When not to take a 25% lump sum?

xylophone

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 is just possible that this is a S32 - is there any mention of a GMP?

Otherwise, what options has the provider offered?

smjxm09

The Zurich pension letter just gives pension value and gives 5 options. 

1/Keep it where it is and keep the money invested.

2/ Buy an annuity

3/ Drawdown

4/ Take a lump sum.  Taking a lump sum seems to be optional and "may" be offered.

5/ A combination of the above

Going back to my original post, which hasn't been answered and assuming it can be done.  If the wife it not a taxpayer, is unlikely to ever be a taxpayer, doesn't need a lump sum and would rather have a higher income to save me topping it up each month by a greater amount out of my pension, what is the disadvantage of not taking the lump sum and are there any situations where not taking a lump sum is a better option?

I just need points to conciser.  No doubt we will end up at the door of a FA but I want to go in there with thoughts.

Thanks

wjr4

Does she even need it? It’s outside of your estate for IHT purposes currently. Why not use your cash and investments to provide a monthly income for her and leave the pension until you don’t have an IHT issue? 

dunstonh

If the wife it not a taxpayer, is unlikely to ever be a taxpayer, doesn't need a lump sum and would rather have a higher income to save me topping it up each month by a greater amount out of my pension, what is the disadvantage of not taking the lump sum and are there any situations where not taking a lump sum is a better option?You would be wasting to the tax free lump sum in that scenario.   Taking the 75% upto the personal allowance with the 25% linked to that 75%  would be more efficient.
And as wjr4 says above, why bring money into the estate when you have plenty outside of it that can be used in its place?

Stop thinking of the pension is being a standalone product.   Think of your savings/investments/pensions as a single lump of money.    You then draw from that in a way that is the most tax efficient both now AND in the future.

No doubt we will end up at the door of a FA but I want to go in there with thoughts.Never use an FA.  If you need advice, use an IFA.

Secret2ndAccount

Is your wife entitled to a full State Pension? If so, then she will likely become a taxpayer when that kicks in. In which case you might want to drain the 45k before that. If the pension can be transferred to a modern one, she could then take the tax free element in stages, e.g. 2k tax free, and 6k taxable each year. 
If she doesn't have a full state pension she should look into making extra voluntary NI payments to increase her entitlement. Do this soon, as many years will become unavailable for purchase after April. The value of these top ups is much more than the marginal value of taking or not taking the lump sum.
If she genuinely, really will never pay tax, then there's no loss in not taking the tax free element. As mentioned, your provider's software or admin may baulk at the concept.
Have you taken advantage of the Marriage Allowance? She can give you 1,260 of her tax free allowance so you pay less tax.

State pension in 2023: 10,600
2024 (guesstimate):    11,000
2025 (who knows):     11,300
...
Income tax threshold: 12,570 frozen until 2028

So someone with any amount of income beyond their SP is likely to be a taxpayer. Also, might not like to think about it but, if you were to depart this mortal coil, and she became the one collecting interest on 500k, she would again be looking at an annual  tax bill...

smjxm09

OK, thanks for the input.  I have much to think about.

Yes we claim marriage allowance. She will get the full state pension but that is 7 years away. She can earn £6000 in savings income taking her to over £16,000 tax free with the marriage allowance reduction, which is a consideration, but much of our money is rapped in ISA’s including income funds.

xylophone

but much of our money is rapped in ISA’s i

Bit of a song and dance?

Does your wife want to bring the pension into payment?

Have you considered your IHT situation?

Would you wish to consider making gifts to eg children/grandchildren?