To take a lump sum to put into savings account or not

hubb

Firstly, I did not contribute 1 penny into this pension when I worked for a company for 12 years as it was on a very long pension holiday. However, I am now 56 (I was able to take a quarter lump sum at 55) I used their benefit modler in Feb of this year to get a "quote and retire" statement. It read £12,160.88 with £152.02 a month

I have just requested another quote and pretty shocked to find how much it has dropped to £10,949.85 with £136.88 a month.

I have a Marcus account that earns me 3% on just over 50K (I have to be careful not to go over the threshold as I will have to start to pay interest)  I was planning on pulling the lump sum into the Marcus to earn as much interest as I can (then I would be paying tax on the interest but may be worth it) but I now feel undecided if I should pull the trigger as it could just keep going down and down. If only I had taken the lump sum in Feb.

What would anyone else do in my shoes ?

Stubod

Taking it out now is one way of consolidating your loses?

hubb

Stubod said:

Taking it out now is one way of consolidating your loses?

Or it could go up again next month.

Albermarle

I used their benefit modler in Feb of this year to get a "quote and retire" statement. It read £12,160.88 with £152.02 a month

Is this a DC pension ( ie just a pot of money that is invested) and the quotes are for 25% tax free and the rest to buy an annuity ?

hubb

Yes, it's the Pension Protection Fund where you can take up to100% of the tax free 25% lump sum. £10,949.85 being 100%. In fact since I posted this the amount is now up a little to £10,980

Scot_39

If do decide on savings route or even I would suggest - perhaps need to review your current savings -  for tax efficiency.

You don't say if that's their standard account or their ISA - both pay 3% AER right now apparently.

And 3% is good - but unless you have need for all of that capital - why have in an instant access account ?   When returns on fixes - including 100% safe cash ISAs (assuming you are eligible) can be 4%+

But as you said worried about tax - lets assume it's the standard.

In which case - that 3% on 50k = £1500pa is already above the basic rate tax PSA of £1000.

So unless you have income below IT PA and interest starter rate band left (so earn under c£17070 as I understand it as a basic rate taxpayer - 12570 + 5000- the 500 over PSA)

You risk being exposed to tax - more likely this tax year than last - as interest rates far lower last April.

ISAs ?

If not using ISAs - why not - in fact why not a higher rate ISA elsewhere. 

You could probably open Marcus one and transfer 20k in 10-20 mins - and then do the same on the 6th - and transfer some or all of it out next month etc - once - if - decide on a better home.  (Haven't checked their account terms or anything - just only noticed they now do one)

You still have a few days to use up this years 20K allowance if haven't already elsewhere too (as long as funds credited by end of working day on the 5th ....).

And any future lump sum could certainly go in one - next year (come the 6th - only 5 days away) - so by Thu - 20k for 23/24 and any unused for 22/23 could be tax free. 40k at 3% = £1200 of that £1500 - all instant access.

Right now for any lump sum or capital i that 50k you don't need access to - there are several on line or branch even - 1,2 year fixes paying over 4% tax free.

See MSE tables, Saving champion etc or several other useful comparison sites.

The problem with removing the funds - is you do realise / lock in the lower capital = losses - but do guarantee no further loss - but again lock out opportunity for recovery / bounce back(if any).  So that decision ulitimately entirely yours - depending on risk.

There is never a gauranteed best time to make a massive investment or withdrawal - there is always a risk of not buying at bottom or not selling at top. And you need to make that decision.

Savings probably look good now - but they generally do lag the markets over 5-10 - but as approach retirement - and don't forget beyond - maybe 20-30 years beyond. Many get hung up with the SPA target - forgetting the funds - it they are to remain invested - have to last far longer - with associated risks / gorwth potential. 

But if say it's an AVC to annuity - then thats different - as it's the value on the day.

Bonds in particular have been badly impacted by not only the size - but the rate of change of interest movements in last year - the future ???

Worrying about savings tax - if not maximising ISA's - now dangerous - as rates recover from emergency lows - moderate pots like yours are now once again in the tax mans site in non ISA accounts or other tax free investments etc.

If you were to remove - and put into an ISA - or regular savings ? as you imply - there's always the option to transfer to a Stocks and Shares ISA - cash or bond or equity funds etc  or some of it into a SIPP - if your attitude to risk changes - or if interest rates start to drop.

hubb

Scot_39 said:

If do decide on savings route or even I would suggest - perhaps need to review your current savings -  for tax efficiency.

You don't say if that's their standard account or their ISA - both pay 3% AER right now apparently.

And 3% is good - but unless you have need for all of that capital - why have in an instant access account ?   When returns on fixes - including 100% safe cash ISAs (assuming you are eligible) can be 4%+

But as you said worried about tax - lets assume it's the standard.

In which case - that 3% on 50k = £1500pa is already above the basic rate tax PSA of £1000.

So unless you have income below IT PA and interest starter rate band left (so earn under c£17070 as I understand it as a basic rate taxpayer - 12570 + 5000- the 500 over PSA)

You risk being exposed to tax - more likely this tax year than last - as interest rates far lower last April.

ISAs ?

If not using ISAs - why not - in fact why not a higher rate ISA elsewhere. 

You could probably open Marcus one and transfer 20k in 10-20 mins - and then do the same on the 6th - and transfer some or all of it out next month etc - once - if - decide on a better home.  (Haven't checked their account terms or anything - just only noticed they now do one)

You still have a few days to use up this years 20K allowance if haven't already elsewhere too (as long as funds credited by end of working day on the 5th ....).

And any future lump sum could certainly go in one - next year (come the 6th - only 5 days away) - so by Thu - 20k for 23/24 and any unused for 22/23 could be tax free. 40k at 3% = £1200 of that £1500 - all instant access.

Right now for any lump sum or capital i that 50k you don't need access to - there are several on line or branch even - 1,2 year fixes paying over 4% tax free.

See MSE tables, Saving champion etc or several other useful comparison sites.

The problem with removing the funds - is you do realise / lock in the lower capital = losses - but do guarantee no further loss - but again lock out opportunity for recovery / bounce back(if any).  So that decision ulitimately entirely yours - depending on risk.

There is never a gauranteed best time to make a massive investment or withdrawal - there is always a risk of not buying at bottom or not selling at top. And you need to make that decision.

Savings probably look good now - but they generally do lag the markets over 5-10 - but as approach retirement - and don't forget beyond - maybe 20-30 years beyond. Many get hung up with the SPA target - forgetting the funds - it they are to remain invested - have to last far longer - with associated risks / gorwth potential. 

But if say it's an AVC to annuity - then thats different - as it's the value on the day.

Bonds in particular have been badly impacted by not only the size - but the rate of change of interest movements in last year - the future ???

Worrying about savings tax - if not maximising ISA's - now dangerous - as rates recover from emergency lows - moderate pots like yours are now once again in the tax mans site in non ISA accounts or other tax free investments etc.

If you were to remove - and put into an ISA - or regular savings ? as you imply - there's always the option to transfer to a Stocks and Shares ISA - cash or bond or equity funds etc  or some of it into a SIPP - if your attitude to risk changes - or if interest rates start to drop.

A lot to think about there but thanks for such a detailed response. 

The Marcus account is an Online Savings. 

I am self employed with fluctuating earnings (media production) My last yearly income on this tax return was a smidgen under £17070 (including tax deductible expenses) so it's hard to tell what the next return will bring from multiple income streams.

Of course I don't need that much capital, but will need access to some of it. So am I right in thinking if my earnings are over £17070 this year my savings interest could nudge me up into a high tax bracket which will be counter productive ? So it would be wise then to put as much as I can into an ISA account which is tax free.

pinnks

Why would you not put the money into an ISA, especially if it is paying the same rate as the non-ISA. Marcus offers both types of account and they both pay 3%, and both offer instant access to your funds.  The only difference is that the ISA interest is tax exempt, so does not count towards your taxable interest.

dunstonh

I have just requested another quote and pretty shocked to find how much it has dropped to £10,949.85 with £136.88 a month.

Are you referring to an annuity quote projection?  It sounds like it.

Assumptions also change as well as the values.   Do the assumptions meet your objectives?   

What would anyone else do in my shoes ?

I woudlnt be buying an annuity.  But thats me.

I wouldn't also be using a synthetic projection, that typically understates reality by being pessimistic as a reasonable guide to my future.

Albermarle

dunstonh said:

I have just requested another quote and pretty shocked to find how much it has dropped to £10,949.85 with £136.88 a month.

Are you referring to an annuity quote projection?  It sounds like it.

Assumptions also change as well as the values.   Do the assumptions meet your objectives?   

What would anyone else do in my shoes ?

I woudlnt be buying an annuity.  But thats me.

I wouldn't also be using a synthetic projection, that typically understates reality by being pessimistic as a reasonable guide to my future.

The OP already replied about the pension in question.
Yes, it's the Pension Protection Fund where you can take up to100% of the tax free 25% lump sum. £10,949.85 being 100%. In fact since I posted this the amount is now up a little to £10,980.

I do not know much about the PPF, so not sure why their pension projection seems to keep moving around?

Scot_39

hubb said:

The Marcus account is an Online Savings. 

I am self employed with fluctuating earnings (media production) My last yearly income on this tax return was a smidgen under £17070 (including tax deductible expenses) so it's hard to tell what the next return will bring from multiple income streams.

Of course I don't need that much capital, but will need access to some of it. So am I right in thinking if my earnings are over £17070 this year my savings interest could nudge me up into a high tax bracket which will be counter productive ? So it would be wise then to put as much as I can into an ISA account which is tax free.

With your savings account - you can match it's 3% return - with full access in a tax free ISA at the same bank (others pay slightly lower rates on ISA's as a general rule - especially "fixed" (*) term ones).

Earnings have one nil rate band - your nominal IT Personal Allowance of £12570  and are taxed relative to that.

Your savings actually have 2 nil rate bands.

https://www.gov.uk/apply-tax-free-interest-on-savings

The starting savings rate - £5000 - but reduces for every pound you earn above the PA - £12570

And the personal savings allowance - £1000 for basic, £500 for upper rate

So using the 3% and 20% - and this is assuming your self employment - doesn't interfere - with the above

Say £17070 earnings + £1500 taxable interest - you pay tax on 17070-12570 @ 20% - so on £4500

That leaves 5000-4500 = 500 of the savings starting rate and of course your PSA of £1000 - so can earn that £1500 taxable interest tax free as well.

So £17070 is merely the level to avoid paying any tax on the £1500 savings.

(As the nil rate starting band on savings reduces by a pound for every pound above IT PA.  Nominally = £12570 - but not for all.)

If your salary goes to £17570 or above - 5000 or above the IT PA - then you have "used up" all of the potential starting band nil band on savings - and note it's only on savings - and only have the £1000 PSA nil band on savings - so £500 also becomes taxable at 20% = £100 tax.

Your actual "wages" tax figures and rates would not change one bit in any of this - sorry if I implied they would. 

Only the tax liability for your savings - you could need to pay back tax on your savings to HMRC - as tax is now paid gross by banks and B Socs.

You would have earned the £1500 in the account - but the tax man is notified of all income, add savings to your earnings, calc your liability - using the rules for the nil band, and then bill you - or more likely reduce your tax code to claim it back from future earnings. 

Or if you are self assessing for expenses - after declaring it when you do your returns.

So although £100 is not a lot - saving the mental exercise of tracking back and this year taxes etc - through years of coding notices is a pain - that is easily avoided. By simply moving some of the cash to an ISA.

https://www.moneysavingexpert.com/savings/isa-guide-savings-without-tax/

ISA maximum contribution is capped - the April 5th deadline is looming for this tax years 20k allowance - but you get another £20k allowance next tax year - from Thursday - and at 3% for 20k that reduces your taxable interest by £600 each time.

(*) I mentioned higher fixed rates of 4%+ right now - but most UK fixed term ISAs allow withdrawals - some partial - some closure - for a fee - 60-90 days interest on amount withdrawn etc.  And some on line banks allow you to mix say 10k in a fix and 10k instant in same tax year.

If you have a good year - earn more - you may end up with more savings - and expose more interest to tax.

(Some of my accounts are yet to increase in response with the last 0.25% base rate - even if only 0.1 - 0.15% - Marcus ?)

Come the 6th - I will be online opening new ISA - and shifting taxable to tax free

The PSA remains at £1000 - until to you hit the upper rate threshold (40% tax, £50.x k gross etc ) - which is possibly a stretch from c£17K - when it drops to £500.

So until you hit upper rate - you would only ever pay £100 on £1500 interest

It was just your original post - suggested you were seeking to avoid paying higher taxes.