Unexpected pension pot advice

davehsug

Hello everyone. About a year ago, I discovered a pension pot about which I knew nothing. It came to light after I cashed in a small pension with Legal & General £1,000. that again I'd only just found out about. This one is rather larger at £27,000 and when L & G originally contacted me, presumably as a result of getting my details from the previous pension, I assumed there was some mistake. After speaking to them, it turned out that it was as a result of being contracted out over 40 years ago.
I'm unsure as to exactly what to do with it. I have my plans already made, with my state pension & 2 smaller occupational pensions, leaving me not much worse off than working and fairly comfortable. This does mature at age 65 in 2023 rather than my state age of 66. Looking at the annuities they're quoting of not much above £1,000 pa, it seems a rather "small" amount that I don't really need, and my overall health leaves me sceptical that I'd ever come out winning!. If I was to cash it in all at once though, I'd end up in the higher tax bracket for that year. There don't seem to be any bonuses applied at retirement age, so I'd considered taking the 25% tax free in one year - probably next, and the rest the following year. 
Does that seem a practical or even possible way forward?

Marcon

davehsug said:

Hello everyone. About a year ago, I discovered a pension pot about which I knew nothing. It came to light after I cashed in a small pension with Legal & General £1,000. that again I'd only just found out about. This one is rather larger at £27,000 and when L & G originally contacted me, presumably as a result of getting my details from the previous pension, I assumed there was some mistake. After speaking to them, it turned out that it was as a result of being contracted out over 40 years ago.
I'm unsure as to exactly what to do with it. I have my plans already made, with my state pension & 2 smaller occupational pensions, leaving me not much worse off than working and fairly comfortable. This does mature at age 65 in 2023 rather than my state age of 66. Looking at the annuities they're quoting of not much above £1,000 pa, it seems a rather "small" amount that I don't really need, and my overall health leaves me sceptical that I'd ever come out winning!. If I was to cash it in all at once though, I'd end up in the higher tax bracket for that year. There don't seem to be any bonuses applied at retirement age, so I'd considered taking the 25% tax free in one year - probably next, and the rest the following year. 
Does that seem a practical or even possible way forward?

Given the age of the plan, you may find it doesn't support drawdown - but there's nothing to stop you transferring it to a more modern SIPP and you could then take chunks of cash as and when you please. If you wish, you could take no tax free cash initially, then 25% of each withdrawal will be tax free.

dunstonh

This does mature at age 65 in 2023 rather than my state age of 66.

No it doesn't.  It will need to mature before 75 in its current form but can be held beyond that with a modern pension.    The statement age may be 65 but it doesn't mean you need to take it at 65.

If I was to cash it in all at once though, I'd end up in the higher tax bracket for that year. 

Why cash it in if you dont need it?  Why not wait until you need to draw from it?

There don't seem to be any bonuses applied at retirement age, so I'd considered taking the 25% tax free in one year - probably next, and the rest the following year. 

What objective of yours does that achieve? 

Also, you probably cant do that with the plan you have.   A small number of legacy plans can but not many.  You would likely need to move it to a modern plan.

Does that seem a practical or even possible way forward?

Nothing you have said suggests it is suitable.  Or indeed unsuitable as you haven't said what your objective is.

xylophone

In order to access the pension flexibly you may well need to transfer it to a modern plan that supports drawdown.
When do you intend to  retire from employment?

Secret2ndAccount

You need to check the rules of this scheme, as they varied a lot. Specifically: how much is your 27k growing each year that you don't touch it? And, once in payment, does it increase every year with inflation? Leave it in a few years, and it could be 1200/yr, rising with inflation. Starts to look not too shabby. Final question at what rate does it convert from annual payment to lump sum?

If you've looked at the specific rules of your pension, and it still doesn't work for you. If you are sure you are happy to give up a guaranteed pension-for-life, then you need to act swiftly. If the value of your pension goes above 30k you will be legally required to take very expensive financial advice before you can transfer. So you need to get out while the getting is good.

Transfer it to a SIPP.  Leave it in there as you don't need the money. If you have an emergency, you can pull out 1/4 of it tax free. If you want to treat yourself, then take out just what you need, and don't pay too much tax. Never take out so much in one year that you push yourself into higher rate tax.

MallyGirl

Nothing in the OP suggested to me that it is defined benefit so the mention of £30k is irrelevant and advice wouldn't be needed to transfer it to a modern product that supports drawdown.
I know that you (OP) weren't expecting it but no need to give loads of it to the tax man - you can just drawdown as and when. 25% of each withdrawal will be tax free and you will pay tax at your normal rate (taking into account other earnings).

Albermarle

As a final option you can leave it untouched ( or partly )and it can be part of your legacy . The pension sits outside your estate and is not counted for inheritance tax purposes.

hyperhypo

As others have said check the details on the old scheme ...was it possibly a PP related to second state pension ? Some of these late 1980s With Profit schemes had bonuses guaranteed (e.g. 4%) so  might be worth hanging on to perhaps. I had one such , which i transferred to my main SIPP and crystallised it. I did this to produce a cash buffer to offset investments and retire earlier... but in hindsight i'd probably have been better leaving it as is , ie as a low risk invested asset.

Secret2ndAccount

MallyGirl said:

Nothing in the OP suggested to me that it is defined benefit so the mention of £30k is irrelevant and advice wouldn't be needed to transfer it to a modern product that supports drawdown.
I know that you (OP) weren't expecting it but no need to give loads of it to the tax man - you can just drawdown as and when. 25% of each withdrawal will be tax free and you will pay tax at your normal rate (taking into account other earnings).

Only that it's 40 years old. There were a lot more DB schemes about then, or at least there could be protected benefits after more recent legislation.

davehsug

Thanks for the replies and advice and apologies for not responding sooner.
There are no bonuses or defined benefits involved, it just seems to be a straightforward pension pot.
The options outlined in the policy are 1) Do nothing for now. 2) Buy a guaranteed income for life. 3) Take the whole pot in 1 go. 4) Leave the pot invested & make withdrawals when needed.
I sort of assumed I could take the 25% tax-tree, in 1 year and the rest the next, of course being aware it would all be taxed.
A legacy doesn't enter into it, there are no children.
To respond to a point made earlier, I really don't have "objectives". My retirement financial plans were made, so this is absolutely a "bonus" and I intend to treat it as such. I'd quite like to be rather like the person I rather envied when checking-out of a hotel, who said to the receptionist, "See you in 6 weeks". Foreign holidays are a non-starter now due to my partner's health, so I'm not talking extravagance, but the financial freedom to take off to the coast for a few days, whenever some good weather turns up, is very appealing. It is most definitely not going to be lost to care home fees, along with my existing relatively modest savings. Although who knows what's around the corner at this age!

Dazed_and_C0nfused

If I was to cash it in all at once though, I'd end up in the higher tax bracket for that year. There don't seem to be any bonuses applied at retirement age, so I'd considered taking the 25% tax free in one year - probably next, and the rest the following year.

This bit didn't really make sense to me.

If taking it all in one go would put you into the higher rate tax bracket why would you take just the 25% TFLS in one year and then all the taxable income in another?

Wouldn't a more tax efficient option be to take as much as you can each year to stay in the basic rate band?  You would presumably still get it all out in a relatively short time frame.