A pension dilemma...

iantowns

My wife is about to leave her last job and I’m in the process of finalising our pension planning.


I want to run the options by a few of the wiser owls on here and gather their opinions please.


My wife is 56, and I am 53. I plan to retire in about 3 years, so we will both be retired by age 56. I am in poor health, although not poor enough to qualify for an early retirement on those grounds, but I do have reduced life expectancy due to a health condition.


My wife has a DB pension that will pay about £10k a year if she takes her max lump sum, or about £12k per year with a minimum lump sum., i.e. both within the personal allowance.


I will have a DB pension that will pay about £15k a year at age 56 (with a proposed max lump sum taken due to my health).


This obviously gives us a combined DB pension of about £25k a year, and I plan to supplement this by drawdown from a DC pension I have, giving us a total net income of about £3k per month. This would give us a comfortable lifestyle as we have no debt as what remains of the the mortgage will be paid off with my lump sum (albeit I will consider if that is worth doing at the time, given the paltry interest rate applicable to it of 1.25%).


I am currently a 40% taxpayer (I earn between £80k-£90k) and am contributing as much as I can to my DC pot in order to claim as much tax relief as possible. For the last 2 years I have managed to avoid 40% tax altogether and my pot has grown quite considerably. I am keen to continue this approach so that the DC pot can fill the gap between retirement and claiming the state pension in 10 years time.


My essential question is this:
Are we better off maximising my wife’s lump sum, and me ‘recycling’ as much of it as I can into my DC pot for tax relief purposes, or, given the appalling commutation rate of 12:1 (it’s a railway pension) are we better off giving her an extra £2k pension, which would still be tax-free and obviously inflation proof and guaranteed?


My ‘gut’ feeling is to forgo the possibility of the 40% tax relief and go for the higher pension (and £24,000 less lump sum), but 40% is a lot of tax relief to be giving up for the next 3 years or so!


There is also the possibility that we could, at a push, defer taking my wife’s pension for a year or so and live off some savings, thus giving her a higher pension anyway.



Any thoughts and views are welcome.



Thanks for reading.

Audaxer

iantowns wrote: »

There is also the possibility that we could, at a push, defer taking my wife’s pension for a year or so and live off some savings, thus giving her a higher pension anyway.

Is there the possibility that your wife could forego any lump sum and get a higher DB pension than the £12k she would get with the minimum lump sum?

DairyQueen

Will your DB provide a 50% widow's pension? Assume your wife has average life expectancy.

Given that you have reduced life expectancy it would seem a priority to maximise your wife's DB pension. A worry-free income will be a priority for her should she survive you (as seems likely) and the household will be down 50% of your DB plus your SP. The extra pension is index-linked and risk-free, plus a poor commutation rate. I doubt the extra tax relief on recycling her TFC into your DC could compensate.

I agree with Audaxer's implication - i.e. your wife should take the most income possible.

Have you both checked your SP forecasts? Do you need to make voluntary contributions to reach the max?

enthusiasticsaver

I would maximise your wife's pension.

soulsaver

In your circumstances I would request a cash equiv transfer value from your DB scheme.
It maybe well in excess of £400k and would be outside your estate for IHT if you die before age 75 & IIRC tax free to your spouse.

kidmugsy

soulsaver wrote: »

In your circumstances I would request a cash equiv transfer value from your DB scheme.
It maybe well in excess of £400k and would be outside your estate for IHT if you die before age 75 & IIRC tax free to your spouse.

Nearly. Under current law (which might not survive for long) inheritance of the pension pot is free of IHT, or CGT or income tax or any other impost, at any age of death.

The stunner is that the income drawn from it by the inheritor is free of income tax if the original pension owner dies before 75. It's an extraordinary concession and I can't see it lasting long.

kidmugsy

iantowns wrote: »

My wife has a DB pension that will pay about £10k a year if she takes her max lump sum, or about £12k per year with a minimum lump sum., i.e. both within the personal allowance.


I am currently a 40% taxpayer (I earn between £80k-£90k) and am contributing as much as I can to my DC pot in order to claim as much tax relief as possible. For the last 2 years I have managed to avoid 40% tax altogether and my pot has grown quite considerably. I am keen to continue this approach so that the DC pot can fill the gap between retirement and claiming the state pension in 10 years time.


My essential question is this:
Are we better off maximising my wife’s lump sum, and me ‘recycling’ as much of it as I can into my DC pot for tax relief purposes, or, given the appalling commutation rate of 12:1 (it’s a railway pension) are we better off giving her an extra £2k pension, which would still be tax-free and obviously inflation proof and guaranteed?

In your shoes I think I'd do both. That is to say, I'd advise your wife not to commute her DB pension. Then I'd take a loan and use it to fill my DC pension to the point that higher rate tax is avoided. Given that interest rates are still low, and that the DC lump sum could be available to you in less than two years, this seems to me a low risk scheme with a high payout.

I'd also follow soulsaver's advice: if the CETV they offer is unattractive it's cost you no more than the time to request it, read it, and discard it. (That's assuming that the DB scheme in question can offer transfers out.)

One last thing: given that your health is poor and that your wife will already have retired, why do you plan to flog on after age 55?

iantowns

Many thanks to you all.



@Audaxer....no, there is no option to increase the £12k sadly.


@DairyQueen, yes my DB pension provides a 50% widows pension (which will be about £7.5k), and yes I have checked both state pension forecasts and we'll both qualify for very nearly the maximum by age 56.


@soulsaver. Yes, I'd already done this. Unfortunately the CETV available for me was less than £200k, so it's not been an option really.


@kidmugsy. Have already considered borrowing money to 'fund' tax relief. It remains a distinct possibility given our ability to borrow. It's not that I plan to 'flog on' after 55...I do love my job (I drive express trains) and I'm not suffering from my health other than my life expectancy has been reduced.


I truly appreciate everyone's thoughts. Many thanks all.