25% tax-free option?

twiglet98

I am female and will be 60 next week.

I have two small company pension schemes, the better one (apparently) is from 8 years employment in the insurance sector, which I left 30 years ago. It's a defined benefit scheme and contributions ceased when I left.

I've been paying £10/week into my current employers' scheme for 16 years and the policy value is about £23000.

I spoke to the pensions consultant my employers use a few months ago and he recommended leaving the older (better) scheme untouched for now, certainly not merging them, and letting it grow at least until state retirement age at 66, and using the current scheme to take a lump sum.

I need a lump sum very soon and I thought I could take 25% of the present 'pot' tax-free now, but having just frazzled my brain reading both companies' websites I wonder if I misunderstood? Can I ask to withdraw £5750 and know it will be tax-free, or would I have to take the whole £23000 for that to happen, and pay tax on the rest of it?

If I ask for £5750 and for the remaining 75% to be left so I carry on paying in to it, would I actually only get 25% of the £5750 tax free?

I earn about £17000 so I'm a basic rate taxpayer and have no other income.

Does anyone know how long withdrawals take to process, and if I have to apply in writing or by phone? No provision to do so on the website.

zagfles

You'll have to ask the scheme what they allow. The pension freedoms allow you to take the 25% tax free and leave the 75% in the fund "crystallised" (subject to tax when you eventually draw it).

Further contributions would then need to be separated into an "uncrystallised" pot, so you can get 25% tax free on that pot too.

But just because the new pension freedoms allow it doesn't mean every scheme will. I'd guess most employer's schemes won't. You might be able to do a partial transfer out to somewhere offering all the flexibilities eg a SIPP provider. But again if you're still contributing the employer might not allow it unless you leave the scheme, then you'd miss out on the employer contributions.

So you'll have to ask your employer.

xylophone

I have two small company pension schemes, the better one (apparently) is from 8 years employment in the insurance sector, which I left 30 years ago. It's a defined benefit scheme and contributions ceased when I left.

What is the Normal Retirement Age for this scheme?

See http://www.which.co.uk/money/retirement/guides/i-want-to-carry-on-working-in-retirement/

"Deferring an occupational pension is less financially advantageous, in that your entitlement may not increase to compensate you for 'lost' years. Scheme rules govern the point at which you stop accruing further pension and many defined benefit (final salary) schemes apply a pension age at which point you are expected to start claiming."

Check your personal situation with regard to deferring beyond normal retirement age - some schemes offer a late retirement increase, others don't.

I need a lump sum very soon and I thought I could take 25% of the present 'pot' tax-free now, but having just frazzled my brain reading both companies' websites I wonder if I misunderstood? Can I ask to withdraw £5750 and know it will be tax-free, or would I have to take the whole £23000 for that to happen, and pay tax on the rest of it?

You are still contributing to this scheme? Will it permit access to the pension while you are still contributing?

Or is the intention to explore transferring it into an arrangement which will allow drawdown and then continuing to contribute?

twiglet98

Thank you - the current one is with Clerical Medical, taken over by Scottish Widows, and the SW website doesn't have an option for CM group scheme members to register for individualised scenarios. The older scheme is with L&G, and has a more detailed online service. I'll have to ring CM I think.

The most recent Scottish Widows booklet sent to me a few weeks ago outlines 'Flexible-Access Drawdown' and 'Full Pension Encashment (FPE)' as possible options for a 25% tax-free lump sum, along with Annuities, and says any combination of options can be considered. I just wondered if 25% of the total pot from the smaller scheme can be taken now and the rest left, either to grow but with no further contributions, or for me to keep adding to it, or if I can only get the full 25% of the pot if I actually withdraw and pay tax on the other 75% at the same time.

twiglet98

Sorry xylophone, cross posted.

Normal retirement age is stated as my 60th birthday, next week, on both schemes. I will have to find out if my contributions to the present scheme stop then. CM's last letter stated that if they don't hear from me before mmy current retirement date they'll change my retirement date to 75. I certainly anticipate working another 6 years until state retirement age, and probably beyond then if I'm able to do so.

xylophone

Normal retirement age is stated as my 60th birthday,

Then check with the administrators of the defined benefit scheme whether there will be any late retirement increases if you defer this pension beyond scheme retirement age.

I cannot now find the post but I remember the discussion concerning a chap who had thought that by leaving his occupational scheme pension undrawn beyond NRA he would benefit from such increases - his particular scheme did not pay any.

You will need to check with SW what options are available for going into drawdown, taking a PCLS and no income and continuing to contribute.

Will your employer continue to contribute?

xylophone

Incidentally, have you obtained a new state pension statement?

https://www.gov.uk/government/publications/application-for-a-state-pension-statement

twiglet98

Thank you for giving me so much to think about, I've been a bit of an ostrich and should have addressed it weeks ago.

I don't know if my employer will carry on contributing to the current scheme with CMedi(SW) beyond my birthday, I assume they would if I were to do nothing and CM change my retirement date to age 75. What an awkward conversation to have with the boss, perhaps the payroll person can find out for me. It's a fairly young company and I might be their first retiree!

The administrators of the older scheme with L&G wrote to me a year ago enclosing a booklet called A Guide To Your Retirement, all I've had since then is information on activating their new online tool. I've set that up but it says Please note that if your intended retirement date is more than 12 months ahead we are unable to provide accurate quotes so please refer to the modeller
so that's no help really if I'm hanging on until state pension age or even beyond. I will have to take a half-day off and ring both companies to see what can be done to release a lump sum as soon as possible.

Thanks too for the link for a State Pension forecast, I haven't had one but as I'm expecting to divorce before I retire the basic info they are asking for will have changed.

jamesd

xylophone is right that for the older and better scheme you need to check what will happen after normal retirement age. Often there is no increase if you don't start to take the pension so all waiting does is throw away the money that you would have received. In others it does increase but the increase may not be worth having. In general it's best to take a defined benefit pension at the scheme's normal retirement age and then if it's not needed just use the money for pension contributions. that gets you the tax relief and further potential for the newly invested money to increase, or decrease, in value.

An adviser would have been supposed to check what happened after NRA but it's possible they didn't and you should do that check yourself to ensure that it is right. They might not have been providing actual advice, for example, and might have wrongly presumed hat it had an NRA of state pension age (an unlikely situation). The letting it grow wording implies to me that they may have assumed it was a defined contribution scheme, not defined benefit, though some DB do grow after NRA. Just check to be sure and definitely take it if it doesn't increase after its NRA.

An employer is required by auto-enrolment rules to continue enrolling and keeping enrolled any otherwise eligible people until they reach their individual state pension age. The retirement age specified makes no difference to this requirement. Otherwise eligible means things like earning enough. After state pension age a person can ask to be enrolled and if they are eligible the employer is required to enrol them. The employer has no discretion in this, it's the law.

It is common for employer defined contribution schemes not to allow people to take benefits like a lump sum while they are paying in. Sometimes it is possible to transfer out to another scheme while still being a member. Other times that is not possible and the workaround is to briefly stop being a member, transfer then enrol again. Check with your scheme to find out what is needed to get it done and they should be able to tell you what the specific rules say. They can't advise you what to do but they do have to tell you what the rules permit as the way to get it done.

Assuming the likely case you'll have to transfer. Then you can use a scheme which allows income drawdown to take the 25% tax free lump sum and leave the remaining 75% invested. If you're lucky you'll be able to do it with the current provider, SW.

There things will probably not have an effect on your divorce financial settlement because actual and potential pension income, lump sums and the transfer values of defined benefit pensions for both people are already normally included in the calculations of the settlements. However you should make your solicitor aware of your plans so they can properly consider if they do make any difference.

xylophone

https://www.pensionwise.gov.uk/divorce may be worth a look.

Your starting amount for NSP will already have been calculated. It is worth getting a statement now.

You may find that your DB pension will offer you the option to take a PCLS and this may be enough for your current need for a lump sum - the ongoing pension would supplement your income.

It may be that you would not need to access your DC pension but could simply carry on contributing as heretofore until you wish to access it - check your options with SW.

atush

you mention divorce, you do know that pensions should be split before taking them?

What pensions does your spouse have?