Some pension advice please

Pat38493

Nelson1100 said:

Thanks for your help here guys, this feels so much less like stumbling about in the dark.

So as you can probably imagine I don't know much about my pensions but looking through the documentation the Legal & General one is L&G PMC Fixed Interest Fund 3 as far as I can tell.  Is that enough information? But looking through the details it's lost 4.92% since 2017!  (I wish I hadn't looked now)

I will talk to my company's payroll dept this week and see what they can do with regards paying more in.
But for my understanding - if I put £4k in to it a month when it comes to withdrawing it I would get £1k back tax free and then if I draw the £3k in small increments over time I would only pay 20% as long as my net income was under £50k?

Do L&G do that? Does my pension become like a savings account where where I can just call up and say "can you transfer £5k this quarter and then £4k the next?


The Zurich one is called Zurich Adaptable Pension Plan (PBP) but I can't seem to find out much about this one.

Regarding the part in bold, yes but it's even better than that because you won't pay any tax on the 4K that you put into the pension now.  The money that you put in your ISA, you have already paid 20% (or even a little but of 40% if you are on 52K) tax on it - that means you can put 4K in your pension but for the same amount of your own money, you can only put £3200 into your ISA during the same period.   The other £800 is lost forever to HMRC.  So you get 3 benefits
- No tax on the way in.
- 25% tax free on the way out.
- Further £12570 tax free on the way out in the year that you withdraw it plus 20% on the rest.

This is all completely safe because you can choose what fund the money is in within the pension - as alluded above, if it's in a fund that has a lot of equities don't be surprised or alarmed if it goes down sometimes - this is perfectly normal and it will go up again over long periods like 5 years or more.  However you can have it in cash.

Further - if I were you I would look into this with some level of urgency (not panic level).  Reason - all this information is calculated by the tax year and this tax year finishes in beginning of April 2023.  As such, you have the opportunity to put nearly all of your income from the past year into your pension right now - i.e. if you could potentially put 40K or whatever into your pension now from your savings.  This is assuming that your employer will allow you to make one off contributions or L&G will allow you do do it directly (most of them do).  Then, in the tax year 23/24, you can increase your pension contributions massively and get the same benefits next year.  In the meantime you have plenty of cash to spend.

You are allowed to put as much into your pension as you are earning in each tax year (there is also a limit of 40K per tax year but you can roll over your 40K from the prior 3 years as well).  Once you stop earning, you are then limited to only a small contribution each year, so this should be a priority to investigate further.  

I suspect that if you book a trial session with an IFA, this is pretty much the first thing they will tell you as well when you describe your situation.

As regards the fund "L&G PMC Fixed Interest Fund 3" - I'm hoping someone else will comment on that as there are much better experts on that part of it than me.  However it seems to me like you must have picked that fund yourself at some time in the past because it doesn't seem at all like a fund that an employer would select as their default.  Having a quick look at the fact sheet, it's a fund that from my limited understanding should grow in almost any year and should be less volatile than equities, but unfortunately 2022 was a very strange year for investments where even fixed interest investments like these went down - all the damage is in 2022.  Others can comment better than me on it, but as I said above, there is nothing to stop you putting your entire pension fund inside the pension into cash, although most people wouldn't recommend it.

In fact it looks to me like this is a UK only fund was hit by the notorious actions of one Liz Truss, but I am not the main expert there so let's see what others say.  You might want to consider investing in a range of items from different countries rather than only UK items, but again I'm not the main expert there (which is what your Vanguard fund will be as it will not be invested only in UK items)

Grumpy_chap

Nelson1100 said:

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

12-month count down so you will be retiring Christmas 2023 (give or take).
That means you have the remainder of the current tax year plus 9 months of the next tax year before you retire.

Nelson1100 said:

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.

Even taking into account the "risk averse" approach, it makes very little sense to incur tax at 40% on some of your income this year when you could contribute your full earnings this year (gross) into a pension scheme.  If possible through an employers' Salary Sacrifice scheme if available.  You'd also get the employer's contributions to the pension, so more free money.  You can select low risk funds within that pension scheme; it may even offer the potential for cash funds.  There will be a lot more cash if put into the pension this way than added into whatever savings vehicles you have outside a pension.

You will need to check that the full £57.5k can be paid into the pension because of the Annual Allowance rules.  The basic restriction is £40k, but I believe you can use carry-forward as you were not contributing over recent years and I think the dormant pension schemes still qualify as being a member of a pension in the years you wish to use the carry forward.  That would be something to double-check.

That needs to be done before the end of March for this tax year.

Then next tax year, you will have £52.5k x 9/12 = £39,375 + £5k bonus = £44,375.  You can do the same to pay as much as possible into the pension before you retire, so maximising the tax-efficiency of everything and making the pot as large as you can.

Based upon your current funds:
 - £260k savings
 - £20k ISA
 - £40k old pension
 - £30k workplace pension

That is a total of £350k.

Given the risk-averse approach to investing, the most that will yield you as a retirement income is around £10k per year, so £900 per month.
At that kind of withdrawal rate, you are below the income tax thresholds and tax is not a matter of concern, at least up until the time you reach state pension age when you will receive another £10k or thereabouts per year.
Even then, because your withdrawal will be mostly from savings as opposed to pension, you are likely to still be entirely below tax thresholds.
Pension income plus interest is income and subject to tax.
Whatever level of withdrawal you take from savings is not income.

Are you certain about your spend forecast of £600 per month?
It is massively less than you have been taking home from your £52.5k per year job (would have been about £3k per month).

Nelson1100

Grumpy_chap said

Are you certain about your spend forecast of £600 per month?
It is massively less than you have been taking home from your £52.5k per year job (would have been about £3k per month).

Yes I reckon I could live off £600 pm if I had to. I own my house, I live alone (mostly in only two rooms), no dependents, and because I have several trades under my belt plus a garage & shed full of tools I'd deal with most household repairs and anything to do with cars myself once I had unlimited time on my hands.

I currently net about £3120 pm from work and save about £2200 of that leaving me with approx £900 pm. About £300 of that is spent commuting to/from work + lunches, coffees etc so that'd all go when I retire but basic living expenses would be around that £600 pm plus a bit of food. 

L9XSS

Vanguard are paying 3.2% interest on cash in there SIPP, after charges.

Nelson1100

As regards the fund "L&G PMC Fixed Interest Fund 3" - I'm hoping someone else will comment on that as there are much better experts on that part of it than me.  However it seems to me like you must have picked that fund yourself at some time in the past because it doesn't seem at all like a fund that an employer would select as their default.  

I'm pretty sure I didn't pick that fund as I didn't even realise I had a choice. Should I be looking at something different? 

But according to my rough numbers if I was grossing £4300pm and sticking it all in to my pension for 10 more months that would be £43000, when I came to drawing it out I could take £10750 (25%) tax free and that would leave £19680 (remainder less £12570) taxed at 20% giving me a net of £39064.
Whereas £43000 over 10 months at 20% would be a net of £36914.  

So by my calculations I'd be £2150 better off?
 

Pat38493

Nelson1100 said:

As regards the fund "L&G PMC Fixed Interest Fund 3" - I'm hoping someone else will comment on that as there are much better experts on that part of it than me.  However it seems to me like you must have picked that fund yourself at some time in the past because it doesn't seem at all like a fund that an employer would select as their default.  

I'm pretty sure I didn't pick that fund as I didn't even realise I had a choice. Should I be looking at something different? 

But according to my rough numbers if I was grossing £4300pm and sticking it all in to my pension for 10 more months that would be £43000, when I came to drawing it out I could take £10750 (25%) tax free and that would leave £19680 (remainder less £12570) taxed at 20% giving me a net of £39064.
Whereas £43000 over 10 months at 20% would be a net of £36914.  

So by my calculations I'd be £2150 better off?
 

You are getting the idea now but in a way it could be even better.

What % does your employer put in to your pension?  It probably won't affect you but normally there are 2 limits that apply at the same time:

- You cannot put more than 40K into the pension in any one tax year, BUT, you are allowed to roll forward unused parts of your 40K allowance from the previous 3 tax years.  Based on your posts you have a lot of allowances left so you would have no issue putting 43K into your pension in 10 months.
- You cannot contribute more to your pension in any one tax year than the amount you earned from qualifying income (for example your job), including your employer's contributsions.  That means if you are earning 43K but your employer is putting in 1K for example, you can only put in 42K in that tax year.  This second limit doesn't have a rollover - it's based only on the current year.  

BUT - keep in mind that this 10 months falls into 2 different tax years.

Therefore before April 6th this year, you could put 52K minus your employer's contributions into your pension.  Usually there is nothing to stop you taking your cash out of your ISA or your bedroom, and putting it into your pension scheme as a one off payment. As long as you don't put more in than you have earned in that tax year you are fine.

Then, after April 6th 2023, you can put another 100% (minus employer contributions) of your salary into your pension for the remaining of the year (also if you get a bonus you can put that in too).

So as well as looking at it by "10 months left to go" you need to also think about it by tax years 22/23 and 23/24.

The next thing is that you don't have to take all the money out again in the same year, so potentially you would not pay any tax at all on the way out depending on how you manage your retirement, so again the benefit to you would be even bigger than you calculate.

Regarding the fund that you are in - if you didn't pick this fund, the only other possibility I can think of is that you were moved into this fund automatically because you are approaching the age at which you told your pension scheme you were going to retire - some schemes have something called "lifesytling" which basically moves your investments into lower risk (but not zero risk) funds as you get towards retirement.

I am hoping that as we get into the week some better expert will post their comments specifically on the fund you named "L&G PMC Fixed Interest Fund 3" - fund factsheet says

"To maximise returns by investing in UK Government stocks and other readily marketable fixed interest securities. The fund may also include stocks of overseas governments and companies."

This fund doesn't look to me like it's doing well over the last 3 years but I am not an expert in these types of funds.  However I wouldn't suggest to change anything until you get some advice, ideally from an IFA but at the least some comments from other more knowledgeable posters here (especially since this fund actually grew again in the last 3 months).  Even in this fund you would still have been better off than outside the pension because the tax gains would have more than offset the losses on the fund.  

Nelson1100

Pat38493 said:

Regarding the fund that you are in - if you didn't pick this fund, the only other possibility I can think of is that you were moved into this fund automatically because you are approaching the age at which you told your pension scheme you were going to retire - some schemes have something called "lifesytling" which basically moves your investments into lower risk (but not zero risk) funds as you get towards retirement.

Yes I think you're right - I have the retirement age set to 60 years old so they must have moved it.

Audaxer

Nelson1100 said:

As regards the fund "L&G PMC Fixed Interest Fund 3" - I'm hoping someone else will comment on that as there are much better experts on that part of it than me.  However it seems to me like you must have picked that fund yourself at some time in the past because it doesn't seem at all like a fund that an employer would select as their default.  

I'm pretty sure I didn't pick that fund as I didn't even realise I had a choice. Should I be looking at something different? 

But according to my rough numbers if I was grossing £4300pm and sticking it all in to my pension for 10 more months that would be £43000, when I came to drawing it out I could take £10750 (25%) tax free and that would leave £19680 (remainder less £12570) taxed at 20% giving me a net of £39064.
Whereas £43000 over 10 months at 20% would be a net of £36914.  

So by my calculations I'd be £2150 better off?
 

Why would you want/need to take it all out in one year and get taxed on some of it? As I said in an earlier post you could draw out the tax free amount, and the taxable part up to your personal tax allowance over 3 years, and not pay any tax, providing that was you only income in retirement.

Nelson1100

Audaxer said:

Why would you want/need to take it all out in one year and get taxed on some of it? As I said in an earlier post you could draw out the tax free amount, and the taxable part up to your personal tax allowance over 3 years, and not pay any tax, providing that was you only income in retirement.

No I wouldn't necessarily take it all out in one year, this is the part I never understood until recently, when the government said we could take our pension as a lump sum a few years ago & only pay tax on 75% I took it to mean if I had £40k in there I would get £10k tax free and pay tax on the £30k, but I thought (and to be honest Zurich never explained it to me) that it had to be all in one go.  I will call them again tomorrow but as I mentioned earlier - once I've taken my tax free 25% can I just call up Zurich or L&G and ask for a few thousand here and there to be transferred out? Do they have a minimum withdrawal amount  or a maximum number of withdrawals a year? 

Pat38493

Nelson1100 said:

Audaxer said:

Why would you want/need to take it all out in one year and get taxed on some of it? As I said in an earlier post you could draw out the tax free amount, and the taxable part up to your personal tax allowance over 3 years, and not pay any tax, providing that was you only income in retirement.

No I wouldn't necessarily take it all out in one year, this is the part I never understood until recently, when the government said we could take our pension as a lump sum a few years ago & only pay tax on 75% I took it to mean if I had £40k in there I would get £10k tax free and pay tax on the £30k, but I thought (and to be honest Zurich never explained it to me) that it had to be all in one go.  I will call them again tomorrow but as I mentioned earlier - once I've taken my tax free 25% can I just call up Zurich or L&G and ask for a few thousand here and there to be transferred out? Do they have a minimum withdrawal amount  or a maximum number of withdrawals a year? 

You should theoretically be able to take out any amounts you want at any time, but this depends on the operational procedures of the pension scheme.  I don't know anything about Zurich so they would have to tell you what their process is for withdrawals - for example some schemes allow you to set up a regular withdrawal monthly, and others you have to trigger the withdrawals.  Some would make a charge for each withdrawal, others don't, or maybe allow x number of free withdrawals per year.

But as said above, if Zurich or whoever doesn't provide the flexibility you are looking for, you can transfer the fund to another provider.

Taking the money out is not quite as simple as taking money out of a cash machine - especially the first withdrawal - there will probably be paperwork to fill in and checks to do.  Depending on the scheme it could take anything from a day or two to a few weeks to get each withdrawal that you request.

All these comments are assuming that you have the money in a pension that allows flexible withdrawals using "drawdown".  But as I say above, if it doesn't you could simply transfer the whole fund into one that does.

One other things to be aware of is that as soon as you withdraw an amount beyond your 25% tax free cash, you will trigger a lower pension contribution allowance in future - if you go back to work after that you will only be allowed to contribute £4K per year to any pension instead of the up to £40K outlined above.  If you never intend to go back to work or at least not to join a work pension scheme in future this doesn't matter to you.