Questions about Crystallizing your pension

Lismac

Hi there, I currently have 3 pension pots, the one I am currently paying into through my work and 2 other ones that just sit there whilst I am not paying anything more into them.

I am 55 in March 2025 and with the serious concern over rising interest rates and our mortgage I am wondering if I could crystallize the 2 "other" pensions at age 55 and take out 25% tax free? Two questions, firstly could I do this whilst I am working and still get the amount tax free and secondly could I then leave those pensions to continue to give me a return on investment for when I want to actually start drawing down the remaining balance a few years later?

Thanks for any help.

MallyGirl

yes you can crystallise the 2 old ones and take the 25% whilst still working and contributing to your current workplace pension. Whether you should would need careful consideration. 
As long as you take no taxable income from them you do not affect your ability to contribute going forward.

dunstonh

You can do what you want but is it wise to use money earmarked for your retirement for spending that should be covered by your working income?

You are effectively wiping 25% off your retirement income.

Doctor_Who

Lismac said:

Hi there, I currently have 3 pension pots, the one I am currently paying into through my work and 2 other ones that just sit there whilst I am not paying anything more into them.

I am 55 in March 2055 and with the serious concern over rising interest rates and our mortgage I am wondering if I could crystallize the 2 "other" pensions at age 55 and take out 25% tax free? Two questions, firstly could I do this whilst I am working and still get the amount tax free and secondly could I then leave those pensions to continue to give me a return on investment for when I want to actually start drawing down the remaining balance a few years later?

Thanks for any help.

I assume this is a typo? As the other posts say, you can do what you want if you are eligible to access your pensions, but whether it's a good idea or not is another matter. Will you have enough to live on in retirement?

MK62

It's an idea, especially if you are paying 7%+ on your mortgage, but you'd need to consider it carefully - if you are planning to pay your mortgage off with the tax free lump sum at 55, and then increase your pension contributions using the money you would have paid each month towards the mortgage, then you'd need to ensure you don't fall foul of the pension recycling rules (just Google them for a full explanation or have a look here https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash)

Lismac

MK62 said:

It's an idea, especially if you are paying 7%+ on your mortgage, but you'd need to consider it carefully - if you are planning to pay your mortgage off with the tax free lump sum at 55, and then increase your pension contributions using the money you would have paid each month towards the mortgage, then you'd need to ensure you don't fall foul of the pension recycling rules (just Google them for a full explanation or have a look here https://techzone.abrdn.com/public/pensions/tech-guide-recycle-tax-free-cash)

That's interesting thank you - from March 2023 - March 2024 I would put in £40K via employer's contribution and my salary sacrifice. I intend to top that up another £20K in March 2024 and again in March 2025 when I get my bonus, giving me the full £60K annual allowance per year.

If I took out £100-£200K early March 2025 when I hit 55 then I don't think I would fall foul of recycling rules as I can prove I was topping up the pension to £60K for the previous 2 years.

If I didn't manage to top up from my bonus in 2024 and only topped up from by bonus at the end of March 2025 only, and I had received the £100-£200K earlier in March, as long as I can prove I didn't use the pension tax free amount to top up my pension contributions but I used my bonus to top it up in a one off salary sacrifice amount, I take it I would also be adhering to the rules? 

It just so happens I will be in a much better position financially to top up to £60K when I am 55 and have paid off some other outstanding finances, but I am thinking it might be better to top up at 54 also and put off paying £20K on other outstanding finances - that way I can prove a pattern that I would not be recycling....

Lismac

Doctor_Who said:

Lismac said:

Hi there, I currently have 3 pension pots, the one I am currently paying into through my work and 2 other ones that just sit there whilst I am not paying anything more into them.

I am 55 in March 2055 and with the serious concern over rising interest rates and our mortgage I am wondering if I could crystallize the 2 "other" pensions at age 55 and take out 25% tax free? Two questions, firstly could I do this whilst I am working and still get the amount tax free and secondly could I then leave those pensions to continue to give me a return on investment for when I want to actually start drawing down the remaining balance a few years later?

Thanks for any help.

I assume this is a typo? As the other posts say, you can do what you want if you are eligible to access your pensions, but whether it's a good idea or not is another matter. Will you have enough to live on in retirement?

Sorry - yes I mean't 2025 - doh!

Yes I would have enough to live on in retirement.

Albermarle

On a practical note, if you had any plans to consolidate these three pensions ( to just one or two) at some point, then it is easier to do this with uncrystallised pots ( before the 25% tax free is taken) than afterwards ( although it still can be done).
Also older pots tend to be less flexible in how you can withdraw them, so often better to transfer them to a newer pension before you start withdrawing money.

ader42

Whilst it can be thought of as avoiding paying 7% is as good as earning 7%, the reality is you need to consider the term too.

The longer the mortgage term remaining the more sensible this option is, as by using that 25% TFLS to pay off a mortgage may save you payments for 10 years but reduce your pension for 35 years. How much of an annuity would that 25% buy you until age 80? The total of those payments may make a better comparison to the total of the mortgage payments.

Then again, paying off the mortgage can also be seen as a way of reducing risk on your overall wealth portfolio if you are heavily weighted in some way.