these mortgages myself, but I can see a case for sacrificing part (or even all) of the value of the house at death in return for some comfort in life.

Conceivably it might even be worth considering equity release to enable bigger pension contributions. I believe you can only get these mortgages through an adviser, so this latter idea could be analysed by the adviser I'd think.

equity release is something to keep in mind. but the older you are, the better the payout you get from equity release (because what you are doing is selling your house - or part of it - at a discount to its full value, because the company buying it won't get it until you die; the older you are, the sooner they expect you to die, and so the smaller the discount). so i'd think this is a route to take only when you've run out of other options. since after delaying, it pays more.

badmemory

I think you really need to get your Mum to check out two main things. Firstly, what was the date that she could officially take her state pension (I suspect it may already be 4 years ago). Secondly, check how much additional pension she has. If she has £15 per week for example and her state pension age was 4 years ago, then her state pension will already be £10k a year. It doesn't take much to make a big change, which I am sure would be a big weight off her mind. If she's a widow then there may be some of her late husband's additional pension to inherit.

ETA Please also check that she isn't paying NI.

atush

I agree, you need to have her call DWP with you there, to alk to them and find out what her SP will be.

Second, she is 65 and has no savings. This VERY much worries me. If he is spending too much to save now, you coudl fall into debt as a pensioner?

She needs to work on for a bit, and bank all her income for a few months to build an emergency savings pot.

Sure, she gets 25% of the 2 small pensions tax free, but really these should be used to pay for any immediate needs such are replacement of white goods when they fail, and essential maintenance of her house etc.

matty2767

This is all really good, thank you very much everyone.

Let me find out some more details as you have suggested and hopefully be able to paint a better picture.