Pension encashment

rubble2

Still trying to get to grips with my pension options.

In addition to my State pension I have two other pension schemes:-
One is a defined benefits scheme which is projecting an annual pension of £6160 payable for life ( also a spouse's pension on my demise) I intend to leave this untouched after my SRA as I intend to carry on working after that date.

My second one is a money purchase scheme with Scottish Widows, this is projecting a pension income of £3720 again with a spouse's pension) or a reduced pension of £2790 with a tax free lump sum of £18,400. I have spoken to Scottish Widows and asked about the possibility of just taking the lump sum and leaving the rest of the pension in situ until needed, apparantly this is possible but I would need to transfer the remaining pension to a 'Flexible Drawdown Scheme' - he pointed me to a separate Scottish Widows website dedicated to this scheme.
I looked at the suggested website and it has raised a couple of questions, the pension seems to be divided into two sections, retirement planning and retirement income, I am assuming that in my example above the remainder of the pension pot after deducting the £18,400 would go into the retirement planning pot. If I should then decide to move some of that money from retirement planning into retirement income, then I can do so and get 25% of the transferred amount tax free. Is that correct?

Also, if I decide to take less than the full initial tax free amount as a lump sum (say £10,000) then all of the rest would go into the retirement planning part of the pension and if I later draw this down as income then as above only 25% of the new lump sum will be tax free?

So, taking the whole lump sum up front gives me £18400 tax free, taking £10,000 up front and the rest later as income gives me £10,000 tax free and 25% of £8400 tax free - is that also correct?

Hope that makes sense, I would appreciate any replies

dunstonh

My second one is a money purchase scheme with Scottish Widows, this is projecting a pension income of £3720 again with a spouse's pension) or a reduced pension of £2790 with a tax free lump sum of £18,400.

Remember that these figures are artificially low and not to be relied on.

I have spoken to Scottish Widows and asked about the possibility of just taking the lump sum and leaving the rest of the pension in situ until needed, apparantly this is possible but I would need to transfer the remaining pension to a 'Flexible Drawdown Scheme' - he pointed me to a separate Scottish Widows website dedicated to this scheme.

That option is called income drawdown. Hence you need a pension that supports income drawdown.

I looked at the suggested website and it has raised a couple of questions, the pension seems to be divided into two sections, retirement planning and retirement income, I am assuming that in my example above the remainder of the pension pot after deducting the £18,400 would go into the retirement planning pot. If I should then decide to move some of that money from retirement planning into retirement income, then I can do so and get 25% of the transferred amount tax free. Is that correct?

If you are going to take the whole 25% in one go, then 100% will be crystallised on day one and there wont be any uncrystallised funds. So, no dividing up needed.

If you are going to take occasional ad-hoc lump sums and nothing up front, then your fund would be split between uncrystallised and crystallised.

The 25% TFC can be taken up front, on an ad-hoc basis or as part of your income. However, you only get to take that 25% once.
e.g. If you took 25% of everything at the start then you never get another 25% tax free on that bit again as it would be fully crystallised. However, if you crystallised half the pot and took the 25%, you wouldnt be able to take another 25% on that chunk but you could on the other half that is uncrystallised. For monthly income, you only crystallise the income amount each month and 25% of that is tax free. The remaining fund is uncrystallised.

Be wary on buying insurance company own-products direct from the insurer. These tend to be expensive (often double the cost of the IFA product or the DIY market).

rubble2

Thank you for the detailed reply, I will spend some time trying to digest the information you provided. One initial question though - what did you mean by 'Remember that these figures are artificially low and not to be relied on.'?

Are you saying that I should expect a higher pension and hence potentially greater lump sum than those quoted by the provider?

AnotherJoe

Almost certainly those figures are assuming you'd buy an annuity, which is rock solid but gives poor returns as an absolute number.
If you have other sources of income you'd likely not buy an annuity but just draw the money down which would probably give you double that return (with an element of risk)

rubble2

AnotherJoe wrote: »

Almost certainly those figures are assuming you'd buy an annuity, which is rock solid but gives poor returns as an absolute number.
If you have other sources of income you'd likely not buy an annuity but just draw the money down which would probably give you double that return (with an element of risk)

Ok, I clearly know even less about pensions than I thought I did (and that wasn't much).
So, in the simplest of terms what is my best way forward? do I need to consult someone (IFA?) in order to get the best from my pension schemes or are there some simple steps I can take myself in order to see in layman's terms what the various options are and how to maximise my future income.

P.S. would the above also apply to my defined benefits scheme? is that also annuity based and should I therefore look at other options for that as well?

dunstonh

rubble2 wrote: »

Thank you for the detailed reply, I will spend some time trying to digest the information you provided. One initial question though - what did you mean by 'Remember that these figures are artificially low and not to be relied on.'?

Are you saying that I should expect a higher pension and hence potentially greater lump sum than those quoted by the provider?

In addition to what AnotherJoe has said, the assumptions use low growth rates (typically less than the average return relative to risk profile). They also have a deduction of 2.5% p.a. for inflation to give you the figures in todays terms. The annuity rate used is lower than current market rates and usually assumes joint life, 50% spouse with an annual increase. Just about the lowest annuity option you can get and barely anyone used that method. And that was before annuity became the minority option.

So, in the simplest of terms what is my best way forward? do I need to consult someone (IFA?) in order to get the best from my pension schemes or are there some simple steps I can take myself in order to see in layman's terms what the various options are and how to maximise my future income.

The two viable choices are either to DIY or use an IFA. Avoid the others (such as using the in-house product from the insurer or using an FA).

If you DIY well and get it right, it will be cheaper than an IFA. If you get it wrong, it can be more expensive. For example, I did a case recently where there was the initial advice charge with me but no on the DIY option she was considering. However, the ongoing charge with the option I was using was more than half the cost of the DIY option. The breakeven point was in year 3. With 25 years or so of retirement, going DIY and not doing it well would have been very costly. It's like anything you can DIY in life. If you can do it and do it well, then it's a cost saver. Do it wrong and it can cost you more.

P.S. would the above also apply to my defined benefits scheme? is that also annuity based and should I therefore look at other options for that as well?

No. There is no annuity with DB schemes. Although the income is typically increased annually.

GunJack

I would check that deferring your DB pension will actually give you an increase/bonus for doing so, not all/many will do. eg my CS one has no enhancements for not taking it on time, so if i left it I would be throwing money away even if taking it were to put me up a tax bracket...

rubble2

GunJack wrote: »

I would check that deferring your DB pension will actually give you an increase/bonus for doing so, not all/many will do. eg my CS one has no enhancements for not taking it on time, so if i left it I would be throwing money away even if taking it were to put me up a tax bracket...

I did check with the DB pension provider and they have confirmed that the benefits would increase if the pension is not taken at SRA.

Silvertabby

“ I would check that deferring your DB pension will actually give you an increase/bonus for doing so, not all/many will do. eg my CS one has no enhancements for not taking it on time, so if i left it I would be throwing money away even if taking it were to put me up a tax bracket...
Originally posted by GunJack ”

I did check with the DB pension provider and they have confirmed that the benefits would increase if the pension is not taken at SRA. Posted by rubble2

But by how much? If it's by inflation, then that would apply anyway - in payment or in deferment. If it's by late payment enhancement, then you need to ask by how much - as it may not compensate for not taking the pension at SRA and paying 40% tax.

In the case of the LGPS, late payment enhancement is added for pensions deferred beyond NRA (minimum of 65) - but the enhancement is minimal.

P.S. - just had a dig at the GAD figures for the LGPS and the post NRA/65 enhancement is 0.010% (simple) for each day of deferment - that's just 3.65% per year.

GunJack

Silvertabby wrote: »

But by how much? If it's by inflation, then that would apply anyway - in payment or in deferment. If it's by late payment enhancement, then you need to ask by how much - as it may not compensate for not taking the pension at SRA and paying 40% tax.

In the case of the LGPS, late payment enhancement is added for pensions deferred beyond NRA (minimum of 65) - but the enhancement is minimal.

P.S. - just had a dig at the GAD figures for the LGPS and the post NRA/65 enhancement is 0.010% (simple) for each day of deferment - that's just 3.65% per year.

This is exactly what I was getting at.....My CS would go up by CPI if I didn't claim it on time, but no other benefit/bonus to make not taking it worthwhile...

Silvertabby

“ But by how much? If it's by inflation, then that would apply anyway - in payment or in deferment. If it's by late payment enhancement, then you need to ask by how much - as it may not compensate for not taking the pension at SRA and paying 40% tax.

In the case of the LGPS, late payment enhancement is added for pensions deferred beyond NRA (minimum of 65) - but the enhancement is minimal.

P.S. - just had a dig at the GAD figures for the LGPS and the post NRA/65 enhancement is 0.010% (simple) for each day of deferment - that's just 3.65% per year.
Originally posted by Silvertabby ”

This is exactly what I was getting at.....My CS would go up by CPI if I didn't claim it on time, but no other benefit/bonus to make not taking it worthwhile... Posted by GunJack

Just to clarify - in the case of the LGPS a deferred pension beyond NRA/65 increases by the 3.65% per year enhancement AND inflation. But as the inflation increase also applies in payment, the only benefit in deferring is the 3.65% per annum late payment enhancement.

Even if the pension was taken at a 40% tax rate, you'd be giving up 60% pension payment for 3.65% increase. Based on these figures, OP should be able to work how how long it would take him to break even.