Using 25% tax free pension lump sum to fund kids' University education

tanoshii

Me:47 years old, 40% share of husband's Ltd company. DC scheme £60000; £10000 per annum rental income from £250000 property with no mtge.

Husband: 50 years old, 60% share of Ltd company, DB scheme expect £900 per month from aged 65, DC pots x 2 worth £75000 total. Hopes to retire around 63 years old, possibly before.

Joint assets: £20000 cash savings, £50000 shares, family home £850000 with £210000 mtge at 1.25%, 15 years remaining. Expect to downsize from 6 to 3 bedrooms at aged 70, probably before. We are reasonably modest in our spending, eg. older cars, IKEA furniture, lots of camping holidays, rarely eat out!

We both withdraw approx. 8k salary per annum from Ltd company to minimize tax liability, and dvds, which are taxed at 7%. Thus far, we have focused on reducing our mtge debt but wondering about the wisdom of continuing to do this as for the past 3 years (since the Ltd company inception) we have not made any company contributions into our pensions. We now want to take advantage of tax relief. I had considered opening Junior Stock & Shares ISAs for our two kids, 7 & 8 years old currently, and saving regularly to help pay for their higher education/house deposit. Does it not make more sense to contribute what we can (at least £10000 per annum) to our pensions, and then withdraw a 25% tax free lump sum when the eldest turns 18? Is the only disadvantage that whoever's pot it comes from will no longer be able to make pension contributions?

Thanks for any comments!

MallyGirl

general advice is to take the loans for uni. You may need funds to top up maintenance.
If you only take 25% tax free thenhat does not restrict further contributions.
I think you are missing a trick by your company not making pension contributions for you - talk to your accountant as it should save on corporation tax.

dunstonh

Thus far, we have focused on reducing our mtge debt

Thats a shame as the pension is likely to have been the better option financially. You pay corporation tax then dividend tax to reduce a debt that is costing less (in interest) than the typical returns on a pension.

You are also leaving yourself short of savings which you should be using for the kids university education. Although you do have time to rectify it.

Is the only disadvantage that whoever's pot it comes from will no longer be able to make pension contributions?

You wont have to stop paying in. That is not an issue. The only real disadvantage is that it will either prevent you or reduce the ability to use phased flexi-access drawdown in retirement which could increase your future tax bills and reduce the amount you can draw tax free.

xylophone

and then withdraw a 25% tax free lump sum when the eldest turns 18? Is the only disadvantage that whoever's pot it comes from will no longer be able to make pension

Taking just the PCLS does not trigger the MPAA.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/money-purchase-annual-allowance-mpaa/


Flexi-access Drawdown Income
A designation of funds for flexi-access drawdown does not in itself trigger the MPAA, nor does the payment of a PCLS. However, once income (or any lump sums from the designated pot) are taken from the funds designated to a flexi-access drawdown plan, the MPAA will apply (see also Accessing Benefits without Triggering the MPAA below)

You could consider both a JISA for each child and pension contributions?

The best cash rate for JISA is currently offered by Coventry BS.

Re stocks and shares JISA see post 7

https://forums.moneysavingexpert.com/discussion/5982800/savings-account-for-child

tanoshii

Thanks for your response MallyGirl. I have heard people saying that it's best to take out loans for Uni fees, and your message has prompted me to look further into the matter, inc. what Martin Lewis says on the matter. Thanks.

tanoshii

Thanks for your reply dunstonh. Indeed, we were too focused on over-paying our mortgage debt, esp. after we had two children! Thankfully, most of the over-payments went towards our rental property mtge debt, which was at a higher rate of 3.75%. We have only over-paid 17k of our family home mtge, and we are now going to fully divert our attention to our pensions. Hopefully we still have enough time to save sufficiently. We expect to receive various inheritances in the coming years so hopefully we won't have to touch our pensions too early, and can give the kids some money which was meant for us. It feels slightly distasteful (and maybe imprudent) to count on potential future legacies though..

tanoshii

Thanks for the links Xylophone. I definitely need to educate myself in this area. I think we will go down the route of upping our pension contributions from our Ltd company for the tax relief, and if need be, take a future 25% tax free lump sum for the childrens' maintenance costs if they go to University. If we receive any additional income/money in excess of our requirements from other sources before the kids turn 18, we will probably divert it into Junior Stocks & Shares ISA's for them, and for ourselves. I presume both my husband and I can both take 25% tax free lump sums from our DC pots which are in our names? So if we were to build up £200000 in our DC pots each, we could take £100000 combined tax free, but not necessarily at the same time?

MallyGirl

tanoshii wrote: »

I presume both my husband and I can both take 25% tax free lump sums from our DC pots which are in our names? So if we were to build up £200000 in our DC pots each, we could take £100000 combined tax free, but not necessarily at the same time?

You might not want to take at the same time but you could - nothing to stop you

tanoshii

Yes, we would be unlikely to take at the same time, but it's good to know that we have that ability. Thanks.