By not taking a 25% tax free pension pot lump sum would the wife be mad? 19 January at 10:29AM in Pensions, annuities & retirement planning 11 replies 1.4K views

smjxm09

Is there any scenario where NOT taking a 25% tax free pension lump sum is a good idea and just ploughing the additional money into a bigger draw down or annuity?

Background

The wife is just about to turn 60 and has yet to decide whether to keep on working part time or to retire.  She is a part time teaching assistant and is on less than £9000 a year.   Her pension pot from a previous employer, which isn’t final salary, is worth just £45000.    

I am 65 and retired 8 years ago on a final salary pension.  Between us we have investments that generate a good income with enough money in the bank that should last us a lifetime.  Most non ISA investments are in the wife’s name, as she is not a taxpayer.

 The vision.

I have told the wife that when I get my state pension in April I will give her most of it as personal income if she decides to retire, as our investment returns and my private pension goes into the general household funds where I pay all the bills.  I would like to at least see some of my state pension so the more income her pension pot generates the more of my state pension I get to keep, which will actually go into the general household fund.

 Bottom line

She doesn’t need or want £11,250 tax free lump sum. If it went into a separate account she would be unlikely to touch it although she could draw down a small income from it until she gets her own state pension. 

She has said she would like all of her pension pot to pay her an income that is 25% higher by not taking a lump sum, which I agree would be a better outcome.  

She is not a taxpayer so any income remains tax free.

When we saw a Pension Wise person he said she should still take the lump sum but why?

dunstonh

Is there any scenario where NOT taking a 25% tax free pension lump sum is a good idea and just ploughing the additional money into a bigger draw down or annuity?

I would say the majority of clients we deal with in drawdown cases do not take the 25% up front.    

In reality, when it comes to drawdown, the question should not be about "NOT taking a 25% tax free pension lump sum" [upfront] but should you take it.

Annuites should be taken up front unless the GAR makes the tax payable worth it.

Most non ISA investments are in the wife’s name, as she is not a taxpayer.

Maybe she should also be considering the pension tax wrapper.

She doesn’t need or want £11,250 tax free lump sum. 

Well, there you go.  If going into drawdown, she shouldnt take it.

When we saw a Pension Wise person he said she should still take the lump sum but why?

If they said that then the PensionWise person has overstepped their remit and given duff information in the process.  You may wish to consider complaining about them as they could do someone a lot of damage.   Pensionwise does not give advice and the people you speak to are not trained or qualified or anywhere near knowledgeable enough to say such things.

tr7phil

I would say it makes most sense to drawdown as and when from the full fund using UFPLS (Uncrystallised Funds Pension Lump Sums).  This is where you take 25% tax free with each individual drawdown, e.g. £1000 drawn where £750 is taxable (at 0% in your wife's case) and £250 tax free.

Audaxer

smjxm09 said:

She has said she would like all of her pension pot to pay her an income that is 25% higher by not taking a lump sum, which I agree would be a better outcome.  

She is not a taxpayer so any income remains tax free.

Leaving it in the pot and taking out a higher income seems the best outcome, especially as that is what your wife wants to do. She will still get 25% tax free as she withdraws the money, and if that is her only income, she isn't likely to pay any tax on it if she gets it all out of her pension before her State Pension kicks in.

Dazed_and_C0nfused

Bit confused to to be honest.

If she continues working and takes money from the DC pension she could become liable, particularly if she has a reduced Personal Allowance of £11,310.

If she stops work and buys an annuity then she may not pay tax now but once she receives her own occupational and State Pensions she probably will be paying tax.

I think you probably need a clearer idea of her future plans to see the full picture.

She has said she would like all of her pension pot to pay her an income that is 25% higher by not taking a lump sum, which I agree would be a better outcome.  

Wouldn't it be 33% higher 🤔.  

Mothman

Also worth remembering that under current rules DC pensions are outside of your estate for inheritance tax purposes and so can be a useful tool for IHT planning if this is likely to be a future issue.

smjxm09

Well this poses the next question.  Drawdown or annuity?  I manage the wife's financial affairs so if I don't set something up nothing will happen.   Annuities seems to be at recent highs and once set up can be forgotten so no worry if I die.  I would be looking for something similar with a drawdown product where it pays a monthly income and can be forgotten, as the wife would never carry out a review.  

Can a drawdown be tapped for monthly income and forgotten, as she would not require lump sums, as I have yet to investigate this option.      I was thinking about an income of £150 a month/ £1800 a year on a £45k pot, assuming she does retire at 60.  This means a drawdown rate of 4% with possibly no capital growth meaning her spending power will drop each year unless I update it to allow for inflation.  

In 7 years time though she will get a state pension so this is really just a 7 year plan to allow me to keep £150 of my state pension each month.  

If I die she won't run out of money, even allowing for my then half pension passing over to her so it is not critical that her pension lasts her lifetime, although it would be nice. .

xylophone

She is a part time teaching assistant and is on less than £9000 a year. 

Does she contribute to LGPS/TPS Scheme?

Marcon

dunstonh said:

When we saw a Pension Wise person he said she should still take the lump sum but why?

If they said that then the PensionWise person has overstepped their remit and given duff information in the process.  You may wish to consider complaining about them as they could do someone a lot of damage.   Pensionwise does not give advice and the people you speak to are not trained or qualified or anywhere near knowledgeable enough to say such things.

My reaction entirely. OP - at the very least go back to them and ask why that comment was made.

I suspect there could be a bit of fine tuning which has been lost in translation (at least I hope so), such as that piece of 'advice' being given in direct response to a question you/your wife asked, and in context was simply meant as pure information. Either way, as dunstohn says, raise the point if only to help ensure similar confusions don't arise with other people. 

zagfles

Marcon said:

dunstonh said:

When we saw a Pension Wise person he said she should still take the lump sum but why?

If they said that then the PensionWise person has overstepped their remit and given duff information in the process.  You may wish to consider complaining about them as they could do someone a lot of damage.   Pensionwise does not give advice and the people you speak to are not trained or qualified or anywhere near knowledgeable enough to say such things.

My reaction entirely. OP - at the very least go back to them and ask why that comment was made.

I suspect there could be a bit of fine tuning which has been lost in translation (at least I hope so), such as that piece of 'advice' being given in direct response to a question you/your wife asked, and in context was simply meant as pure information. Either way, as dunstohn says, raise the point if only to help ensure similar confusions don't arise with other people. 

I suspect what they meant was taking tax free lump from a DC pension is almost always a good idea, as you could theoretically crystallise the whole pension without taking tax free lump sum and then the whole drawdown will be taxable. This is rarely a good idea.

But the other possibility is phasing the drawdown, eg using UFPLS or phased drawdown, where you crystallise in chunks. Say take £10k a year in a UFPLS of which £2.5k is tax free and £7.5k taxable. Or crystallise £10k a year, take £2.5k tax free cash and draw the £7.5k over the year.

diddyflanker

If it is the TPS or LGPS then, to get the 25% tax-free lump sum, she has to "sell" some of the annual, fully index-linked, pension for a measly 12 times the amount sold.
That, unless she were to die within 12 years, is IMO very poor value.