First World Pension Query

SainteeBoy

Morning

Have only recently come across this forum and have learned so much about pensions from the various posters. This has encouraged me to run my situation past more knowledgable people than myself and get a sense check on my pension plans.

I am 60 in April 2022 and my wife is 59 in May 2022 and we both retire today.We live in Scotland where the higher rate of tax kicks in at £43,662.

My wife has an annual pension of £17k and lump sum of £18k. I have a deferred DB annual pension of £39k and a DC annual pension of £7k if I do not take any lump sums.We are both forecast to have £8,500 per annum state pensions at 67.We have £60k in stocks and shares ISA,s and £40k in a general investment account. I also have £35k in a retirement account with st james palace (having read about them on this forum I now realise this might not have been my best decision!)

My thinking is to go with my wife’s pension arrangements as outlined above and for myself to take a reduced DB annual pension of £31k which will also give me a lump sum of approx £145k and to take a reduced DC annual pension of £5k which will give me a lump sum of £44k. This will give me an annual pension income of £36k which will keep me below the higher rate of tax. In addition when I receive my state pension I will have an annual income close to the higher rate of tax.

We have no pressing need for the lumps sums outlined above and will invest in stocks and shares ISA,s, premium bonds and give some to our boys.I have read various posters on this forum suggest that unless you need the lump sums it is usually best to forego the lump sums in favour of higher annual pensions. However is this still a valid point where higher annual pension income will be subject to a higher rate of tax?

Appreciate that to be still contemplating your pension arrangements on the day you retire is not ideal but would be interested in any thoughts on my plans.

Thanks for reading.

MallyGirl

I wouldn't let tax avoidance be the driving force. It sounds like you won't be far over the threshold.
you haven't mentioned family but taking those lump sums brings them into your estate and liable to inheritance tax.
I would be going the other way and using a bit of your savings to top up the gaps that there must be in your NI to try and achieve the maximum state pension

Silvertabby

Happy retirement!

My State pension figures would have been very similar to yours, as I also retired at 60 - but I have topped myself up to the maximum £179.60 per week by buying 4 years of Voluntary Class 3 NIs.

In round figures, that was a one-off payment of £3K in return for an extra £20 per week (£1K per year) index linked State pension.  Even as a basic rate tax payer I will get my investment back in less than 4 years.

This could be a good option for your wife.  Maybe not quite so much for you if you will pay higher rate tax on the extra pension - but still a good deal.

Albermarle

I have a deferred DB annual pension of £39k and a DC annual pension of £7k if I do not take any lump sums

With a DC pension you just have a lump sum , no specific figure for an annual pension, unless maybe does it have some special guarantees ? 

I have read various posters on this forum suggest that unless you need the lump sums it is usually best to forego the lump sums in favour of higher annual pensions. However is this still a valid point where higher annual pension income will be subject to a higher rate of tax?

I would say that whether to take the lump sum or not depends a lot on your personal situation and personality . Plus of course the commutation rate on offer . Some public sector pensions have a poor commutation rate . Yours is 18 which is not the best, but as you say potentially paying higher rate tax swings it more to take the lump sum .Remember the posters on here are not reflective of wider society where the large majority take the lump sum and see it as a kind of retirement bonus.

However note Mally Girls comment about IHT liability before making any decisions.

Secret2ndAccount

You say you have a DC pension of 7k.  DC pensions can normally be accessed very flexibly. If it's an old pension, that might mean transferring it to a different provider, or a newer pension plan with the same provider. Once you have flexible access you can do two things: 
1. Leave the tax free lump sum in the pension until you want it. This allows it (hopefully) to continue to grow, fully protected against tax
2. Take out just the right amount each year to keep you one inch below the higher rate tax limit. Looking at the overall picture, you will probably need to pay higher rate tax somewhere along the line if you want to use up all the money. However, if you leave it in the DC, it passes to your heirs without inheritance tax.

You are close to the Lifetime Allowance. Add up your pensions: 20 x DB + Lump Sum + total DC pot. If that's 1 million, you could be heading for a nasty tax bill. I suggest you read all the threads about LTA and LTA mitigation. That normally means taking the max lump sums. I realise that's the opposite of what I just said above, so you need to lay out your situation very carefully (spreadsheet ideally) and come to some decisions about how to play it. Depends on your inheritance tax position, or your views on you spending the money vs your children.

Also worth continuing to pay your National Insurance contributions to get your State Pension up. State Pension falls outside the LTA, and, even at higher rate tax, the return on NI is very good. Check your State Pension Forecast to see how much you could get.

Albermarle

 I suggest you read all the threads about LTA and LTA mitigation. That normally means taking the max lump sums.

With a DB pension , whether you take the lump sum or not , only has a marginal effect on LTA.

In this case taking the full pension - £39K X 20 = £780K 

Taking lump sum of £145K and reduced pension of £31K = £765 K 

The difference is only really down to the relatively low commutation rate of 18 . If it was the more usual 20 then the LTA figures would be nearly identical. 

What can reduce the LTA contribution is taking a reduced DB pension early , with or without the lump sum. 

Audaxer

I agree with Silvertabby's comments. It would be a good idea to top up your State Pensions over the next few years to the maximum amount.

jim8888

Take your time in your decisions! It took me a full year of thinking about the best way to approach my pensions until I arrived at a "strategy" that I felt comfortable with. You could take some of your lump sum to live on for a while as you look into things. There is fantastic advice available here, but it takes quite a while to digest it all into your own personal circumstances!