Is it really so naughty to take full lump sum when you don't need it?

german_keeper

think I understand the point made many times about not taking the 25% TFLS if you don't need to. Future withdrawals are likely to be higher due to investment returns and therefore you get more tax free money and also you retain more flexibility if circumstances change.

We are quite fortunate in that we both have a decent DB pension and the new state pension rules really favour us. My wife already has enough contracted in years and I will get there in April 2023. So it means our situation is quite simple. We are both currently in DC schemes with our employers so the period before SPA will be DB + DC drawdown, after SPA will be DB and state pension.

With my DB annual amount and drawdown from DC I will be above PTA when we retire at 60 (maybe a bit earlier with a following wind). So we are about to start loading a few hundred a month into my wife's NEST pension so that we can get the tax relief on the way in but she shouldn't pay tax on the way out. Her deferred DB is about £6k per year, increased by RPI, so plenty of leeway with the PTA.

Here's the bit I have been thinking about. Both DC are in low risk so I would estimate mine will be worth maybe between £45k and £50k when I am 60, my wife's probably more like £25k to £30k. Our intention is to take the full 25% lump sum for both and then drawdown the rest before SPA.

The reason for taking the lump sum is that my attitude to investments probably borders on paranoia, which is a bit ironic for someone who loves a flutter on the nags, and I would rather have it in a savings account. I accept the inflation risk but we have some leeway in our plans. This fear of investments crashing is part of the reason for full drawdown before SPA even if we don't need it but also it will be far more tax efficient than leaving it till after SPA.

Grateful for any thoughts, particularly good reasons to change our plans.

Albermarle

You want to take the TFLS for a specific reason :

The reason for taking the lump sum is that my attitude to investments probably borders on paranoia,

You understand the downside , so in the end it is up to you.

Many posters seem to just want to take the TFLS because it's there and have not considered any up or downsides, but you have .

Dox

What on earth has 'naughty' got to do with anything? It's your choice; if after thinking it through you want to take tax free cash, fine. You aren't going to be sent to stand on the naughty step!

german_keeper

Dox wrote: »

What on earth has 'naughty' got to do with anything? It's your choice; if after thinking it through you want to take tax free cash, fine. You aren't going to be sent to stand on the naughty step!

Just a light hearted choice of wording, really sorry if it upset you.

Dox

german_keeper wrote: »

Just a light hearted choice of wording, really sorry if it upset you.

Thank you, not upset at all - just concerned that you genuinely felt you might be doing something 'wrong'!

Malthusian

german_keeper wrote: »

The reason for taking the lump sum is that my attitude to investments probably borders on paranoia, which is a bit ironic for someone who loves a flutter on the nags, and I would rather have it in a savings account. I accept the inflation risk but we have some leeway in our plans.

Then this sounds like a case of "if you don't need the return, don't take the risk", especially if your needs are going to be covered in full by guaranteed State Pensions and DB pensions, and the DC fund is just a nice extra bit of cash, partly generated by milking the difference between tax relief in / tax out.

german_keeper

Dox wrote: »

Thank you, not upset at all - just concerned that you genuinely felt you might be doing something 'wrong'!

No worries, to be honest I did wonder if we might be doing something wrong, but only if there was another reason not to take the full lump sum other than the ones I mentioned.

german_keeper

Malthusian wrote: »

Then this sounds like a case of "if you don't need the return, don't take the risk", especially if your needs are going to be covered in full by guaranteed State Pensions and DB pensions, and the DC fund is just a nice extra bit of cash, partly generated by milking the difference between tax relief in / tax out.

DC funds aren't just a bit extra, effectively they will be "replacing" the state pension prior to SPA, if it's possible to replace something before it happens! With my attitude I really wanted to put our spare money for the next 3 or 4 years into savings but even I really couldn't turn down the tax relief on the pension conts in favour of about 2% interest or less.

Thrugelmir

£12k or thereabouts isn't a significant amount in the overall scheme of things. How easily accessible are your other cash savings?

kinger101

One thing to consider with taking a large lump sum you don't need from a DC scheme is you'll be moving it outside of an inheritance tax wrapper. If there's any possibility your estate will exceed the IHT threshold, might be more sensible to leave it in the pension as cash or gilts.

german_keeper

Thrugelmir wrote: »

£12k or thereabouts isn't a significant amount in the overall scheme of things. How easily accessible are your other cash savings?

Hello Thrugelmir, really sorry but I am not sure what your £12k figure is. I do have some savings and I am not precious about my financial position so happy to put some numbers on it. My DB is currently £9k increasing by CPI, my wifes is £6k increasing by RPI. Looking to retire at 60 in 4 1/2 years.

I am looking to have about £90k or so in savings and DC to supplement the DB for the 7 years between 60 and SPA of 67. I currently have £20k in a 1 year fix at 2.02% and about £7k in 123 current account at 1.5% (down to 1% in May). So overall at current values we are looking at about £28k pa with little tax pre SPA, £33k after SPA but all taxable so very similar net. The DB and SP are index linked so if inflation rockets and the DC don't do very well we just work on for a time.

We are very proud of our achievement in bringing up 3 kids, now 24,20 and 17 and for the last 15 years living in a large 4 bedroom, 3 bathroom house current value about £220k and on a joint income less than £40k so we are confident those retirement amounts will be more than enough. Mortgage free so that is easy to quantify, kids now flying the nest and household bills dropping but not enough evidence to quantify yet.

I do wonder whether it's wise to hold so much in the current account particularly when it goes to 1% but money has been fairly tight at times over the years and it is very satisfying to have that balance. For example my car is 10 years old, my wife's 11 years old so knowing if one conked out we could just buy a replacement with cash is very comforting.