Pension Advice

dunstonh

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.

Or it could be the very common scenario of starting a pension but never increasing it. For example, when personal pensions first came out in 1988, many people paid in £20-£30pm. That was a good contribution back then (a tank of petrol was under a £10 and average wage under £10k). However, many failed to increase their contributions despite inflation and what started as a good became a really low amount. Also, in the period, as people lived longer, they needed more money to make it last longer. So, contributions had to increase. If you didnt increase, you ended up with less.

The economy use to be boom/bust on a regular basis. Inflation was higher. So, investment returns were higher (although broadly similar net of inflation). These things need ongoing updates and increase to payments.

Most people who have got less out of their pensions than they thought is usually down to inconsistent planning. saw someone once and never gave it much of a thought since. Started paying in £30 when a tank of petrol was under £10 but still paying in £30 when a tank of petrol was over £60.

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

Not on a final salary scheme. That has no investment element. There isnt 25% either. It is calculation that is designed to largely equate to the 25% that money purchase schemes have.

If you cashed it in, like you suggested in post 1, it would require transferring to a personal pension and then cashing it in for a massive tax hit. It is possible to leave the bulk of the money in a personal pension and avoid that tax.

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

My concern perhaps is that you are looking at potential solutions but not necessarily working out your objectives first. There are a lot of options. Some good. Some bad. Some really really bad. The best thing to do is look at what you want to do and then filter the options to can fit with your objectives.

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.

Dont forget James that the personal allowance would be reduced to zero given the amount being drawn.

Theark

atush
Well renting in general can mean a poorer retirement- is he renting privately? Has he been on a list from council accommodation? Sheltered housing? If you yourself own, you take high private rents out of the equation.

Has he checked with age concern or others to see he is claiming all he should be doing? such as reduced rates, etc?

He rents from the local authority in london where rents in general tend to be high, I think his rent is about £180 a week, looking into figures it would seem if he was just getting state pension he would be much better off, don't really know how it works, it seems unreal to me

Theark

My concern perhaps is that you are looking at potential solutions but not necessarily working out your objectives first. There are a lot of options. Some good. Some bad. Some really really bad. The best thing to do is look at what you want to do and then filter the options to can fit with your objectives.

The thing is I don't want much, I want to be able to pay my bills, buy food, treat my grandchildren and go on holiday. Thinking about it seriously I would like to afford my granddaughters opportunities like university, if they want it. I come from a really poor family and have clawed my way to where I am now through hard work (this may sound tacky). I have never claimed any benefits in the whole of my life so far, BUT, on my soap box now I know people that live better lives off the state and will continue to do in old age. Where in the justice in this, you work hard all your life only to see someone that hasn't be better off than you

dunstonh

Theark wrote: »

He rents from the local authority in london where rents in general tend to be high, I think his rent is about £180 a week, looking into figures it would seem if he was just getting state pension he would be much better off, don't really know how it works, it seems unreal to me

Under the old state pension, there was a pension credit system to bring people up to a certain level of income. However, it did not penalise people who had made individual provision for small amounts. So, he cannot be worse off through his pension.

The new state pension (which you are on) aims to reduce the number of available benefits.

BUT, on my soap box now I know people that live better lives off the state and will continue to do in old age. Where in the justice in this, you work hard all your life only to see someone that hasn't be better off than you

The benefits that bring them to a certain position but they are never going to live better lives than you can afford. The new state pension and reduced benefits system will aid that.

coyrls

Theark wrote: »

I know people that live better lives off the state and will continue to do in old age. Where in the justice in this, you work hard all your life only to see someone that hasn't be better off than you

What do you mean by "know" and what do you mean by "better lives" and "better off"?

Theark

The benefits that bring them to a certain position but they are never going to live better lives than you can afford. The new state pension and reduced benefits system will aid that.

What reduced system is that, I know for a fact that my father's next door neighbour has an income exceeding my father via the state in respect of additional benefits that my father cannot get because of his pensions.

Theark

What do you mean by "know" and what do you mean by "better lives" and "better off"?

OK I know my father's next door neighbour only has his state pension, but he gets lots of top ups, his council tax is supplemented as is rent and various other things, he has far more disposable than some one who has worked all their life and saved for their retirement. And I have seen this pattern a lot

jamesd

dunstonh wrote: »

Dont forget James that the personal allowance would be reduced to zero given the amount being drawn.

Yes, it will be. I used the Invidion calculator which does that in its calculation of the tax cost.

FLEXI-ACCESS DRAWDOWN PENSION ENCASHMENT TAX CALCULATION

Your Gross Income for the current tax year:£0.00
Your Current Personal Allowance:£11,000.00
 
Total Value of Pension Funds to be encashed:.      £300,000.00
Tax Free Lump Sum taken from Pension Funds:.       £75,000.00
Residual Pension Funds potentially subject to tax: £225,000.00
Total Taxable Income:.                             £225,000.00

Income Tax Details

Personal Allowance.                        Allowance reduced to 0.
20% Basic Rate Tax on £32,000.00.          £6,400.00
40% Higher Rate Tax on £118,000.00.        £47,200.00
45% Additional Rate Tax on £75,000.00.     £33,750.00
 
Total Tax Bill:. £87,350.00
 
This is comprised of: 
Tax on earned income:.   £0.00 
Tax on pension income:.  £87,350.00

When explaining the effect of splitting across more than one tax year I didn't adjust for anticipated increases in personal allowance, though.

jamesd

Theark wrote: »

Is the general opinion I leave as is.

It normally is but that's always subject to the objectives of those involved.

What you're after isn't unreasonable and if you were to take the pension early you should be OK on the combined lower pension and state pension even if we ignore your husband.

Transferring and taking as a lump sum doesn't look like a good move for you.

Given what you both can expect in pensions it doesn't seem unreasonable to take yours early and use a mortgage to do what you have described. Maybe not best for income, but OK.

dunstonh

Theark wrote: »

What reduced system is that, I know for a fact that my father's next door neighbour has an income exceeding my father via the state in respect of additional benefits that my father cannot get because of his pensions.

It can depend on point of retirement. Go back to the old minimum income guarantee and that did penalise people with small pensions or other small incomes. However, pension credit did not penalise them on a £1 for £1 basis. Now we have moved to the single state pension, the means tested benefits are fewer.

he has far more disposable than some one who has worked all their life and saved for their retirement.

But the low income you suggest your father is on would hint that he made very minimal savings for retirement and effectively fell in the gap where he didnt do enough but did too much. Something that wont impact on you the same way