When not to take a 25% lump sum?

smjxm09

The wife will soon be 60 and is contemplating retirement.  She has a small pension pot of around £45,000 that will keep her in knitting wool by way of a small monthly income.   

Despite a limited fund she doesn't need a lump sum, as we are sitting on cash savings and investment of over £500,000, which pays us an income plus my pension.  It is to be noted that I pay all the bills.   As a way of a top up I said I would give her part of my state pension, which to be honest I won't need when I draw it next April. The more income she gets from her pension pot the less I will need to top up, which is why she is contemplating not taking a tax free lump sum. 

As the wife is not a taxpayer and to maximise her pension income our intention was not to take a lump sum but an ex financial advisor in a conversion said the lump sum should always be taken.   Is that sound advise seeing that most of our cash savings are in her sole name but I can't see the day when those savings, her private pension and state pension  would affect her tax status?

molerat

If it is a DC pension fund then she does not have to take the tax free sum in one go, she could take a monthly income with 25% of each payment being tax free.  More information on the type of pension, and her other income, would be needed to give a clearer view.

Albermarle

You may find the provider's system will be unable to cope with someone not taking the tax free lump sum, as it is so unusual. You can just take it and reinvest it .

Linton

Not taking the lump sum is probably more hassle than taking it.  If your wife will not be a tax payer in retirement whether she takes the lump sum or not makes no difference, so she may as well take it.

dunstonh

As the wife is not a taxpayer and to maximise her pension income our intention was not to take a lump sum but an ex financial advisor in a conversion said the lump sum should always be taken. 

That is why he is an ex financial adviser.  

That used to be the case in the 1990s and is still the case 99% of the time with annuity purchases but it is not the case with drawdown.   Once you leave an industry, your knowledge of the industry goes out of date.    Plus, FAs are limited in what they can do.  It may be that their products forced it.  Whereas an IFA doesn't have that limitation.    So, it could be a mixture of out-of-date knowledge, being an FA rather than IFA or just plain wrong.

I hardly do any drawdown cases where the 25% is taken up front.   Your scenario suggests it shouldnt be taken up front.  Indeed, your scenario could lean to never taking a penny from the pension if your estates are likely to be subject to inheritance tax.

smjxm09

He is still in a financial role advising on pension options only on a government scheme.   He was not allowed to offer financial advice but only on 6 pension options but provided hints on a path forward regarding lump sums.  

The wife's pension goes back many years to a football club she left over 35 years ago and is with Zurich.  It pays out at 60 with a pot of money that she has to decide what to do with.

No other pension apart from a  council pension that is much smaller as she works just mornings.  I think on death in service it would pay out £15,000 if she died tomorrow. That would pay a pension  when she turns 67 so we have demised that for the time being. 

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dunstonh

He is still in a financial role advising on pension options only on a government scheme. 

That makes it worse as Government linked schemes are mostly DB and very often its best not to take the lump sum.  And people in those roles are not authorised to give financial advice.

He was not allowed to offer financial advice but only on 6 pension options but provided hints on a path forward regarding lump sums.  

Those 6 pension options may be only what the scheme/provider offers.  They may not cover all options.   If it led you to the option where taking 25% up front was the best then it is flawed or misunderstood.

The wife's pension goes back many years to a football club she left over 35 years ago and is with Zurich.  It pays out at 60 with a pot of money that she has to decide what to do with.

Most DC schemes only have the age is information only and do not hold you to it.   A small number may have terms that are specific to the age.

Albermarle

The wife's pension goes back many years to a football club she left over 35 years ago and is with Zurich.  It pays out at 60 with a pot of money that she has to decide what to do with

It could well be possible to transfer it to a more modern scheme, with more flexibility/options.

Brie

Albermarle said:

The wife's pension goes back many years to a football club she left over 35 years ago and is with Zurich.  It pays out at 60 with a pot of money that she has to decide what to do with

It could well be possible to transfer it to a more modern scheme, with more flexibility/options.

I doubt it.  I suspect if it was from that long ago it's likely to be a defined benefit scheme as they were much more common then.  And if it is a DB then it may be impossible to transfer it.  And it should be very straight forward to NOT take a tax free lump sum.

Marcon

Brie said:

Albermarle said:

The wife's pension goes back many years to a football club she left over 35 years ago and is with Zurich.  It pays out at 60 with a pot of money that she has to decide what to do with

It could well be possible to transfer it to a more modern scheme, with more flexibility/options.

I doubt it.  I suspect if it was from that long ago it's likely to be a defined benefit scheme as they were much more common then.  And if it is a DB then it may be impossible to transfer it.  And it should be very straight forward to NOT take a tax free lump sum.

There were plenty of occupational DC schemes around from the mid-80s, so no reason it couldn't be DC given the wife is only 59.

dunstonh

With it being Zurich, it is more likely to be a COMP/CIMP or a section 32 buyout bond.  Or maybe it was transferred at some point in its history and is a group PPP or Group SHP.