Making the best of a bad situation..(Pension/Right To Buy)

domjon1

well a relatively bad situation...there is of course always someone else much worse off.

A tentative, general inquiry this really...the father in law is coming up to retirement age in February of next year and I've been asked by the mother in law to give them some help working through the pensions minefield.

FIL's forecast state pension is £222 p.w./ £968 p.m. and he is already in receipt of one foolishly cashed-in pension, of which the tax-free lump sum is long since squandered, which will pay £16 p.w./£69 p.m. once he reaches 65.

His remaining pension savings amount to approx £42k spread over 4 different pots.

Assuming he lumps all four pots together, does not take a tax-free lump sum and buys a non-escalating Joint Annuity I'm guesstimating an income from the untouched pots of approximately £35 p.w./£154 p.m. (appreciate there are lots of variables which could affect this either way).

Which would leave him with a total income in the region of £1190 p.m.

Monthly bills are approx £700 p.m. of which approx £375 is rent paid to local housing association.

MIL works part time, earns approx £500 p.m. and is five years away from retirement age where she is forecast to receive £159 p.w.

All things being equal they are not going to be on the breadline but neither can they really look forward to a golden age, that much is accepted.

The kicker is that they have been continuous council tenants for 34 years and as such would likely to be eligible for a 64% discount under the Right To Buy scheme. House value is approx 80k-90k which would leave them needing to find around 30-35 k to purchase the property.

Taking the total value of all his 4 pensions as a lump sum (whilst obviously tax inefficient) would see them very close to or just around this figure.

As life-long council tenants the idea of buying their own home at this late stage would no doubt be bewildering and terrifying but to me at first glance it looks like a very sensible option. Utilizing the discount they've built up with 34 years of tenancy would seem to be effectively doubling his pension savings.

Either buy a guaranteed income of £150ish a month that is eaten away by inflation or knock a continuously rising £375ish a month off their monthly bills.

Obviously there is the cost of home ownership to factor in...insurance/upkeep etc but on the face of it it seems unlikely that would negate the savings.

I'm going to investigate further before at least making them aware of the option but just wondered if anybody could see any glaring potential pitfalls I'm not seeing or indeed if anybody here has done similar?

Are there negatives regarding their situation in the event FIL passes early and home-ownership would exclude MIL from otherwise available benefits?

Would there be an ideal time of year tax-wise to cash-in his pensions to make the purchase?

Am I underestimating the risk/cost of home ownership in their case.

Are there any completely different strategies which may be more beneficial? (MIL is insistent that FIL cannot be trusted with significant tax free lump sums)

Would very much appreciate any help/advice/suggestions

bigadaj

In theory what you suggest makes sense, you'd need to calculate the remaining cost of home ownership, but in the face of it then a near 10% return looks favourable.

Have they reviewed the full range of benefits they might be entitled to, that needs to be factored into any calculations as well.

However someone who has rented fro decades from a council may well find ownership a big jump,me ven if it is straightforward, and trying to do that whilst heading into old age is not good timing so I'd be very wary.

domjon1

bigadaj wrote: »

In theory what you suggest makes sense, you'd need to calculate the remaining cost of home ownership, but in the face of it then a near 10% return looks favourable.

Have they reviewed the full range of benefits they might be entitled to, that needs to be factored into any calculations as well.

However someone who has rented fro decades from a council may well find ownership a big jump,me ven if it is straightforward, and trying to do that whilst heading into old age is not good timing so I'd be very wary.

No doubt it would be a big psychological hurdle for them and will need to be a pretty demonstrable advantage for them even to consider it. I'll be booking them some appointments with Pensionwise/Citizens Advice to try and explore the benefits side of things of which none of us has any knowledge/experience.

bigadaj

domjon1 wrote: »

No doubt it would be a big psychological hurdle for them and will need to be a pretty demonstrable advantage for them even to consider it. I'll be booking them some appointments with Pensionwise/Citizens Advice to try and explore the benefits side of things of which none of has any knowledge/experience.

Yes I'd be very wary and cautious, if they do this at your suggestion and things go wrong, for reasons outside your control then it could still be a problem.

Looking at the figures then your mil income will actually go up in retirement which is a plus.

Also with the extra income what would they actually do with it, longer term equity could also be taken back in care home fees.

domjon1

bigadaj wrote: »

Also with the extra income what would they actually do with it, longer term equity could also be taken back in care home fees.

Yeah the care home fee issue is one I do have bitter personal experience with. However the purpose of purchasing would not to be to bequeath assets but simply to ease their retirement years so it may be less of a factor in this case.

enthusiasticsaver

Cashing in the 4 pots would give rise to a fairly substantial tax bill. Presumably this tax year your father in law will have used most of his personal allowance and next tax year a pension of around £220 per week will again mean most of his tax allowance will be used up. This means anything over 25% will be liable to tax so on the remaining 31500 he will have to pay tax of 20% presuming he is basic rate tax payer. This would be over £6k. If they have other savings they would be better using them but in practical terms it would make sense to spend £30-£35k to buy and save £375 per month. It does exclude them from benefits though and the £6k tax bill could mean they are short of money to buy when you take fees into account and they will be left with few savings.

domjon1

enthusiasticsaver wrote: »

Cashing in the 4 pots would give rise to a fairly substantial tax bill. Presumably this tax year your father in law will have used most of his personal allowance and next tax year a pension of around £220 per week will again mean most of his tax allowance will be used up. This means anything over 25% will be liable to tax so on the remaining 31500 he will have to pay tax of 20% presuming he is basic rate tax payer. This would be over £6k. If they have other savings they would be better using them but in practical terms it would make sense to spend £30-£35k to buy and save £375 per month. It does exclude them from benefits though and the £6k tax bill could mean they are short of money to buy when you take fees into account and they will be left with few savings.

They have a small amount of savings they could use to top up any purchase/ cover any shortfall from an emergency tax deduction. Presumably he'd actually have to pay higher rate tax on a proportion of his pension withdrawal due to his wages from his final year.

Such a difficult one....if I was in this position I know I'd definitely be doing it, recommending it to someone else is a different matter altogether.

enthusiasticsaver

It is an incredibly poor tax efficient way of drawing the pension though. If he did it all in this current tax year in one hit then yes there would be 40% to pay on some of it depending on his income. It would have been much better to have done this 5 years ago and even taken a low rate mortgage out. You need to work out the actual tax bill involved preferably splitting it over 2 tax years and figure out if it is worth losing £7k + to save £375 per month. I think it is definitely worth considering but it is not straightforward and they may not like the idea of home ownership. What has held them back all these years?

domjon1

enthusiasticsaver wrote: »

It is an incredibly poor tax efficient way of drawing the pension though. If he did it all in this current tax year in one hit then yes there would be 40% to pay on some of it depending on his income. It would have been much better to have done this 5 years ago and even taken a low rate mortgage out. You need to work out the actual tax bill involved preferably splitting it over 2 tax years and figure out if it is worth losing £7k + to save £375 per month. I think it is definitely worth considering but it is not straightforward and they may not like the idea of home ownership. What has held them back all these years?

Agreed it would be very tax inefficient...but sometimes practical considerations trump theoretical efficiencies. The most tax efficient method i.e. drawing the 25% tax free lump sum is about as much practical use as a chocolate fireguard it its frittered down the pub within a few months

enthusiasticsaver

Ah, is that the reason they have not bought before as FIL no good with money? Do you know what he earns?

enthusiasticsaver

The tax allowance is £11500 and the higher rate threshold is £45000. Assuming FIL earns £20k up until retirement in February then claims 2 months of pension until April this should mean he can take the 25% tax free on each of the pots (or combine) and a further £15-£20k in 2017/2018 and pay the £3000-£4000 tax bill. Then he can withdraw the remaining balance after April 2018 which at least means it is all paid at standard rate tax.