NHS Pension Lump sum how to invest

Pat38493

My wife is in the NHS 1995 scheme and from what I have read, it's compulsory to take a lump sum on retirement if you are still in that scheme.

She will be retiring soon but she does not need the lump sum amount in the short to medium term - she might need to take out a few thousand here and there over the following 10 years.

Do members have any advice on what is the best thing to do to invest that?  I think it will be between £90K and £100K.  

I am thinking that she should keep 20K or so in cash, invest the maximum in a stocks and shares ISA, but then the question is what to do with the rest during the following few years?  

I assume she is not allowed to put it back into a private pension account as this would be seen as recycling?  Therefore it would have to be invested outside of a pension or ISA wrapper somehow.  I'm wondering if in that situation it might be better to put it against the mortgage especially if the mortgage allows us to take it back out again later as long as it's an overpayment.

Albermarle

If she is not working /earning then the max she can put in a pension would be £2880 and £720 tax relief would be added. No worries about recycling such a small amount .
If she has some earned income during the final tax year she works, she could add more, but would have to have a look at the recycling rules . Keep in mind though these rules were set up to stop fraudulent gangs milking the system and unlikely that HMRC would take much interest in your wife as long as she did not overdo it.
Otherwise you can invest in a GIA ( General Investment account) . CGT and dividend tax can be payable but can usually be avoided on this sort of amount using allowances and some occasional buying and selling to spread CGT liabilities over more tax years .
Or she could just save it and feed the ISA £20K each year.
Or overpay the mortgage .
It is personal decision and dependent on the rest of the family financial circumstances and risk appetite/ need for the money .

Pat38493

Albermarle said:

If she is not working /earning then the max she can put in a pension would be £2880 and £720 tax relief would be added. No worries about recycling such a small amount .
If she has some earned income during the final tax year she works, she could add more, but would have to have a look at the recycling rules . Keep in mind though these rules were set up to stop fraudulent gangs milking the system and unlikely that HMRC would take much interest in your wife as long as she did not overdo it.
Otherwise you can invest in a GIA ( General Investment account) . CGT and dividend tax can be payable but can usually be avoided on this sort of amount using allowances and some occasional buying and selling to spread CGT liabilities over more tax years .
Or she could just save it and feed the ISA £20K each year.
Or overpay the mortgage .
It is personal decision and dependent on the rest of the family financial circumstances and risk appetite/ need for the money .

Thanks - actually that's an interesting point because she is planning to retire on end of April this year, so technically she will have almost a month pay in the 22/23 tax year - as such her normal pension allowance would apply (outside of recycling rules) - however I think I read that you are not supposed to add more than what you added the previous year and that's when it might trigger HMRC to take a look.  Paying £80K in as a lump sum might get their attention even though I am not a fraudulent gang?

I would have to take a look if we overpaid the mortgage, how easy would it be to get some of it back out if we wanted it later, although actually we are planning to downsize in next 5 years anyway.

Also regarding the tax relieve £720 to be added - is this effectively free money from the government?  In that case why doesn't everyone do that?

Dazed_and_C0nfused

Also regarding the tax relieve £720 to be added - is this effectively free money from the government? In that case why doesn't everyone do that?

Not everyone has £2,880 available.

Or believes pensions are a great thing.

It locks money away till you are 55 (or later for some)

75% becomes taxable income when taken out so there is minimal gain (£180) for some and none if you are a basic rate payer now and higher rate payer in retirement.

Pat38493

Dazed_and_C0nfused said:

Also regarding the tax relieve £720 to be added - is this effectively free money from the government? In that case why doesn't everyone do that?

Not everyone has £2,880 available.

Or believes pensions are a great thing.

It locks money away till you are 55 (or later for some)

75% becomes taxable income when taken out so there is minimal gain (£180) for some and none if you are a basic rate payer now and higher rate payer in retirement.

Oh yes of course so if I take a small my tax free cash and put it back in, I will end up with £180 net gain if I am a basic rate marginal rate due to paying tax on 75% of the balance.

However, the growth on it will also be completely tax free so if it's in there for a few years it might also be worth it from that perspective. 

I just read an article that implied that regardless of any other arguments or situation or intentions, I can put up to 30% of the lump sum back into a private pension and the rules won't be broken.  For £2880 it's hardly worth it but for £33K it would be if you are going to leave it there for at least a few years?

So this means that from a £100k lump sum for example, she could put £3K back into a SIPP, £20K into an ISA, and then only leaves £47K to invest in another way.

Edit:  Intersetingly though, the article says that this only applies to PCLS lump sums, and technically I think a mandatory lump sum from a DB scheme is not a PCLS?  Or is it?   The article kind of implies that anything to do with DB schemes doesn't break the rules "in itself".  Since her only pension is a DB scheme, if I read it this way, she could pay the whole amount back into a SIPP.

Dazed_and_C0nfused

You need to have earnings of at least £33k to contribute £33k gross (£26,400 payable by her).

Pat38493

Dazed_and_C0nfused said:

You need to have earnings of at least £33k to contribute £33k gross (£26,400 payable by her).

Good point but I assume this means "taxable income" which means here DB pension, which by coincidence would be around 33K I think, would count?

Or does DB pension income in payment not count as "earnings" in this context?

Edit: to clarify in 22/23 she would have about a month of employment earnings ans 12 months of DB pension in payment.

QrizB

Pat38493 said:

Dazed_and_C0nfused said:

You need to have earnings of at least £33k to contribute £33k gross (£26,400 payable by her).

Good point but I assume this means "taxable income" which means here DB pension, which by coincidence would be around 33K I think, would count?
Or does DB pension income in payment not count as "earnings" in this context?

Pensions are not considered earnings for this purpose.

Here's an article on what counts and what doesn't:

https://rossmartin.co.uk/private-client-a-estate-planning/income-losses-claims-reliefs/1034-relevant-earnings-for-pensions-purposes

Pat38493

QrizB said:

Pat38493 said:

Dazed_and_C0nfused said:

You need to have earnings of at least £33k to contribute £33k gross (£26,400 payable by her).

Good point but I assume this means "taxable income" which means here DB pension, which by coincidence would be around 33K I think, would count?
Or does DB pension income in payment not count as "earnings" in this context?

Pensions are not considered earnings for this purpose.

Here's an article on what counts and what doesn't:

https://rossmartin.co.uk/private-client-a-estate-planning/income-losses-claims-reliefs/1034-relevant-earnings-for-pensions-purposes

OK so actually, you can only pay back in the £2880 described above, unless you have an actual employment income.

So that really means in my case she can only pay in £2880 or whatever the earnings for April 2022 are whichever is higher?

OldBeanz

Pat38493 said:

QrizB said:

Pat38493 said:

Dazed_and_C0nfused said:

You need to have earnings of at least £33k to contribute £33k gross (£26,400 payable by her).

Good point but I assume this means "taxable income" which means here DB pension, which by coincidence would be around 33K I think, would count?
Or does DB pension income in payment not count as "earnings" in this context?

Pensions are not considered earnings for this purpose.

Here's an article on what counts and what doesn't:

https://rossmartin.co.uk/private-client-a-estate-planning/income-losses-claims-reliefs/1034-relevant-earnings-for-pensions-purposes

OK so actually, you can only pay back in the £2880 described above, unless you have an actual employment income.

So that really means in my case she can only pay in £2880 or whatever the earnings for April 2022 are whichever is higher?

80% of her earnings less what she pays into her NHS Pension or £2880.

Flugelhorn

it has varied what my colleagues have done with their lump sums - some paid off the mortgage, one blew the lot on worldwide trips, another one is planning visiting family far away and then putting down a deposit on a city flat and another bought a mobile home on the coast and  I was going to go on a few cruises but then covid happened so have bought a seaside flat instead.