Take my pension to clear my credit card debts.

alistair123

I have circa credit card debt of £18k, currently paying 10% over the minimum amount every month, the cards are spread over 2 Lloyds and Barclays. The debt occurred from divorce 5 years ago. My age is 57 and I have 3 pensions schemes, 1 scheme is in the PPF, and was my original work scheme, I am not planning on touching this.
But I also have 1 smaller pension I paid into with Scottish Widows about 35 years ago, only paid into it for 12 months, can't remember the amount but it was around £20 per month, anyhow I can take this pension now its got a transfer value of £18k if I left it with SW all I would get at retirement age is £464 yearly.
Therefore on paper, it seems to make sense to cash it in now and clear my debts, this would save me about £560 monthly on my credit card payments and if I took my pension at 65 it would only pay out £9280 if I lived to 85.
What are my tax implications though, I am currently a director and take the minimum salary monthly and take a dividend monthly.
It seems obvious to me but that seems to easy.
Help or advice, please.

Blackbeard_of_Perranporth

No.

You would pay tax on 75% and ruin any further pension savings. Use Debt Management to clear these debts and avoid interest. Try posting in Debt Free Wannabe thread.

xylophone

If you withdraw the whole of the pension, 25% will be tax free but the balance would be taxable as income in the year of receipt.

You would also trigger the MPAA in respect of future contributions to a DC pension.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/pension-contributions-the-basics/

Dox

alistair123 said:

I have circa credit card debt of £18k, currently paying 10% over the minimum amount every month, the cards are spread over 2 Lloyds and Barclays. The debt occurred from divorce 5 years ago. My age is 57 and I have 3 pensions schemes, 1 scheme is in the PPF, and was my original work scheme, I am not planning on touching this.
But I also have 1 smaller pension I paid into with Scottish Widows about 35 years ago, only paid into it for 12 months, can't remember the amount but it was around £20 per month, anyhow I can take this pension now its got a transfer value of £18k if I left it with SW all I would get at retirement age is £464 yearly.
Therefore on paper, it seems to make sense to cash it in now and clear my debts, this would save me about £560 monthly on my credit card payments and if I took my pension at 65 it would only pay out £9280 if I lived to 85.
What are my tax implications though, I am currently a director and take the minimum salary monthly and take a dividend monthly.
It seems obvious to me but that seems to easy.
Help or advice, please.

You are only 57. Do you (or your company on your behalf) intend to continue to pay into a pension scheme in future years, and if so, do you intend to pay in more than £4,000 a year (including any basic rate tax relief on personal contributions)? If the answer is 'definitely not', then you might consider transferring your SW pension to a more modern contract which will allow drawdown - i.e. you can take 25% tax free now, and the balance of the pot in 'chunks' spread over more than 1 tax year to help minimise the tax you'd pay. Before doing that, check if the SW pension has any sort of perks such as a guaranteed annuity rate, which would make such a transfer rather less attractive.

If you do want to pay in £4,000+ a year to your pension, you may be able to transfer out of the SW as a split transfer, putting £9K into two different pension schemes. You could then cash these in on the basis they are 'small pots', which applies where the value is under £10K per pot. Same rules - 25% tax free for each pot, balance taxable at your marginal rate. That wouldn't trigger the £4,000 a year restriction. Again, make sure the SW pension has no hidden attractions. 

dunstonh

anyhow I can take this pension now its got a transfer value of £18k if I left it with SW all I would get at retirement age is £464 yearly.

That is an incorrect assumption.   What SW are projecting is an amount that could be paid if you bought a particular annuity with the lowest assumptions possible.  It is also shown in today's terms and not future money terms.    That figure is artificially lower than reality.

DiggerUK

Yes, you have a debt problem. All problems can be solved. Yours is not the end of the world. The best suggestion you have received is to post on the Wannabe Debt Free forum.

The warning about income tax needs taking on board as well, but I see no problem taking whatever you can tax free.
You also have a lot of pension schemes, all with separate admin fees and charges, have you investigated any advantages in amalgamating..._

Dox

DiggerUK said:

You also have a lot of pension schemes, all with separate admin fees and charges, have you investigated any advantages in amalgamating..._

Three pension schemes isn't 'a lot' - and one is in the PPF, which doesn't charge individuals. If the other two are both defined contribution schemes, charges are normally based on overall fund value, so simply having more than one pension scheme doesn't automatically mean someone is paying more than they need to. May be worth transferring one into the other if one scheme has lower charges for similar fund choices - but there are sometimes good reasons for not doing that. See https://www.thisismoney.co.uk/money/pensions/article-3550085/STEVE-WEBB-merge-small-pension-pots.html

jamesd

Regrettably you've received some incorrect answers so I'll first correct what those have said. If you "flexibly" take taxable money from the SW plan you will trigger the Money Purchase Annual Allowance. That limits contributions to personal pension in your name to £4k a year and is usually a bad idea for those still working. But "flexible" only covers two things: UFPLS lump sums or taking taxable money from a Flexi-access Drawdown account. You do not trigger the MPAA if  you do either of these things (and some not relevant others):

1. Take a 25% tax free lump sum and place the remaining 75% into a Flexi-access Drawdown account without taking money from that account.
2. Use the small pot rule. Up to three times in your life you can use the Small Pot Rule to take all of a pot worth up to £10k as a sum that is 25% tax free and 75% taxable. You can move parts of pots to ensure the value doesn't exceed the limit and Hargreaves Lansdown will do this for you automatically.

So, yes, you can do it, by using the small pots rule twice.

Is it a good idea? Yes again, with a caveat: that you make gross pension contributions equal to the amount you withdraw on roughly your original debt repayment schedule. This makes you better off by the debt interest saved and the second time around pension tax relief. Doing this via company contributions reduces the corporation tax bill to deliver the relief. Hargreaves Lansdown can explain.

The £464 assumes that you waste about half of the pot value by buying a dual life RPI inflation-linked annuity. That used to be less than 10% of the  annuity market and is probably less now. The efficient way to convert £18k to income around state pension age is to defer claiming your state pension until you've skipped £18k worth, about two years. Take an income from the £18k while doing this. That gets you £1,044 a year inflation linked with the lower CPI and without spousal pension after your death, though you could fund a spouse deferring. (Note 1)

You don't have to use Hargreaves Lansdown but their small pot rule handling is helpful and their ongoing costs are reasonable for the amounts involved.

The pension firm will deduct basic rate tax from the taxable 75% and you might need to pay more or seek a refund start out with no tax code so will charge you on the emergency month 1 basis, so you'll have excess tax deducted initially. You can do the second when a proper tax code has been issued or both at once and reclaim.

Ensure that you say you want to use the small pots rule. If you don't, UFPLS is likely to be used and will trigger the MPAA.

Note 1: I made the very crude assumption that SW has projected that growth will be the same as inflation so the value stays at 18k in todays money. That's reasonably close to the value implied by buying the annuity.

ffacoffipawb

jamesd said:

Regrettably you've received some incorrect answers so I'll first correct what those have said. If you "flexibly" take taxable money from the SW plan you will trigger the Money Purchase Annual Allowance. That limits contributions to personal pension in your name to £4k a year and is usually a bad idea for those still working. But "flexible" only covers two things: UFPLS lump sums or taking taxable money from a Flexi-access Drawdown account. You do not trigger the MPAA if  you do either of these things (and some not relevant others):

1. Take a 25% tax free lump sum and place the remaining 75% into a Flexi-access Drawdown account without taking money from that account.
2. Use the small pot rule. Up to three times in your life you can use the Small Pot Rule to take all of a pot worth up to £10k as a sum that is 25% tax free and 75% taxable. You can move parts of pots to ensure the value doesn't exceed the limit and Hargreaves Lansdown will do this for you automatically.

So, yes, you can do it, by using the small pots rule twice.

Is it a good idea? Yes again, with a caveat: that you make gross pension contributions equal to the amount you withdraw on roughly your original debt repayment schedule. This makes you better off by the debt interest saved and the second time around pension tax relief. Doing this via company contributions reduces the corporation tax bill to deliver the relief. Hargreaves Lansdown can explain.

The £464 assumes that you waste about half of the pot value by buying a dual life RPI inflation-linked annuity. That used to be less than 10% of the  annuity market and is probably less now. The efficient way to convert £18k to income around state pension age is to defer claiming your state pension until you've skipped £18k worth, about two years. Take an income from the £18k while doing this. That gets you £1,044 a year inflation linked with the lower CPI and without spousal pension after your death, though you could fund a spouse deferring. (Note 1)

You don't have to use Hargreaves Lansdown but their small pot rule handling is helpful and their ongoing costs are reasonable for the amounts involved.

The pension firm will start out with no tax code so will charge you on the emergency month 1 basis, so you'll have excess tax deducted initially. You can do the second when a proper tax code has been issued or both at once and reclaim.

Ensure that you say you want to use the small pots rule. If you don't, UFPLS is likely to be used and will trigger the MPAA.

Note 1: I made the very crude assumption that SW has projected that growth will be the same so the value stays at 18k in todays money. That's reasonably close to the value implied by buying the annuity.

Minor correction: Pensions taken under the small pots rule use the BR tax code, not an emergency code. I took one last year and have a schedule that confirms it.

Twentytwothousand

Sorry to jump on this but can you use the small pot rule to take £10k from a £17k pot? or do you need to empty the pot?  I am in a similar position, I have one pot that is at a low level, not growing at all (totally stagnant for 2 and a half years) and I could really do with the money to pay off another debt due to a Covid related pay cut. If I take £10k from it (it's a Bank of Scotland/ex Scottish Widows pension) how do I avoid triggering anything sinisiter and can I leave the other £7k there? I have three other pension pots, all doing fine. Not retired as yet and not going to be able to for at least 10 years (I'm 55)

xylophone

It may not be possible to split the pot  into two within this old pension scheme.

 However,  would it be possible to  arrange a transfer of  £7000 from SW to one of your other pensions and then take the SW as a small pot?

Or arrange for transfer  of SW to Hargreaves Lansdown and proceed as outlined above?