Pension Advice

dunstonh

I have also started to question pensions in general, my father worked hard all his life and was told to cater for his old age in the form of pensions, which he did, but he is now taxed so heavily they are almost worthless and he struggles to manage financially.

Pensions are taxed exactly the same was as other income. You pay income tax on the income above your personal allowance.

If his pension is worthless then it means he paid peanuts into it. If you pay in peanuts, you get back peanuts. Pensions are not magic beans.

We have a large amount of equity in our property and minimal mortgage so would be financially secure in our retirement.

How much is the equity in your property going to pay you as an income?
If you have no personal provision because you have used it up during your working life, what other income will you live on in retirement beyond the £8000 a year state pension?

With regards to my father, it's high rent, higher cost of living, he is being taxed on his private pension so has less income than he thought he would after working 55 years, and he didn't retire till he was 70

That is a failure of planning rather than a failure of product.

I have asked for an update DB statement, the last one I can find was when I left the company 11 years ago which says I can expect to receive £9986 per annum and £29960 at 60 which is 4 years time

That is not an insignificant amount of income. With indexation, it will be higher than that. Most of the country would kill to have a guaranteed pension from one spouse paying that amount. Why do you think so little of it?

this will end next year and he will come back and work for a company of which he is director (a silent partner at present), this company will provide a salary + dividends + another pension pot. He will receive previous company pension of around 8k per annum in 2028, age 60, he has another small pension of 3k per annum, full state pension in 2035, plus whatever the pot is in new pension he will be paying into next year.

Again, pensions are a very tax efficient way to get money out of a company for directors. So, you need to be careful that your disdain for pensions does not transfer to your partner.

I am mindful that I am 7 years older than my husband and my health might start failing before his, so would like to enjoy life possibly buy a small place abroad for us and family to enjoy while we can which is why I was thinking of transferring out, taking advantage of the 25% tax free lump sum putting what's left into another income generation scheme plus we would add to this pot any equity released when we sell our property.

Women live longer than men. So, actually, your age gap, mortality wise, is not as likely as great as you think.

All these things you want, how will you pay for them if you have given up a great chunk of your income?

Taking the money out of the pension will hit you for a significant tax bill and "putting what's left into another income generation scheme" will not be as good as the pension. If you were worried about paying 20% income tax on the pension income, how do you feel about paying 45% tax (which is what it would be on most of what you propose)? i.e. losing almost half the pension in tax?

Theark

dunstonh

Thanks for your comments, certainly food for thought, it's not that I have a disdain for pensions, it's just that a see a section of people struggling in their later years even after careful planning, so I will try to address your comments.

If his pension is worthless then it means he paid peanuts into it. If you pay in peanuts, you get back peanuts. Pensions are not magic beans.

I understand this, perhaps it was the case or poor advice or who knows, I certainly know my father worked hard all his life and didn't retire till he was 70.

How much is the equity in your property going to pay you as an income?
If you have no personal provision because you have used it up during your working life, what other income will you live on in retirement beyond the £8000 a year state pension?

for this I would seek proper financial advice, as it stands now we have 450k equity, my husband has also 3 other pensions to collect at the appropriate time.

That is a failure of planning rather than a failure of product.

perhaps, but he did his planning on advice from professionals a long time ago, I see so many pensioners in the same situation.

That is not an insignificant amount of income. With indexation, it will be higher than that. Most of the country would kill to have a guaranteed pension from one spouse paying that amount. Why do you think so little of it?

I don't think so little of it, I'm just exploring options, I do know that the company and pension scheme are one of the better one's and my husband has exactly the same coming at a different time.

Again, pensions are a very tax efficient way to get money out of a company for directors. So, you need to be careful that your disdain for pensions does not transfer to your partner.

I don't think in a million years this would be the case

Taking the money out of the pension will hit you for a significant tax bill and "putting what's left into another income generation scheme" will not be as good as the pension. If you were worried about paying 20% income tax on the pension income, how do you feel about paying 45% tax (which is what it would be on most of what you propose)? i.e. losing almost half the pension in tax?

I was on the understanding you could get 25% tax free and reinvest the rest.

I am really on a fact finding mission, we are not frivolous people and have worked hard the last 15 years to be debt free and financially stable and in these years have lived very frugally.

We are just looking a the best options for our future

LHW99

I was on the understanding you could get 25% tax free and reinvest the rest.

Yes, 25% would be tax free, but the rest is taxed as income in the year you take it, so if that means you become a higher rate taxpayer, you pay higher rate on 75% of the money.
Then you could invest the rest, but why would you want to lose so much, when 100% is already invested?

OldBeanz

Theark wrote: »

...

We are just looking a the best options for our future

The professionals on here will help. They do like to de-bunk the myths and mistruths which have grown up around pensions. Their opinions may appear brusque but hang on in there - it is not personal.

One thing to note is that the Government has planned to look at retirement ages this year. As the consensus tends to suggest that they will give at least 10 years notice of any change then your retirement age in 2028 is not yet confirmed.

ThinkingOutLoud_2

LHW99 wrote: »

Yes, 25% would be tax free, but the rest is taxed as income in the year you take it, so if that means you become a higher rate taxpayer, you pay higher rate on 75% of the money.
Then you could invest the rest, but why would you want to lose so much, when 100% is already invested?

I think I know what is meant above, but this could be unclear to the OP.

If you take the 25% tax free - then the rest becomes taxable income as taken out.
The tax rates depend on your total income:-
- each of you will be able to earn from this a coming tax year £11,500 tax free (going up tp £12,500 if the government come clean on their promise)
- you will then pay tax @20% on earning above the £11,500 up to the higher earnings threshold (which is again promised to go up)
- and above that you pay higher rate tax (not on all of the 75% as might have been understood)

The same is true of you, me, your father and everyone else pensioner or not - we all pay tax on our income above that initial income threshold (always have and always will I reckon). Those who only have state pension and not other income will, of course, fall below the income level you pay any tax on.

If you do not take you tax free sum, then as you drawdown on your pension - 25% of what you take is tax free each year. The above applies to the rest.

jamesd

You're right that it is possible to take 25% as a tax free lump sum and reinvest the rest but there are some catches around the 75% that you need to know about:

1. If you take even a penny of the 75% out of the pension using flexible drawdown your annual allowance for pension contributions is reduced to £4,000 a year for life.
2. Any money taken from the 75% is taxable as income in the tax year in which you take it. So nil on the first £11,000, 20% on the next £32,000, 40% on the next part up to £150,000 total and 45% on the remainder. Also you start to have your 0% personal allowance band reduced above £100,000 so above that it's not nil on the first £11,000. What this does is make it very expensive to take it out quickly, but quite cheap or free to take it out slowly.

If you took a whole £300,000 as one lump sum in one tax year with no other income the tax due would be £87,350. If the pension provider didn't already have a tax code for you, the normal situation, they would deduct £99,679.16 of income tax using the emergency tax code and you'd be able to reclaim £12,329.16 from HMRC.

Take it in even chunks over two tax years and the tax due would be £36,700 each year, £73,400. Do it over three and it drops to £19,200 a year, £57,600 total. Over five years it's down to £7,200 a year, £36,000 total, and from then on the extra savings are lower because no part is taxed at 40% or higher any more.

What this illustrates is why it's normally far cheaper to buy with a mortgage. Given the size of the potential tax savings you can save a lot of money.

This is also why the usual approach is to leave the 75% invested inside the pension until needed.

This discussion is a bit moot because to do the transfer you'll need independent financial advice and it's unlikely that the advice will be to make the transfer.

jamesd

What you can do without advice is take the defined benefit pension at 55, usually.

There is normally an actuarial reduction for doing that in the region of a one to five percent decrease for each year before the normal retirement age of the scheme. So you'd be looking at potentially five to twenty-five percent reduction. The exact number depends on the scheme and is largely based on how long they think people in the scheme normally live. Smaller reductions if life expectancy is high, bigger if low, because shorter life expectancy means that each year early has a bigger percentage effect on the total payout over the life.

Combining this with a mortgage might be a sensible way to go. Depends just how big the reduction is.

Taking a lump sum from a defined benefit pension is usually a bad idea because the conversion rate - commutation rate - of income to lump sum tends to be bad, giving poor value for money. But not always, again the values depend on the specific pension scheme.

jamesd

If one of your grandchildren is or was under 12 when you were looking after them do ensure that you're claiming the NI credits towards your state pension.

For a person who was contracted out into a defined benefit pension for as long as you seem to have been it's unlikely that at 55 they would have a state pension entitlement of the full flat rate £155.65. Each year of credits or working from 2016-17 onwards increases it by 1/35th the flat rate until it gets to that cap. So do check that if it says the full £155.65 that's now, not assuming you continue to get more years. If it is with more years those credits are excellent value.

Theark

I'm even more confused which doesn't normally happen I'm usually pretty clued up.

Is the general opinion I leave as is.

I checked my details on HMRC and it said full pension of £155.65, I have worked full time since I left school at 16 only taking maternity leave.

My granddaughters are 3 and 2 and I will be looking after them for two days a week.

My husband has a really good job and good pension benefits to come, I was really looking at transferring mine out to give us more flexibility given that he will have good benefits anyway, but I don't want to jeopardise our future, we are not extravagant people but want to live comfortably in our retirement.

I also thank everyone for their input, it's given me a lot to think about

Theark

I should say my pension is with BT Scheme B