Tax free lump sum or not?

MrsVanderkamp

Hi, this is my first post on here so treat me gently (and apologies if this ends up being duplicated as tried to post last night).
I turned 55 this year and am planning on retiring from (stressful job). Last year I transferred from a previous company deferred DB scheme to and now have a pot of £250k in a DC pension that is not being added to.
The plan is to finish work end of April or May, and I would like to have an income of £1500 pm for the next 3 years whilst youngest is still at uni, but see this reducing after that period.(I will probably find a small part time job). My hubby is still working and due to retire in 3 years with a police pension.

I'm in a dilemma about whether to take the 25% TFLS and put into ISA's etc, and then a small monthly amount from pension or to take a higher monthly amount and not the lump sum. With all the talk of poor investment performance, I'm thinking would it be better to take the lump sum now so it is protected so to speak, even though it won't grow? I'm quite disciplined so won't be tempted to go and blow it! I appreciate my plans probably mean my pension will have depleted by the age of 70, but with both our state pensions and hubbie's pension am ok with that.

dunstonh

I'm in a dilemma about whether to take the 25% TFLS and put into ISA's etc

That would take four years in just your name or two if you did it each. So, straight away, you wouldnt take the whole 25% up front.

, and then a small monthly amount from pension or to take a higher monthly amount and not the lump sum.

at 55 and stopping work you can earn £11,850 a year (currently) without paying tax. So, you may as well maximise that and put any excess into ISA. Its better to take out the 75% chunk whilst you can tax free rather than take out the 25% chunk which can be used later when you become a taxpayer again.

With all the talk of poor investment performance, I'm thinking would it be better to take the lump sum now so it is protected so to speak, even though it won't grow?

What talk of poor performance?
Taking it out to protect it will actually result in lower returns over the long term and make it subject to inflation risk and shortfall risk. At age 55, you would actually be increasing the risk of real terms losses by doing that.

Phased flexi-access drawdown may be the most suitable option here. Not full drawdown of the 25%. Plus, some education about investing so you understand things better and dont make costly mistakes.

MrsVanderkamp

Thanks dunstonh, that is really helpful.

In respect of taking the 75% tax free once not working, would there be any advantage to me finishing work 31st March before the start of the new tax year?

I was delaying it until April/May to try to not activate pension until October time, when daughter had submitted her student finance application as did not want to disadvantage her in any way, but not sure whether this will make a difference as i think it is the prior years earnings they take into account?

You are right about needing to educate myself on investments, I've never had the need to know before now!

tacpot12

Have you checked your entitlement to the State Pension? You might find you need to make some voluntary National Insurance Contributions to secure the full amount. Saving what voluntary payments you need to make will you are working would be a good idea.

I found it useful to make a budget for what my costs in retirement would be. Your figure of £1500 pm might be informed by such a figure, but you haven't said what you will need to live on after three years. Your figure of £1500 pm requires £54,000 from your pension pot, leaving less than £200,000 for the rest of your retirement. Whether or not this is sufficient will depend on how much you need and on the return from your investments over the next three years. The more you can save now, to avoid withdrawing from your pension, the better.

dunstonh

In respect of taking the 75% tax free once not working, would there be any advantage to me finishing work 31st March before the start of the new tax year?

Taking your last earned pay in this tax year means you have a clean slate for the new tax year. So, its only a matter of convenience.

You are right about needing to educate myself on investments, I've never had the need to know before now!

Technically, you have had the need ever since you had the DC scheme. However, do make sure you learn and understand as investments go down as well up. Always have, always will. So, the minute there is a short term loss period, it should not be a surprise or a worry. They come regularly and you will see a number of corrections, crashes and depressions again throughout your retirement. Once you understand why and how and realise you have no control over timing with them, they become less scary. And once you have been through them a couple of times, it really does become "here we go again". The other thing is not to look at values daily. You will drive yourself mad.

xylophone

https://www.gov.uk/check-state-pension

For you and spouse.

MrsVanderkamp

Thanks for your responses.

I have previously checked out the state pensions and we both qualify for the full amount.