Advice please!

Evolwen

Hi all

My wife has recently been dismissed from work (very harshly but not what this post is about). She's been working part-time for a number of years and has around £11k in her works pension pot. As she is just over 55 she can now chose what she wants to do with it.
We're around £700 per month worse off due to dismissal and are contemplating cashing the full pension in; given the relatively small value, I believe the tax liability will also be small.
The cashed-in pension could be used to pay off an existing loan (around £8k left) and would then free up around £450 per month.
This would make us around £250 per month worse off, which is just about manageable. My wife is still looking for another job and any excess left from paying the loan off could fund us until she finds employment. If that takes too long then we will go and speak to the bank about changing / reducing mortgage payments etc.
Although we'd be sacrificing her pension, I think our short-term needs have to take priority.
She hasn't gone onto Job Seekers Allowance yet, though the entitled web site says she should get some contribution-based benefits. Would this be affected by cashing in the pension?

So any advice you wonderful people out there could offer would be much appreciated. Please let me know if there's any more information you need.

Kind Regards
Rich Newlove

jamesd

Assuming she has sufficient income tax personal allowance left she can make at least £720 a year by continuing to make pension contributions then taking out the money.

For the current year she can potentially make more because the limit is her earned income or £3600, whichever is higher.

Contribution-based JSA is might not affected [STRIKE]in any way[/STRIKE] by savings, including pension money. [STRIKE]It is not means tested and the main requirement is simply to be seeking work.[/STRIKE] She should apply as soon as she can. See the contributory benefits section at the end of this document for how the rules work and note the importance of the money being capital, not income, based on whether it's taken regularly mainly.

When it comes to taking her pension, it's probably best not to take it all in the current tax year. 25% is a tax free lump sum. The remaining 75% is taxable income in the year in which it is taken. If she has a low enough income in the tax year she can arrange to get it all out tax free within her personal allowance. She's probably used much of her allowance this tax year but next she should be in a better position to get it with no tax, if planning for the pessimistic case where she might not yet have a new job.

The interest rate on the debt is a factor. So are things like possible ability to get a 0% balance or money transfer or purchases credit card that can reduce the cost of the debt. With 0% deals as long as 40+ months they can be a great tool. She can't qualify while unemployed but you might.

xylophone

http://researchbriefings.parliament.uk/ResearchBriefing/Summary/SN03122

The above may be of interest.

See also "Contributory Benefits" in

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

If your wife's pot is £11,000, she could take £2750 as a tax free pension commencement lump sum - the balance would be treated as income in the tax year taken.

Perhaps she could consider transferring the pension to a SIPP with Hargreaves Lansdown, taking the lump sum and then not drawing any income or only the equivalent of under £50 a week until she found a job or until her right to JSA conts was exhausted - six months?

You might check with a Benefits Adviser at CAB?

xylophone

Contribution-based JSA is not affected in any way by savings, including pension money. It is not means tested and the main requirement is simply to be seeking work. She should apply as soon as she can.

See links above - it would appear that

"Contribution-based Jobseeker's Allowance is a benefit for unemployed people with a sufficient record of National Insurance contributions. It is not means-tested as such, but the amount of contribution-based JSA payable is reduced on a pound for pound basis by any regular income the claimant receives from an occupational or private pension in excess of £50 a week."

jamesd

There isn't any plan to take an income from the pension. The plan is to take one or more lump sums. As the document says: "Any cash lump sum you take that is deemed to be capital will not affect entitlement to a contributory benefit" and "If you or your partner do take money from your pension pot, it will be treated as either income or capital, depending on, for example, how regularly you withdraw it."

Thanks for the correction, though! I've edited my earlier post even though it was written with the lump sum rather than income plan in mind

Another potential option, of course, is just to increase borrowing while claiming and then later use the pension to pay off the borrowing.

xylophone

There isn't any plan to take an income from the pension

As far as I understand it from the first post, the original idea was for the wife to cash in the whole of the £11,000 pension pot almost immediately?

She would then receive the PCLS but the balance would be regarded ( certainly for tax purposes) as income for the current tax year.

It is true to say that when the cash appeared in her bank account it would be as a lump sum, but the DWP could regard anything above the PCLS as income - it would seem (from DWP guidance), to be up to the Decision Maker?

In the OP's wife's position, I'd check the situation carefully before taking any action.

Evolwen

Thanks to you both for the rapid responses - much appreciated.
Although it would be great if she could continue to make pension contributions, we simply don't have the funds available do that. Her earnings since April are around £3k, which is why I thought the tax liability on the cashing the full pension out would be quite small; £2750 is tax free, so she'd only be paying tax on the remaining £8k. If her allowance is £11k, the tax would be negligible? Please correct me if I'm wrong on that.
If she receives the full amount (which I assume is the PCLS?), then what would the balance be?

xylophone

See http://adviser.royallondon.com/pensions/technical-central/information-guidance/benefit-options/emergency-tax-and-lump-sum-withdrawals/

badmemory

Don't forget that JSA is taxable income.

sleepless_saver

If she's been dismissed for something like misconduct she might well have a sanction applied and so not get the JSA right away. https://www.turn2us.org.uk/Benefit-guides/Jobseeker-s-Allowance-(JSA)-sanctions/What-are-JSA-sanctions
She should still apply for it now though, as jamesd said.

jamesd

xylophone wrote: »

She would then receive the PCLS but the balance would be regarded ( certainly for tax purposes) as income for the current tax year.

Tax purposes and benefit purposes are different. A lump sum payment isn't income, it's a lump sum. Doesn't matter whether it's taxable or tax free, it's still only a payment or two or three, not an ongoing regular thing.

xylophone wrote: »

It is true to say that when the cash appeared in her bank account it would be as a lump sum, but the DWP could regard anything above the PCLS as income - it would seem (from DWP guidance), to be up to the Decision Maker?

If it's a payment or two on a non-regular schedule the decision seems pretty clear.