Cash or Extra Pension

benny5

Just had a pension quote and considering the options of pension or reduced pension plus cash.

Given my age (58) the offer is;

A full pension at 65 of £10,090.

Or
An immediate pension of £6,700.

Or
A maximum cash sum of £32,517.
Plus an immediate (reduced) pension of £4886.

The big question is which of the latter two offers is the more attractive given my aversion to risk.



Thanks Benny

EdInvestor

Waht other pension income are you expecting? What other savings do you have?

benny5

Financial position – briefly;

No Mortgage/No debts.
Cash ISA’s £29K
Some Shares £20k
Recent State pension estimate of £7,500.
AVC Fund £22K
SERPS Fund £32k
Redundancy package of £50k – hence the early retirement. (Of this £50k considering adding the taxable portion £20 to the AVC.)

Decisions, decisions.

Any view welcomed.

Regards

Benny

benny5

Anyone with are views ????

EdInvestor

Option 1 isn't good as you will lose out through age allowance clawback on taxable income over 20k.

Whether you fancy options 2 or 3 really depends on how much of a cash pile you need to feel comfortable and how long you reckon you will live to collect the pension income.

Also if you are married taking the cash is often sensible as the pension income will normally be halved after your death.Plus the cash lump is tax free of course, and if invested properly the income can be tax free too - not the case with the pension.

benny5

Thank you Edinvestor for that insight.

As a complete novice to this, what is the precise impact of “ age allowance clawback on taxable income over 20k.”.

At today’s rates, I have guesstimated that, by deferring all pensions until 65, I could have a total of circa £20k. Should my current strategy of living of my redundancy/interest from savings/share Divi’s and the wife’s income fail, then I may have to call on the pension payout earlier.

I am currently awaiting further information from the pension provider as to whether the rules will allow ‘deferred’ early retirement. By that I mean not taking option 2 or 3 at this stage but at some point after I have left the company and before 65.

Regards


Benny

EdInvestor

As you know pension income is taxable, while income from cash and investment ISAs is not: nor (effectively) is dividend income from shares or equity funds as long as total income is below 20k.

At this point the age allowance (for 65+) is reduced to the personal allowance level at a punitve rate of tax in the 33% range.This goes on between 20 and 25k.So you want to avoid having taxable income (ie pensions) in this range.

If I were you I would maximise cash and plow it into your stocks and shares ISA, so as to get as much income completely tax free as possible.Age allowance will be going up to 10k over the next few years which will mean your state pension and the AVC/SERPS pensions should be tax free.

So I'd suggest keeping the main pension lowish and maximising cash.It would seem you could already get a 100k fund which will generate 5k in income per year.I wouldn't put the rendundancy money into the AVC.

Have a look at the High Yield Portfolio idea for some of your money.It's ideal for long term income investors who can take some equity risk - the income is stable, and no tax payable as long as you stay under the magic 20k (is that enough?)

http://www.fool.co.uk/Investing/guides/The-High-Yield-Portfolio.aspx

benny5

Thank you so much, you have provided a multifold increase in my knowledge in this area. I am very greatfull.

Just one final point. You say no further additions to the AVC's, I am assuming the suggested overall long term return on this would outweigh the initial tax hit of 40%.

Regards

Benny.

EdInvestor

benny5 wrote: »

Just one final point. You say no further additions to the AVC's, I am assuming the suggested overall long term return on this would outweigh the initial tax hit of 40%.

Does your occupational scheme allow you to notionally amalgamate the f/s fund and the AVCs and then take your tax free cash entirely from the AVCs?
If so this is an excellent deal and you should go for it.:)

Otherwise the AVC is far too inflexible and the investment options usually quite poor these days - better to use a SIPP/ immediate vesting pension if you must go into the pension environment.

However, given the tax downside and your immediate needs I would tend to take the tax hit and then reinvest the money for max flexibility for the time being, keeping all options open..You can always pick up 22% tax relief later if you want to, after all.

benny5

EdInvestor wrote: »

Does your occupational scheme allow you to notionally amalgamate the f/s fund and the AVCs and then take your tax free cash entirely from the AVCs?
If so this is an excellent deal and you should go for it.:)

Unfortunately not.

My statement did however include the following 'I would like to point out that should you decide to take cash from your AVC’s you would have to take a cash some from your main benefit of at least the same proportion’.



I assumed this is standard for most pension.