Royal Mail Pensions - Cash Balance help

Sunshine_and_Roses

My husband is due to retire from Royal Mail soon, and we have the paperwork options for his pensions.  Royal Mail have had lots of changes over the years with their pension schemes which does not make things easy.

I am ok with the Final Salary pensions.  He took his Royal Mail Statutory Pension Scheme (RMSPS) Age 60 pension and lump sum when he turned 60, so will take the RMSPS Age 65 and a small lump sum when he retires.  Both of these are managed by Capita.  The Royal Mail Pension Plan is confusing me more as there are more options to choose from.  I understand the smaller pension and larger lump sum v larger pension and smaller lump sum (favouring the first option), but then the Cash Balance pension pot is thrown in.  I believe that this can be combined with the pensions/lump sum or taken as a separate payment of either 25% tax free and 75% taxed, to be paid 8 weeks later, or 75% to be transferred to another investor and used as monthly/yearly taxed amounts.

Our thoughts are to take the larger lump sums and smaller pensions, and take all the Cash Balance using the 25% tax free 75% taxed option.  He will not get state pension for another year but we plan to use the lump sum cash to subsidise the pension if needed.

I know everyones circumstances are different, but would this seem a sensible option or am I missing something?  Grateful for any advice.

Albermarle

I understand the smaller pension and larger lump sum v larger pension and smaller lump sum (favouring the first option)

With Final Salary pensions ( or to be more accurate - Defined Benefit pensions) whether to take the lump sum, depends on a few things, but one critical issue is how much £ of pension is given up for each £ of lump sum . If you divide the lump sum by the amount of reduced pension you get the 'commutation factor' . If this is less than 20 , taking the lump sum is usually poor value. Ideally should be over 20 .

 but then the Cash Balance pension pot is thrown in.  I believe that this can be combined with the pensions/lump sum or taken as a separate payment of either 25% tax free and 75% taxed, to be paid 8 weeks later, or 75% to be transferred to another investor and used as monthly/yearly taxed amounts.

Normally it is not a good idea to take a pension as one big lump sum, ( unless it is a  small amount) as the 75% taxable all occurs in one tax year, and added to other taxable current income , he could end up paying 40% tax on some of it.

I am not familiar with the Royal mail situation specifically, but I am guessing with the other option, 100% will be transferred to another pension provider. Then you can take the 25% tax free from them, although if you do not actually need it , it might well be better to take it a later date, or even in tranches. Unlike the DB pension, there is no deadline ( like age 60 or 65) when you have to start taking money from the pension.

Normally the 75% remains invested ( or in cash ) and you can then take a regular or ad hoc payments from it. Clearly the quicker you take money from it the quicker it will run out.

Sunshine_and_Roses

Albermarle said:

I understand the smaller pension and larger lump sum v larger pension and smaller lump sum (favouring the first option)

With Final Salary pensions ( or to be more accurate - Defined Benefit pensions) whether to take the lump sum, depends on a few things, but one critical issue is how much £ of pension is given up for each £ of lump sum . If you divide the lump sum by the amount of reduced pension you get the 'commutation factor' . If this is less than 20 , taking the lump sum is usually poor value. Ideally should be over 20 .

 but then the Cash Balance pension pot is thrown in.  I believe that this can be combined with the pensions/lump sum or taken as a separate payment of either 25% tax free and 75% taxed, to be paid 8 weeks later, or 75% to be transferred to another investor and used as monthly/yearly taxed amounts.

Normally it is not a good idea to take a pension as one big lump sum, ( unless it is a  small amount) as the 75% taxable all occurs in one tax year, and added to other taxable current income , he could end up paying 40% tax on some of it.

I am not familiar with the Royal mail situation specifically, but I am guessing with the other option, 100% will be transferred to another pension provider. Then you can take the 25% tax free from them, although if you do not actually need it , it might well be better to take it a later date, or even in tranches. Unlike the DB pension, there is no deadline ( like age 60 or 65) when you have to start taking money from the pension.

Normally the 75% remains invested ( or in cash ) and you can then take a regular or ad hoc payments from it. Clearly the quicker you take money from it the quicker it will run out.

Thanks for your really helpful reply, it's much appreciated.

As most of his pension was taken at 60, the amounts for the age 65 pensions are small.  The difference between the high and low annual pension amounts is only a couple of hundred pounds, which was why we were leaning towards the larger cash lump sum. 

The amount in the Cash Balance pot has only been paid into over the last four years, and is just over £26k.  So £6.5k would be tax free and £20k would be taxed.  He had/will have a wage in April, May and June, then pensions from July onwards.  If I add these amounts plus the £20k (assuming the other lump sums are tax free) this will be less than £50k for 2022/2023, so still in the lower tax bracket.  But does this mean that he will pay tax on his pension as well as the £20k?

Albermarle

Once the tax free amount is taken, all pension income is taxable in the same way that earnings from income is, including the state pension.
Just as when in employment you get a personal tax allowance of £12570 .
So for tax year 22/23 - he will have income from the pension taken at 60 + salary for 3 months + this smaller pension starting at 65 + any taxable income taken from the cash balance pension. Add it all up and anything above £12570 ( unless there is other income or special situations that affect this personal allowance) will be taxable at 20% , or if it adds up to more than £50 , then some 40% tax . If this is an issue then it could probably be avoided by delaying some of the taxable income to a later tax year.

Apart from tax issues, as said already, it is not necessary to cash in this £26K asap. unless you actually need the money.
If you do not need the money, it is probably best left as something to take later when you might need it more.

GunJack

Yes...you pay tax on all income over the personal tax allowance

Sunshine_and_Roses

Thanks.  I pass on some of my allowance to him as I only work part time, therefore his three months wages and nine months pension will take him approx £2k over his personal tax allowance for 2022/2023.  

The options for the £26k are to 'transfer to another provider' for either the whole amount or 75%.  I have no idea on where to start looking for providers for this - could you point me in the right direction please?

xylophone

I have no idea on where to start looking for providers for this - could you point me in the right direction please?

You have a wide choice of pension providers.

It is a matter of contacting the provider of your choice who will organise the transfer on your behalf.

https://moneytothemasses.com/saving-for-your-future/pensions/the-best-cheapest-sipps-low-cost-diy-pensions

Or you could look a personal pension from the likes of Standard Life or Aviva or Legal and General etc

Dazed_and_C0nfused

clareski said:

Thanks.  I pass on some of my allowance to him as I only work part time, therefore his three months wages and nine months pension will take him approx £2k over his personal tax allowance for 2022/2023.  

The options for the £26k are to 'transfer to another provider' for either the whole amount or 75%.  I have no idea on where to start looking for providers for this - could you point me in the right direction please?

Assuming getting the full Personal Allowance will be of no use to you then he needs to be careful to avoid becoming a higher rate payer otherwise he will lose the benefit of Marriage Allowance from that year onwards.

You could apply again for the next tax year but the year he is higher rate would be wasted.

When working out if he (the Marriage Allowance recipient) will be a higher rate payer you ignore Marriage Allowance as that doesn't increase his Personal Allowance, it just entitles him to a deduction off whatever his tax liability is.

£1 into higher rate tax means he would lose the £252 Marriage Allowance deduction ☹️

Albermarle

clareski said:

Thanks.  I pass on some of my allowance to him as I only work part time, therefore his three months wages and nine months pension will take him approx £2k over his personal tax allowance for 2022/2023.  

The options for the £26k are to 'transfer to another provider' for either the whole amount or 75%.  I have no idea on where to start looking for providers for this - could you point me in the right direction please?

It is probably easier than you think, to set up a new pension online and request a transfer in . When the money arrives , you have two basic options. 1) Keep it in cash , earning zero interest or 2) Buy an investment(s) 
Option 1) is more suitable if you want take the pension out in the near future and Option 2) is more suitable if you want to leave it for later.
Two hints ;
1) Better to transfer 100% over, the process will be simpler with less potential admin issues.
2) Understandably pension providers are not mad keen on clients who transfer in and then take it all out again very quickly. It costs them a  lot more than they will ever gain in charges/fees. One provider ( AJ Bell)for sure has a £300 penalty for doing this within 12 months. When you decide which provider to use , have a close look at the small print on this issue.