Cashing out pension and applying an MVA

stoneman

Looking back on my wife’s pension pot of £36k over the last 3 years it’s lost money. She hasn’t added to it for 15 years and gets charged £325 a year by Reassure to administer it. With savings rates now acceptable we’ve looked at cashing it in. With her tax free allowance still mainly in tact she would be able to claim most of the tax back. 

She has a with profits policy and after talking with them they came up with an exit fee of £325 and an MVA of £2.5k. She’s 57. 

We asked about just taking a portion (the 25% tax free) but we’re told that she’d have to change to unit linked first, but would still be liable for the MVA. Does this sound correct?

Linton

Does the pension include any guarantees?  In pensions of that age they can be valuable.

Yes it does sound correct that the MVA is applied if you move the with profits pension elsewhere.  The reason is that the finances  are arranged on the basis that the money is taken at maturity.  If you take the money before then the pension company has to ensure that the unexpected call for cash does not disadvantage other investors.

stoneman

Linton said:

Does the pension include any guarantees?  In pensions of that age they can be valuable.

Yes it does sound correct that the MVA is applied if you move the with profits pension elsewhere.  The reason is that the finances  are arranged on the basis that the money is taken at maturity.  If you take the money before then the pension company has to ensure that the unexpected call for cash does not disadvantage other investors.

Will have ask them if there are any guarantees with the plan. Thanks for your reply

dunstonh

Looking back on my wife’s pension pot of £36k over the last 3 years it’s lost money

I assume you mean cumulatively and not each year (2022 was a negative year but 2021 and 2023 are not - although the lag on some WP funds may have shifted some losses into early 2023)

We asked about just taking a portion (the 25% tax free) but we’re told that she’d have to change to unit linked first, but would still be liable for the MVA. Does this sound correct?

Most legacy plans do not support drawdown.    So, being told it needs to be moved into a modern plan sounds correct and expected.   The MVR would be charged as it would mean exiting the WP fund.

With savings rates now acceptable we’ve looked at cashing it in. 

With the MVR and exit charge and investment returns doing nothing that is unexpected (1 in 5 years is negative) and being at the point when you would expect markets to improve and Gilts to start to slightly recover,  it does not seem to be a good idea to pay fees to move it to cash.

xylophone

Looking back on my wife’s pension pot of £36k over the last 3 years it’s lost money. She hasn’t added to it for 15 years and gets charged £325 a year by Reassure to administer it. With savings rates now acceptable we’ve looked at cashing it in. With her tax free allowance still mainly in tact she would be able to claim most of the tax back. 

After deductions, she would transfer around £33,000 to a modern plan that would support drawdown?

She would take a  tax free PCLS  of around £8000?

She would then draw down the balance of the pension over a couple of tax years so as to use the Personal Allowance to the full?

Albermarle

Linton said:

Does the pension include any guarantees?  In pensions of that age they can be valuable.

Yes it does sound correct that the MVA is applied if you move the with profits pension elsewhere.  The reason is that the finances  are arranged on the basis that the money is taken at maturity.  If you take the money before then the pension company has to ensure that the unexpected call for cash does not disadvantage other investors.

I thought MVA was only usually applied after a significantly negative period in the markets, not just because you are cashing in early?
However I think any MVA in operation does not apply if you only take the pension at maturity date.
I transferred out of a with profits pension and no MVA was applied.

stoneman

xylophone said:

Looking back on my wife’s pension pot of £36k over the last 3 years it’s lost money. She hasn’t added to it for 15 years and gets charged £325 a year by Reassure to administer it. With savings rates now acceptable we’ve looked at cashing it in. With her tax free allowance still mainly in tact she would be able to claim most of the tax back. 

After deductions, she would transfer around £33,000 to a modern plan that would support drawdown?

She would take a  tax free PCLS  of around £8000?

She would then draw down the balance of the pension over a couple of tax years so as to use the Personal Allowance to the full?

Hadn't looked at drawing down over a couple of years to utilize the tax allowance. Thanks will look into that

stoneman

Albermarle said:

Linton said:

Does the pension include any guarantees?  In pensions of that age they can be valuable.

Yes it does sound correct that the MVA is applied if you move the with profits pension elsewhere.  The reason is that the finances  are arranged on the basis that the money is taken at maturity.  If you take the money before then the pension company has to ensure that the unexpected call for cash does not disadvantage other investors.

I thought MVA was only usually applied after a significantly negative period in the markets, not just because you are cashing in early?
However I think any MVA in operation does not apply if you only take the pension at maturity date.
I transferred out of a with profits pension and no MVA was applied.

Yes cashing in 4 years earlier than maturity. 

Qyburn

stoneman said:

With her tax free allowance still mainly in tact she would be able to claim most of the tax back. 

You don't say how much allowance is unused, but let's say it was £9,000 still available. She could take an uncrystalised lump sum of £12,000, of which £3,000 would be inherently tax free, the other £9,000 taxable but within her allowance so any tax deducted would be claimed back. Repeat for next two tax years.

If the amount she's going to earn, and therefore unused allowance isn't known exactly, choose between rounding up to ensure all allowance is definitely used, or round down to ensure no tax paid.