Early retirement (for now) Pension V savings for an income

DeadlyD

Hello, I've suddenly been put in a fortuitous position of taking an early retirement from a stressful business management role. I intend to re-train for a much lower paid role which will be more fulfilling and vocational combined with the voluntary work I do. As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. I'm 57 with a fund of approx £350,000 with a younger husband in a FT role . My question is 
- if I don't return to work in the next 2 yrs whilst training how does the 25% tax free lump sum work? Can I take say £20k at a time or should I take an income from my pension of £1000 pm which will be tax free. Not sure how a drawdown (monthly) works with withdrawing the tax free lump sum and the best way to avoid paying tax on a pension. Or do I use my savings as income instead?
I've looked for answers across a few different providers including L&G, HL etc but am stuck in trying to understand how the whole drawdown & tax free bit works together. Help! 
DeadlyD 

Marcon

DeadlyD said:

Hello, I've suddenly been put in a fortuitous position of taking an early retirement from a stressful business management role. I intend to re-train for a much lower paid role which will be more fulfilling and vocational combined with the voluntary work I do. As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. I'm 57 with a fund of approx £350,000 with a younger husband in a FT role . My question is 
- if I don't return to work in the next 2 yrs whilst training how does the 25% tax free lump sum work? Can I take say £20k at a time or should I take an income from my pension of £1000 pm which will be tax free. Not sure how a drawdown (monthly) works with withdrawing the tax free lump sum and the best way to avoid paying tax on a pension. Or do I use my savings as income instead?
I've looked for answers across a few different providers including L&G, HL etc but am stuck in trying to understand how the whole drawdown & tax free bit works together. Help! 
DeadlyD 

See https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/what-is-flexible-retirement-income-pension-drawdown for an excellent, clear explanation.

Lots of question on this forum on just this topic - use the search box above to help you narrow them down.

Given that this is presumably the DB pension you transferred to a DC arrangement, are you sure your IFA didn't cover drawdown/tax implications in one of their reports, given that you wanted to transfer to gain control of your pension? Might be worth revising that large heap of paperwork...

Hopefully that will do the trick, but if the penny still hasn't dropped, please come back and set out which bits (assuming it isn't 'all of it'!) are still baffling you.

DeadlyD

Marcon said:

DeadlyD said:

Hello, I've suddenly been put in a fortuitous position of taking an early retirement from a stressful business management role. I intend to re-train for a much lower paid role which will be more fulfilling and vocational combined with the voluntary work I do. As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. I'm 57 with a fund of approx £350,000 with a younger husband in a FT role . My question is 
- if I don't return to work in the next 2 yrs whilst training how does the 25% tax free lump sum work? Can I take say £20k at a time or should I take an income from my pension of £1000 pm which will be tax free. Not sure how a drawdown (monthly) works with withdrawing the tax free lump sum and the best way to avoid paying tax on a pension. Or do I use my savings as income instead?
I've looked for answers across a few different providers including L&G, HL etc but am stuck in trying to understand how the whole drawdown & tax free bit works together. Help! 
DeadlyD 

See https://www.moneyhelper.org.uk/en/pensions-and-retirement/taking-your-pension/what-is-flexible-retirement-income-pension-drawdown for an excellent, clear explanation.

Lots of question on this forum on just this topic - use the search box above to help you narrow them down.

Given that this is presumably the DB pension you transferred to a DC arrangement, are you sure your IFA didn't cover drawdown/tax implications in one of their reports, given that you wanted to transfer to gain control of your pension? Might be worth revising that large heap of paperwork...

Hopefully that will do the trick, but if the penny still hasn't dropped, please come back and set out which bits (assuming it isn't 'all of it'!) are still baffling you.

Thank you ! 

I will check this out.. you are quite right about that heap of paperwork but I did speak to the IFA and they just advised me to pay the mortgage off not much more than that. 

xylophone

https://forums.moneysavingexpert.com/discussion/comment/79068944/#Comment_79068944

A lucky chance with the redundancy package since you had hoped to "retire" anyway after the transfer of the DB pension!

As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. 

You do not intend to bring your pension into payment until April next year?

Where is your pension now?

What options does your provider offer?

If the full range of options is not available, will you need to transfer again?

Would 25% of the value of the pension cover the full repayment of your mortgage?

Audaxer

If you are not going to be working for 2 years, I would ensure during that time that I would drawdown up to my tax-free allowance. That plus the 25% tax free could amount to approximately £16.5k a year. Even if you want to use your savings for income, you can still drawdown that amount from your pension and reinvest it into the same or similar funds within an S&S ISA.

phynix_uk

I agree with Audaxer, even if savings are available, you should consider drawing your personal income from your pension equal to the current personal income tax allowance of £12,570. To explain how drawdown works in a defined contribution (DC) pension:

You receive 25% tax free and 75% as income. In drawdown, you can stipulate how you draw funds from the pot meaning you can draw tax-free cash out on its own, income on its own or a combination.

Assuming you have no other taxable income, you can crystallise £16,760 of the pot. This 'benefit crystallisation even' will mean that of the £16,760, 25% is tax-free (£4,190) with the remaining 75% (£12,570) paid as income but equals your personal income tax allowance.

Pat38493

DeadlyD said:

Hello, I've suddenly been put in a fortuitous position of taking an early retirement from a stressful business management role. I intend to re-train for a much lower paid role which will be more fulfilling and vocational combined with the voluntary work I do. As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. I'm 57 with a fund of approx £350,000 with a younger husband in a FT role . My question is 
- if I don't return to work in the next 2 yrs whilst training how does the 25% tax free lump sum work? Can I take say £20k at a time or should I take an income from my pension of £1000 pm which will be tax free. Not sure how a drawdown (monthly) works with withdrawing the tax free lump sum and the best way to avoid paying tax on a pension. Or do I use my savings as income instead?
I've looked for answers across a few different providers including L&G, HL etc but am stuck in trying to understand how the whole drawdown & tax free bit works together. Help! 
DeadlyD 

The links above should help but I think most or all of the options you outline could be available depending on which provider you are with.  The most common approaches seems to be to take the 25% tax free all in one go, or to make regular withdrawals of which 25% of each one is tax free.  This could also be provider dependent as there may be charges for each withdrawal.

I’m also a bit curious how you managed to get an IFA to let you transfer your DB pension to DC - I’ve read so many posts on this forum saying that this is very difficult if not impossible.  £330K is not a huge pot in the grand scheme of things when retiring at 57.  Maybe as a couple you have other large guaranteed assets which mitigates the risk of not having your relatively small DB pot?

DeadlyD

xylophone said:

https://forums.moneysavingexpert.com/discussion/comment/79068944/#Comment_79068944

A lucky chance with the redundancy package since you had hoped to "retire" anyway after the transfer of the DB pension!

As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. 

You do not intend to bring your pension into payment until April next year?

Where is your pension now?

What options does your provider offer?

If the full range of options is not available, will you need to transfer again?

Would 25% of the value of the pension cover the full repayment of your mortgage?

Hi Xylophone! Indeed - I think I was very lucky transferring the DB in Feb and then taking a redundancy package. 
I'm unsure whether to live off the severance money for a year + or drawdown.
I have 1 pension combined £200k with L&G (was workplace and transferred DB) and 1 pot with St James Place (£150k) 
I know the L&G offers drawdown, don't think I need to transfer on either one and IFA is casting his eye over it. 
Yes 25% would cover mortgage (£52k)but as I have a much younger other half this isn't really an issue with a low fixed rate.

Marcon

Pat38493 said:

DeadlyD said:

Hello, I've suddenly been put in a fortuitous position of taking an early retirement from a stressful business management role. I intend to re-train for a much lower paid role which will be more fulfilling and vocational combined with the voluntary work I do. As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. I'm 57 with a fund of approx £350,000 with a younger husband in a FT role . My question is 
- if I don't return to work in the next 2 yrs whilst training how does the 25% tax free lump sum work? Can I take say £20k at a time or should I take an income from my pension of £1000 pm which will be tax free. Not sure how a drawdown (monthly) works with withdrawing the tax free lump sum and the best way to avoid paying tax on a pension. Or do I use my savings as income instead?
I've looked for answers across a few different providers including L&G, HL etc but am stuck in trying to understand how the whole drawdown & tax free bit works together. Help! 
DeadlyD 

The links above should help but I think most or all of the options you outline could be available depending on which provider you are with.  The most common approaches seems to be to take the 25% tax free all in one go, or to make regular withdrawals of which 25% of each one is tax free.  This could also be provider dependent as there may be charges for each withdrawal.

I’m also a bit curious how you managed to get an IFA to let you transfer your DB pension to DC - I’ve read so many posts on this forum saying that this is very difficult if not impossible.  £330K is not a huge pot in the grand scheme of things when retiring at 57.  Maybe as a couple you have other large guaranteed assets which mitigates the risk of not having your relatively small DB pot?

It's not for the IFA to 'let' someone transfer a DB pension. Their role is to give advice which complies with FCA requirements where a scheme has safeguarded rights and a transfer value of £30,000+. Once the ceding scheme is satisfied that the member has received advice, they can pay out the transfer. It is up to the member whether or not to follow the advice they were given - assuming they can find a receiving scheme willing to accept the transfer if the advice is to stay put.

DeadlyD

phynix_uk said:

I agree with Audaxer, even if savings are available, you should consider drawing your personal income from your pension equal to the current personal income tax allowance of £12,570. To explain how drawdown works in a defined contribution (DC) pension:

You receive 25% tax free and 75% as income. In drawdown, you can stipulate how you draw funds from the pot meaning you can draw tax-free cash out on its own, income on its own or a combination.

Assuming you have no other taxable income, you can crystallise £16,760 of the pot. This 'benefit crystallisation even' will mean that of the £16,760, 25% is tax-free (£4,190) with the remaining 75% (£12,570) paid as income but equals your personal income tax allowance.

Ah so I can "use" both pots at the same time ie 25% of the tax free (Pot1) and 75% income as drawdown (Pot2) Thank you for explaining. Why the figure £4,190? 
Is it possible to take income (£12,570 pa within tax allowance) and more of the 25% tax free (pot1) in any one year? 
Sorry if I'm missing a point..

Pat38493

Marcon said:

Pat38493 said:

DeadlyD said:

Hello, I've suddenly been put in a fortuitous position of taking an early retirement from a stressful business management role. I intend to re-train for a much lower paid role which will be more fulfilling and vocational combined with the voluntary work I do. As this has happened sooner than I expected and I have received a severance package, I will be living off this income until the new tax year. I'm 57 with a fund of approx £350,000 with a younger husband in a FT role . My question is 
- if I don't return to work in the next 2 yrs whilst training how does the 25% tax free lump sum work? Can I take say £20k at a time or should I take an income from my pension of £1000 pm which will be tax free. Not sure how a drawdown (monthly) works with withdrawing the tax free lump sum and the best way to avoid paying tax on a pension. Or do I use my savings as income instead?
I've looked for answers across a few different providers including L&G, HL etc but am stuck in trying to understand how the whole drawdown & tax free bit works together. Help! 
DeadlyD 

The links above should help but I think most or all of the options you outline could be available depending on which provider you are with.  The most common approaches seems to be to take the 25% tax free all in one go, or to make regular withdrawals of which 25% of each one is tax free.  This could also be provider dependent as there may be charges for each withdrawal.

I’m also a bit curious how you managed to get an IFA to let you transfer your DB pension to DC - I’ve read so many posts on this forum saying that this is very difficult if not impossible.  £330K is not a huge pot in the grand scheme of things when retiring at 57.  Maybe as a couple you have other large guaranteed assets which mitigates the risk of not having your relatively small DB pot?

It's not for the IFA to 'let' someone transfer a DB pension. Their role is to give advice which complies with FCA requirements where a scheme has safeguarded rights and a transfer value of £30,000+. Once the ceding scheme is satisfied that the member has received advice, they can pay out the transfer. It is up to the member whether or not to follow the advice they were given - assuming they can find a receiving scheme willing to accept the transfer if the advice is to stay put.

Yes understood I was over simplifying it, but from a lot of other posts I got the impression this is the catch 22 - nobody will accept it.  However it appears there are still a few options like the one mentioned in the other thread.