Financially assisting a parent to retire

ViolaLass

Pollycat wrote: »

How would this work if the OP's Mum needed to go into care at some stage in the future?
Thinking 'deprivation of capital', I guess.

She'd have the money - no deprivation.

kidmugsy

Locoblade wrote: »

if she deferred it entirely she'd have to work a lot more for the next few years which is defeating the end goal of allowing her to enjoy her early retirement years.

No; my point was that you should persuade her to defer the pension and use that as an entry to persuading her to accept your financial support by way of loans. Then you can lend her enough to give up work altogether (if you can afford to go that far).

In my experience with family members the difficulty can be finding a good, courteous reason to raise financial matters. "Look, Mum, I've just discovered the wonders of deferring an old-style state pension like yours" opens the whole question of her finances and retirement, which is just what you want. "Please, Mum, let me lend you the money so that you can take advantage of this wonderful offer from the government. Why, Mum, I couldn't find an investment for us that's anywhere near as good!" And it's all perfectly true too.

Locoblade

kidmugsy wrote: »

No; my point was that you should persuade her to defer the pension and use that as an entry to persuading her to accept your financial support by way of loans. Then you can lend her enough to give up work altogether (if you can afford to go that far).

In my experience with family members the difficulty can be finding a good, courteous reason to raise financial matters. "Look, Mum, I've just discovered the wonders of deferring an old-style state pension like yours" opens the whole question of her finances and retirement, which is just what you want. "Please, Mum, let me lend you the money so that you can take advantage of this wonderful offer from the government. Why, Mum, I couldn't find an investment for us that's anywhere near as good!" And it's all perfectly true too.

Ah understood, sadly I can't afford to lend her enough to fully support herself for that length of time so I think it's probably a non starter unfortunately.

Locoblade

I'm doing some reading into mum paying into a personal pension and from what I've read you can contribute the aforementioned £3600 (£2880) if a non-working pensioner, or if working the limit is the amount you earn per year. My question is if you're working part time whilst claiming your state pension, is your annual income considered to be your salary plus your pension, or just your salary? If its the former including pension, mum has the option to reduce her hours and perhaps only work 1 day per week so I was wondering whether by retaining that small income stream she could then go over that £2880/year limit and put more of her savings straight into a pension?

Dox

Locoblade wrote: »

I'm doing some reading into mum paying into a personal pension and from what I've read you can contribute the aforementioned £3600 (£2880) if a non-working pensioner, or if working the limit is the amount you earn per year. My question is if you're working part time whilst claiming your state pension, is your annual income considered to be your salary plus your pension, or just your salary? If its the former including pension, mum has the option to reduce her hours and perhaps only work 1 day per week so I was wondering whether by retaining that small income stream she could then go over that £2880/year limit and put more of her savings straight into a pension?

It's the higher of £2,880 (£3,600 including tax reclaimed) and earned income - i.e. she can't add her pension to increase her tax-efficient contributions.

Dox

Locoblade wrote: »

Thanks, so just to ensure I'm getting it (it's me not you!), with no income from working she could pay £2880 annually from her savings pot into a stakeholder pension for the next 3 years to get that up to £10k (£3600x3), she'd then withdraw a £10k lump sum from the pension pot (which I guess would attract some tax in that tax year when added to her state pension income) then repeat the process another 2 times whilst she's under 75?

Mind the arithmetic - it really matters here! £3600 x 3 exceeds £10K, which would mean she can't cash in the whole lot in one go on the basis it is a 'small pot'.

sleepless_saver

Locoblade wrote: »

She has around ~£20k in savings and a full state pension, she did the Pension Credit calculator and if she gave up work completely it would be about £4/week which isn't nearly enough.

Did you know that if she gets guarantee pension credit she would be entitled to full council tax support in spite of her capital?

jamesd

Dox wrote: »

Mind the arithmetic - it really matters here! £3600 x 3 exceeds £10K, which would mean she can't cash in the whole lot in one go on the basis it is a 'small pot'.

But 3 times 2700 is only 8100 so you can. You take the tax free money, place the rest into drawdown, then use the small pot rule on that 8100.

Technically triviality is the wrong term now except for DB, it's now the small pot rule for DC and personal pensions in general.

jamesd

Locoblade wrote: »

just your salary

Just gross salary and the gross (after tax relief) contribution limit is the higher of 3600 or gross pay.

So, is her pay more than 3600? More than 4000?

If no, or if it'll never be above 4000 again, forget about triviality/small pots rule. She can pay in and take out each tax year. Extensive discussion at Paying £2880 into pension when retired.

If it is or will be more than 4000 there's another rule to know about: if you use a UFPLS lump sum or take any of the taxable money from a flexi-access drawdown pot (the usual sort) your annual pension contribution limit is reduced to 4000. This is called the money purchase annual allowance. You can still take the tax free lump sum whenever you like. The use of the small pot rule doesn't trigger the cap so it's a handy workaround for those who are still working who want to make the biggest possible tax gain. The small pot rule can be used three times per human lifetime.

A potential catch of the small pot rule is income tax on the way out if it takes her taxable income over her personal allowance. It's probably better to pay in as much as possible then just take tax free money out until she won't go over 4000. Then she can take out exactly the right amount of taxable money to fully use her personal allowance but not go over it.

Alternatively she could use the small pot rule three times to take it out and could arrange to make the amount in the pot just right to not go over he personal allowance. You can do that by taking 25% of less than the full amount in the pot you're paying in to so that the 75% that ends up in the drawdown pot is right. This would be wasteful of the 10000 a time small pot rule limit for someone who will work for many more years but may be fine for her.

So assorted fine tuning to maximise her tax and tax relief gain, just need to take whichever track best fits her income.

Also worth checking that her employer isn't deducting NI from her pay. Occasionally employers don't stop that when someone reaches their state pension age.

jamesd

kidmugsy mentioned state pension deferral and I'm normally a fan of it but in this case I wonder about the inheritance. It takes many years before the higher income from deferring pays out more than you drew from savings to live on while deferring. So it might be better to gradually drain the savings instead as an income top up. If the inheritance amount will be large enough to make this no longer matter and is of sufficiently reliable amount and timing.

It seems likely that she reached her state pension age before 6 April 2016 so would get an increase of 10.4% for each year deferred, inflation-linked for life.

Is she getting the maximum basic state pension as part of the total state pension? The other parts are additional state pension (the earnings-related bit) and sometimes a little graduated retirement pension. Occasionally we find that there's still a chance to buy old years, even more than six years ago, and get an excellent value for money increase.