Help - hitting 55 soon - any major flaws in my pension thoughts?

SheenaG4

I was made redundant by my second employer in my early 50’s, a few years ago.
The terms were quite generous in that they allowed for me to draw my DB pension early at age 55 without any reduction. The pension scheme wrote last year to advise my pension pot was c£400k and my annual pension from age 55 would be c£20k

At the time I also put my redundancy lump sum into my AVC fund. This fund currently stands at c£80k.

I am married, no children and the house is worth c£300k, mortgage free.

We also have c£300k of savings. Having had our fingers burned with equities in the past, we are fairly risk averse and the majority of savings are currently in short term (1y) fixed rate ISAs.

Hubby is 55, worked for same employer for 30+ years but is not currently working and unlikely to be any time soon. He has a DB pension which he can take in 5 years at age 60, which will provide a net income of £18k per annum /£1500 pm (assuming he doesn’t take any cash lump sum).

I also have another DB pension scheme with my first employer which I can draw at age 60, with an expected net income of £6k per annum / £500 pm.      

I currently have a small part time job (zero hour contract) from which I earn c£500 pm.  I quite enjoy the work and am likely to continue this going forward.

We live a fairly modest day to day existence but we do have aspirations to holiday more frequently and at shorter notice. (the part time job situation does allow for this as I work some weeks but not others and I can turn down work if need be).

Going forward I estimate a monthly income of between £3k and £3.5k would cover our needs.  

I am now close to reaching age 55 and am unsure how to proceed. My initial thought was to take the maximum cash lump sum, which I assume is £120k (£400k +£80 =£480k @25%) but hubby is citing current poor savings interest rates and suggesting I at least leave my main DB scheme intact (i.e. commence monthly pension drawdown but with no lump sum withdrawal). I presume by doing so the whole £400k pot would benefit from inflation increases.

So, as a compromise I am now minded to just take my AVC fund of £80k as the tax free cash lump sum, thinking as follows:

From age 55-60
Pension income £1500pm (net from £20k p.a gross) + Job income £500pm  = £2000pm
Shortfall of between £1k & 1.5k per month against desired income, which over 60 months = between £60k and 90k total income shortfall, i.e. roughly the same figure as the AVC cash lump sum (and therefore existing core savings of £300k are left intact).

From age 60 onwards, a further £2k of monthly pension income kicks in from hubby’s pension and my other DB scheme, and we are then slightly above break even going forward.

We are both pension novices and our plans seem too straightforward to be true.
Are there any major flaws in our thinking?
Any input would be much appreciated, thank you.           

enthusiasticsaver

Your figures look pretty good to me.  If your DH is not working can he transfer part of his personal tax allowance to you to save you some tax by way of marriage allowance? I also agree with your DH that as you will not be investing your lump sum and presumably getting poor interest rates on your savings that not taking the lump sum might be better. You have £300k in savings to make up any shortfall so I would not even take the AVC pot.  

squirrelpie

Second the view that your finances and your plan seem to be in pretty good shape. I also think that only investing savings in fixed term products especially short-term ones is not a good strategy so I too would leave as much as possible in the hands of the DB pension managers if you want to continue with that strategy.

Thrugelmir

Is the £400k figure the CETV? DB schemes don't have pots nor allow 25% cash to be withdrawn.  Cash can be withdrawn but at the expense of a lower annual pension.

The 25% can be withdrawn from the AVC element. 

Look into the both of you contributing to SIPPS and obtaining tax relief. That's a pile of cash doing nothing otherwise. 

SheenaG4

enthusiasticsaver said:

Your figures look pretty good to me.  If your DH is not working can he transfer part of his personal tax allowance to you to save you some tax by way of marriage allowance? I also agree with your DH that as you will not be investing your lump sum and presumably getting poor interest rates on your savings that not taking the lump sum might be better. You have £300k in savings to make up any shortfall so I would not even take the AVC pot.  

Thank you. Yes, we did the tax allowance transfer thing a little while ago.

SheenaG4

Thrugelmir said:

Is the £400k figure the CETV? DB schemes don't have pots nor allow 25% cash to be withdrawn.  Cash can be withdrawn but at the expense of a lower annual pension.

The 25% can be withdrawn from the AVC element. 

Look into the both of you contributing to SIPPS and obtaining tax relief. That's a pile of cash doing nothing otherwise. 

From the documentation from the pension scheme - "the value of your pension built up to mm/yy in the scheme is £400k".
In the same booklet, the CETV figure, as at the same date is £680k. 
I was assuming it was the lower figure that was used for working out the 25% tax free lump sum.
I'm sorry but I'm a little confused by your first paragraph. Obviously any lump sum taken will result in a lower annual pension, that's a given. But from what I've read, I can elect to take a 25% tax free cash sum from the combined DB & AVC 'pot', but with the proviso that the "cash will automatically be taken from the AVC fund first"     

Brynsam

Could I suggest that you check out anything where you have written the words 'I presume' or 'I assume'? Sounds picky, but you'd be surprised how often assumptions and presumptions prove to be not quite accurate!

jamesd

With DB you can take 25% of the value off the income (multiplied by something, maybe 20) added to the AVCs and the AVCs can fund this if high enough.

But what you have remains confusing unless, possibly, the income element is one number, DB AVCs the £400k and "AVC" is a defined benefit pot of £680k.

Alternatively, 400k happens to be exactly 20 times the 20k income so the 400k value could be them telling you the value for lifetime allowance purposes of the income part.

Whatever those numbers are you need to understand them and since we don't, you might not either.

You'll also need to find out what can be done with AVCs above the amount used for the tax fee lump sum.

Assuming AVCs do fund the tax free lump sum the benefit of getting that out free of tax is worth more than the interest rates consideration.

Have you started your lifetime allowance planning yet? Reducing that bill might be a reason to take the smaller DB as soon as allowed instead of waiting for its normal pension age

ukdw

I would suggest looking at how much annual income you will have from State pension age, from the 3xDBs plus 2xSP, which should be well in excess of your £36k-£42k requirement, Then if possible trying to give yourselves that sum annually in the intervening years out of DB's as they come available, bridging the difference from DC pensions, lump sums and savings.
I suspect you will find the £80k AVC more useful as bridging cash, rather than as a larger DB that will push your post SP total income (and therefore bridging cash requirement) even higher.
Some of your figures are gross, some net and some I am not sure - so best to work them all out net to make calculations easier.

george4064

SheenaG4 said:

I was made redundant by my second employer in my early 50’s, a few years ago.
The terms were quite generous in that they allowed for me to draw my DB pension early at age 55 without any reduction. The pension scheme wrote last year to advise my pension pot was c£400k and my annual pension 

We also have c£300k of savings. Having had our fingers burned with equities in the past, we are fairly risk averse and the majority of savings are currently in short term (1y) fixed rate ISAs.

We are both pension novices and our plans seem too straightforward to be true.

Are there any major flaws in our thinking?

When you say “having had our fingers burned with equities in the past” what actually happened?

I suspect you were not diversified enough or did not have a strategic plan with your equities that you quickly got ‘spooked’ and have now (it seems) ruled out equity investing because you were inappropriately invested in the first place!

I should make you aware that keeping a lot of your savings in a low earning interest account is risky in its own ways:
1. Inflation risk. Imagine inflation is circa 0.8% per annum and your savings are earning c. 0.5% per annum, you real return (after inflation) is 0.3%
2. Shortfall risk. This is where your savings fall short of your financial objectives and risk ending up not having sufficient assets for your particular goal because your savings generated such a poor return (you are guaranteeing this part because you have put it all into a low interest earning account).

wjr4

Ask if you can take the AVC fully as tax-free cash without it reducing the DB pension too much.