Some pension advice please

Nelson1100

I wonder if someone might be kind enough to help a financial dunce with a bit of advice?

I have just turned 59 and always swore I'd stop working before I was 60 so the 12 month countdown has begun.

I have 2 pensions which I have not been paying into for many years in favour of just piling money into various savings accounts so I have a large lump sum set aside for my old age which I intend to draw down to keep me in my golden years.  
However the 2 dormant pensions I hold have a combined total of about £70k as of today and my question is this, what is the most tax efficient way to get my hands on that money now I'm over 55. I know I can draw 25% tax free so that would leave £52.5k with the pension companies, so as I will no longer be working from next year and essentially living off my savings (and lets say I don't earn a penny in interest on them) am I right in thinking that I could take £12,570 a year for the next four years from the pensions without paying tax? Or could I take £7.5k a year out over the next 7 years (before my state pension starts eating up my allowance) to allow for a bit of interest on my savings? Or am I completely wrong and have to pay the tax on the 75%- £52.5k regardless of when & how I take it out?

Hope this makes sense? And thanks for trudging through it! 

Pat38493

Mainly yes you are correct.

Keep in mind the tax year runs April to April so you need to keep in mind any money you have earned from working in the tax year before you retire, but after that it’s £12570 (or whatever that allowance increases to).

As an aside, if you want to post some more details about your situation, assets and spending needs there are lots of knowledgeable people on here who can sense check your plans a bit if you are interested - you can very likely make your money go a bit further by investing at least some of it in other things than cash savings accounts, depending also on your risk tolerance.

Example  - if you want to investigate  a clever trick - you can maybe start paying 100% of your salary into your pension right now, and live of your savings for the next 12 months.  You will get 20% tax rebate added back to the money, and you can then take 25% of it back out tax free when you stop working.

MX5huggy

If you restrict your draw down to £12750 (of taxable pension) then you also get £5000 starting rate for savings which is in taxed at 0% then you have of savings allowance of £1000 as well. 

But before we get there you seem to have missed the pensions magic power. Drop your whole salary in one for this tax year (live off those savings) then because you get the tax relief added on you get the 25% added to what pay in. As you’ve seen you might not pay any tax. Even if you pay 20% because of the 25% tax free you get a benefit of 6.25% on the funds. 

xylophone

 I'd stop working before I was 60 so the 12 month countdown has begun.

No occupational scheme? Or are you self employed/employed by your own company?

I have 2 pensions which I have not been paying into for many years in favour of just piling money into various savings accounts 

 If you have not been contributing to any pension scheme when you had the opportunity you have missed out on valuable tax relief?

Would you wish to consider making a pension contribution in this tax year and the next before your "relevant earnings" cease?   

https://www.royallondon.com/articles-guides/pensions-and-retirement/understanding-pension-tax-relief/

If you have very substantial amounts in savings accounts, you must surely be earning interest whether or  not you are withdrawing it and if you are on even  minimum wage at the moment, presumably you are seeing the effect of this in your tax code( unless in ISAs)?

https://www.litrg.org.uk/tax-guides/savers-property-owners-and-other-tax-issues/savings-and-tax

 However, if we take a person with no income at all other than pension income, £12,570 per annum of that pension would be tax free.

 Thus a person aged 60 with a pot of £70,000 could take £17,500 tax free as a pension commencement lump sum and the balance in equal amounts of income over the years to SPA and pay no income tax.

Or he might prefer not to take the PCLS up front but spread it in equal amounts over those years - it would still be tax free if his only income.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

Marcon

Pat38493 said:

Example  - if you want to investigate  a clever trick - you can maybe start paying 100% of your salary into your pension right now, and live of your savings for the next 12 months.  You will get 20% tax rebate added back to the money, and you can then take 25% of it back out tax free when you stop working.

Just to be clear...although so many websites refer to 'contributing up to 100% of your earnings', the rarely make it clear that includes the tax relief. So if you earn £20,000 a year, and are contributing to a personal pension, you'd pay £16,000 and the provider would add a 25% uplift on the amount you contributed, courtesy of the taxman to your pot, bring the total to £20,000.

Nelson1100

Pat38493 said:

Mainly yes you are correct.

As an aside, if you want to post some more details about your situation, assets and spending needs there are lots of knowledgeable people on here who can sense check your plans a bit if you are interested - you can very likely make your money go a bit further by investing at least some of it in other things than cash savings accounts, depending also on your risk tolerance.

Thanks for your comments -

Basically I'm extremely risk averse which is why I stopped paying into my first pension. For a while the total amount was constantly going down even though I was paying money in so I opted to just put the cash aside (at home) until it became a large enough sum to cause me concerns about being robbed. I did try investing for a while but lost lost the equivalent of a years wages over 2 years and started to develop a gamblers attitude towards chasing losses so cashed out and went cold turkey. It was the darkest period of my life and one I swore I'd never go back to. I have got a Vanguard fund but its barely made me 1% the past year so that seems utterly pointless.

So I'm 59 single, no dependents, own my home, I have no debts & my outgoings are about £600 a month. I earn £52.5k pa with a bonus of around £5k on top due in April.  I have £260k spread accross 3 different savings accounts, £20k in a stocks & shares ISA that's in a Vanguard fund. I have an old pension with Zurich that has £40k in it and a workplace pension with £30k in it (that gets about £350 paid in a month) I have about £10k at home in cash. I'll also be getting my full state pension at 67.

Now I know that doesn't sound like a massive amount (if I'm lucky enough to live 25 more years) but I do own some classic cars & motorcycles which I'm prepared to cash in further down the line if things get tight and I should imagine I will be inheriting some property from my parents estates at some point.

I've been working full time for 43 years and have very little left in the tank, I need to stop working by the end of the year while I still have some semblense of sanity so does anyone have any wise words?

Pat38493

Thanks for the info - I am on a phone so I’ll try to reply in more detail later if someone else doesn’t, but just a couple of additional comments.

Even if you are extremely risk averse, you can still set up a pension account and pay money into it, and have the money kept in cash or very safe investments within the pension wrapper - that is under your control, so you could still do what people have suggested above but keep it as cash in the pension.  Therefore you can still benefit from the approach above.  You could also have the money in the same Vanguard fund that you mentioned as you can choose how the money is invested inside the pension.

Investments  for retirement purposes should be considered in the long term and one year is very short in terms of a 30 or more year retirement period.  In 2022 almost everyone lost money, but in the few years before that returns generally were very good.  Normally we don’t worry about losing money in one particular year, but the performance over periods not less than 5 years.  

It seems like you might have got burned by some poor or unofficial advice in the past.  The other thing to avoid is trying to chase the market selling when it is going down.  A fund like a Vanguard fund might well be a reasonable choice for someone in your situation as they are mainly supposed to track the long term market performance.  That doesn’t mean they won’t lose money in one single year but they should grow during longer periods.

Nelson1100

I suppose one of my biggest questions is that should someone in my financial position pay for financial advice? Would that advice cost more than I would be saving?

I'm wary because of the bad experiences I've had in the past, I'm one of the idiots that was sold an endowment mortgage, I was convinced that investing was relatively risk free & I even got talked into buying a Vauxhall Frontera by people who had a financial incentive to see me take their advice.

I know looking for direction on the internet has its drawbacks but there's a wide variety of folk out there and very few of those benefit from you taking their advice. 

Audaxer

With a salary of £52.5k you could contribute up to £32,000 net into a pension in this tax year and get £8,000 tax relief added to take it up to £40,000 gross - AND as you are risk averse, you don't even need to invest it, you can leave it as cash until you want to draw it out. After you are retired and not earning, you can if you wish still contribute up £2,880 net in each year and get tax relief of £720 added. 

Pat38493

Nelson1100 said:

I suppose one of my biggest questions is that should someone in my financial position pay for financial advice? Would that advice cost more than I would be saving?

I'm wary because of the bad experiences I've had in the past, I'm one of the idiots that was sold an endowment mortgage, I was convinced that investing was relatively risk free & I even got talked into buying a Vauxhall Frontera by people who had a financial incentive to see me take their advice.

I know looking for direction on the internet has its drawbacks but there's a wide variety of folk out there and very few of those benefit from you taking their advice. 

I am just having a look at the numbers you posted.

One question - when you say your outgoings are £600 per month, is that your full spend requirement, or is that your mandatory bills like council tax and so on?

If that's your full spend requirement, you are already in very good shape because your State Pension will cover that already, so you just need to bridge the period till state pension age.  If that's the case, the comments above are not essential but would certainly give you extra spending money in retirement.  

If not, if you give us an idea what you actually think you will need to live on each month during retirement, you will probably get some more specific commentary.

But fundamentally Audaxer and others are correct - you could invest most of your salary during just this one year into a pension like a SIPP fund, and have it kept as cash in the pension.  But it's perfectly possible and you will probably just get a small amount of interest on the cash inside the pension, but, you will make nearly 30% return on that year of money which is a heck of a lot better than any savings account outside the pension wrapper.  The 30% return sounds too good to be true  but it's not from the investments or interest - it's mostly from the tax that you won't be paying.

Regarding financial advice - the legal situation with regard to financial advisers has massively changed since the 1980s.  My wife was one of the people who was "conned" back in the day into transferring her double gold plated NHS pension and leaving the NHS pension scheme.  This happened to a lot of people and after legal cases, she was allowed back in with no loss of service of benefits.

These days, the laws have been massively tightened up and as long as you choose a registered independent financial adviser, they are pretty highly regulated and they cannot be paid by commission on the individual products they recommend.

You have getting on for 400K in assets.  Getting one off advice from an IFA will probably cost you 2-3K, so it's not insignificant but you should get good advice these days.  It kind of depends how much interest you have in these topics - it's perfectly possible to take a DIY approach to these things, but frankly your approach at the moment is very far from what a financial adviser would have recommended.  Unfortunately but understandably given the past events you mentioned, you've missed out on a lot of tax benefits in the past by stopping to put money into your pension, but that's water under the bridge - the question now is more what's the best approach going forwards, and there are things you could do even in the last year of working to give yourself some more spending power in retirement, even things that are very safe.

Finally, please, put the money in your house in a bank account - cash that is in your house is usually not covered in house insurance so you will lose most of it if you are burgled.  In a bank, it's protected up to 85K per institution, so even if the bank went bust (extremely unlikely) you would be protected.

Edit: I do believe that most financial advisers will meet with you for one general meeting free of charge, so you can meet a few and if you don't have a good feeling about it there is no financial commitment there.  There is a link where you can find a registered IFA near where you live but I don't have it to hand - I'm sure someone else can provide it.

Albermarle

Basically I'm extremely risk averse which is why I stopped paying into my first pension

Being too risk averse, is a risk in itself and has probably contributed a lot to your current situation.

I suppose one of my biggest questions is that should someone in my financial position pay for financial advice? Would that advice cost more than I would be saving?

Almost inevitably a financial advisor will recommend you invest a lot more, and not keep too much in cash. You can argue that this would benefit them, but in fact this would most likely be the best advice anyway, and they are legally obliged to give you what is appropriate advice for your situation. Of course there can be some flexibility as to what the client would like to do. However if the advice is to invest 80% of it and you say no, I would rather keep it 90% in cash, then you will have wasted your money .