Old pension scheme winding up - lump sum or transfer

yip35uk

An old pension scheme from a previous employer is winding up. They are offering a lump sum or a transfer to a new pension scheme. I am 15+ years off retiring yet! The predicted pension as it stands is £399 a year. The lump sum offer is £11k.  I understand the first 25% of that is tax free and the remainder is taxable (which would be at basic rate for me). 
I have another pension scheme with my current employer.
Any suggestions as to what I should do? Thank you for your help!

xylophone

Would your current scheme accept a transfer in?

yip35uk

I think so. They say you have to apply on a case by case basis.

Albermarle

yip35uk said:

An old pension scheme from a previous employer is winding up. They are offering a lump sum or a transfer to a new pension scheme. I am 15+ years off retiring yet! The predicted pension as it stands is £399 a year. The lump sum offer is £11k.  I understand the first 25% of that is tax free and the remainder is taxable (which would be at basic rate for me). 
I have another pension scheme with my current employer.
Any suggestions as to what I should do? Thank you for your help!

You have to build up pretty large sums in your pension pot to generate a decent retirement income. Hundreds of Thousands normally, so unless you pension is already quite large, probably best to transfer.
However have you been told what the transfer value is ? Is that also £11K?

gm0

Keeping an already saved pension in a pension wrapper is for most people going to be the sensible long term financial planning decision.  Indicating transfer as the attractive option.

Moving it to current employer pension scheme is going to be simplest. 

May or may not be best investment range, service or cheapest.  Other options are available to look at.  At added cost alongside.  Retail SIPP providers.  If you want the investment freedoms - great.  If not - then why do it. 

Current employer scheme transfer. Job done. No tax. No allowance complexities.  Still outside estate for IHT.  No double taxation or extra tax relief.  No cash available.  Pension savings intact.

Lump Sum is a lot more complicated - with single year income tax, HRB tax benefit clawbacks and tapers, pension contribution limits, tax relief at different rates in different years, pensionable earnings, recycling rules, MPAA.
And winding up lump sums.  This tax manual seems likely in context to be the relevant area.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063600

Which doesn't say whether MPAA is triggered.  And doesn't say it isn't.  It is for normal lump sums.  Don't know.  It matters.

So there is a lot more for you to consider to evaluate a lump sum for your specific circumstances, work plans, savings rates, family, income this year, uses for 8k capital etc.  But a bad choice for many people once the various complexities are added up.  And a small win for a tiny few in edge cases in their particular circumstances.  Perhaps there is £500 extra tax relief to be had going the long way around via lump sum and ongoing saving - if everything else adds up.  And the equivalent of the TFC ends up back in a pension later.  Buffered via savings (also suitably invested until consumed) - over several years,  Input as regular higher from salary contributions from income. Not recycled innappropriately - there are rules to discourage exactly this.

For most people - it won't stack up.  MPAA now at 10k is mildly less punitive than hitherto (vs 60k AA) - but still an issue you don't want to trip over if you now or ever in the future expect to be employed with  contributions at that level where more than 10k is going in.  Loss of child benefit by tipping into higher rate tax would also be a show stopper for people who aren't past that stage.  Make £500 and lose £1248 on child one and more on any others. 

Mind how you go

Marcon

yip35uk said:

I think so. They say you have to apply on a case by case basis.

If they won't accept the transfer, it's simple enough to set up a SIPP or stakeholder pension for yourself and transfer the cash to that. Taking the cash now might look appealing, but come your retirement....

Pat38493

Was it not also said on another thread recently that if you take the cash, you have to pay 20% tax on it regardless of your marginal tax situation, or is this not the same situation here?

Marcon

Pat38493 said:

Was it not also said on another thread recently that if you take the cash, you have to pay 20% tax on it regardless of your marginal tax situation, or is this not the same situation here?

I think you're thinking of the recent thread where these was a potential refund of own contributions for an individual who had short service (under two years) in a DB scheme. As you correctly surmise, a winding up lump sum is different.