Change of plan - How to use a SIPP.

SSTJCKel

Hi, I need some help in how to move on from where I am now with pension plans.

I am 65 (can get state pension from July 2024 when I turn 66) and was planning to carry on working for 3 to 5 years depending on how my health holds out however due to the way I have been treated by my employers over the last year and the demands now being made which includes working an additional 4 hours after work for no extra pay in addition to very tiring long drives to and from the areas I work in each day I have decided life is too short to put up with this.

I have approx 100k in various DC pensions which I understand would give me about 4k (maybe up to 8k due to my health issues) a year from an annuity but that when combined with the state pension isn't enough to pay my rent and bills so i'm looking at drawdown (1k per month) until the money runs out.  From something I heard on Moneybox yesterday combining the pensions in a SiPP may be the way to go but I then have to make the decision where to invest the SiPP. Can anyone suggest a resource that would give good advice how and where and how to invest the SiPP please.

I had a meeting with Pensionwise before my change of plans but they don't give specific advice only generic advice. I know that in an ideal world I would go to a financial advisor but they charge about 4k and I haven't got that sort of money and it seems a large percentage of my pot to pay out.

I would be happy to follow up on any other suggestions anyone has to help me move forward.

WYSPECIAL

If you if you intend to spend the SIPP funds at the rate of £1k per month they will probably be exhausted within your lifetime. What are your plans beyond that?

Is going part time a possibility.

Have you taken into account that 25% of what you withdraw from the SIPP will be tax free?

SSTJCKel

Hi... Yes I am aware of all that. I intend once i've left this job getting a local full or part time job to reduce the drawdown use. I am already scouting around to see what jobs may be available. 
Thanks

dunstonh

I have approx 100k in various DC pensions which I understand would give me about 4k (maybe up to 8k due to my health issues) a year from an annuity but that when combined with the state pension isn't enough to pay my rent and bills so i'm looking at drawdown (1k per month) until the money runs out. 

8k on an annuity at age 65 would be significant health issues.   Really life shortening ones.   

  From something I heard on Moneybox yesterday combining the pensions in a SiPP may be the way to go 

Wouldn't make any difference in terms of planning.   Its a micromanagement administrative thing.   10 pensions of £10k = £100k.  1 pension of £100k = £100k.    

. Can anyone suggest a resource that would give good advice how and where and how to invest the SiPP please.

A local IFA.    Everything else is just opinion, comment and discussion.

 I know that in an ideal world I would go to a financial advisor but they charge about 4k and I haven't got that sort of money and it seems a large percentage of my pot to pay out.

£2500 would be closer to the target mark for an IFA.    You should avoid FAs.

. I intend once i've left this job getting a local full or part time job to reduce the drawdown use. 

Maybe you should line that up first then you can reduce your draw down to a more reasonable circa 3.5%.  However, if you lack secure income, then  annuity -may well be the way to go but your expectations are probably too high on what it would deliver.     

Sharkb0y

You may find this quite helpful as it will let you see how long your pension would last using drawdown. You can play around with figures to vary the amount/length in years etc. It's also worth remembering that when you drawdown part of your pension is still invested so has potential for growth (and loss unfortunately!)

https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/pension-income-drawdown/income-drawdown-calculator-making-your-money-last-ajWVD8L3bN92

SSTJCKel

Brilliant. Thanks for that.

LHW99

Also, if you may want to pay in to a new pension in your new job, remember that taking even £1 taxable from your SIPPs limits you to the MPAA (£10,000) thereafter. Although if you expect to earn only a low annual wage, that may not be too much of an issue.

jamesd

Sharkb0y said:

You may find this quite helpful as it will let you see how long your pension would last using drawdown. You can play around with figures to vary the amount/length in years etc. It's also worth remembering that when you drawdown part of your pension is still invested so has potential for growth (and loss unfortunately!)

https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/pension-income-drawdown/income-drawdown-calculator-making-your-money-last-ajWVD8L3bN92

No, it won't let you see how long your pension would last. It completely ignores sequence of returns risk so it'll be producing a safe income level about 50% above what is really safe.

jamesd

Your situation is worrying, in part because you mentioned rent. Are you in a part of the UK where a cheap flat can be bought for £50-60k? If you are, buying one may be a good move to remove the rent risks. You'd also want to discuss equity release with a mortgage broker so you can get some if your capital back to support a better lifestyle.

Normally I'd be suggesting deferring claiming your state pension because it'll be increased by 5.8% for each year. From April 2024 the full new state pension is £221.20 a week, £11,502 a year. Defer for five years costing £57,512 of your savings or by continuing to work and you'd get an extra £3,335 a year increasing with inflation, not triple lock. That'd take you to £14,837 a year. Plus the annual increases while deferring. How does that look compared to living costs? You wrote that £4k more isn't enough to cover bills so I assume this isn't either?

Usually annuities pay less inflation adjusted income than state pension deferral but that may not be true with your health issues and one with RPI inflation increases might pay more.

For planning in your current situation a big issue is Pension Credit. It has a starting threshold around the full new state pension and it provides means tested help with rent and other state benefits. Because of this, any increase in your long term guaranteed income from state pension or annuity may do nothing more financially than block you from getting means tested benefits.

This leads to a big choice between one of two approaches:

1. Buy the cheapest home you can to get rid of the rent and also see if equity release is available at that value, with a view to cutting your expenses so much that state pension deferring or annuity buying or some of each leaves you with enough income.

2. Decide you can't manage to do 1 then use drawdown from the pension pots to deliberately live above your long term means for many years, then fall back on means tested benefits.

Both of these can be improved greatly by working for at least a few more years. It could be of the greatest value for 1, allowing you to buy a home and get enough long term extra guaranteed income.

Citizens Advice offers benefit checks and it would be a good idea to ask them to help you with the numbers for 2, so you know what living on Pension Credit would mean.

My next reply is about some detailed planning to increase your pension pot without risk using a few tricks. It doesn't help the big issue much but some is good.

jamesd

You're allowed to make gross pension contributions up to your gross pay for the year and get tax relief. There's a £60,000 cap with workarounds as well but this seems irrelevant for you. You can recycle pension income and tax free lump sums to do this but if you "flexibly" take any taxable money your limit will be capped at £10,000 a year, called the money purchase annual allowance. 

So, the trick is how you recycle as much as possible to get a second set of tax relief on the same money.

1. You're allowed to take the whole of three pension pots each worth no more than £10,000 in your lifetime using the small pots rule. The payment is 25% tax free and 75% taxable, added to your other taxable income to work out the tax due. This doesn't trigger the MPAA because this rule doesn't count as flexible drawing.

You're allowed to combine and split pots to get to exactly £10,000 and maximise your gain. Hargreaves Lansdown makes this very easy because they will do splitting into £10k chunks in the background for you. So I suggest transferring at least £30k to Hargreaves Lansdown to do this easily. Then you use savings or this money to get in the maximum allowed pension contribution.

Because 75% is taxable each time you do this will add £7,500 to your taxable income. You could do it three times this tax year if the total extra £22,500 would still leave you in basic rate tax. If not, split it over two tax years.

This makes you around £470 on the tax free recycling bit plus 6.25% of whatever extra you can pay in above the 7,600 tax free part.

This also quickly gets you capital that you might instead need to use to help buy a home.

2. Using the flexible withdrawing rules you're allowed to take 25% tax free lump sum from all or part of pots without triggering the MPAA. The 75% can go into a flexi-access drawdown pot and won't trigger the MPAA until you withdraw some of it, best done when you know that you're stopping work and have made the maximum pension contributions for that year. So take 25% tax free from the portion not used for the 30k in part 1. With £100k total that'd be 25% of £70k, so £17,500.

But there's a catch with some rules on recycling tax free lump sums into new pension contributions. The easy way to stay within those rules is to take no more using method 2 than £7,500 every rolling twelve months, not tax or calendar year. Alternatively, up to 30% of the tax free lump sum is OK. No limit if not recycling tax free lump sums and the £30k before tax from 1 can show you didn't recycle this but instead that.

Alternatively, if buying a home the money for a deposit or buy without a mortgage isn't recycling so you could just take the whole £17,500 at once.

For convenience and simplicity I suggest transfering the rest to HL to do it all there.

That's the end of the maximise tax relief gain bit, next is overall plan.

jamesd

So, an overall plan.

If the cheapest and most basic home you can live in is cheap enough in your area, try to buy one to cut your long term living costs. You can use the pension lump sums to help you do this as first priority, to maximise pension contributions the second.

If the price is too high, do the maximise pension contributions and recycling to increase the number of years you can live beyond your means before falling back on Pension Credit and other means tested benefits.

Or maybe you could move to a cheaper area and buy there, since you're planning on a new job anyway.

Property prices and how much more you can work are key to your decision, property the most important. If you can swing it without spending too much the buy approach is the one that will leave you better off, probably.

Either way, getting started on the pension transfers bit will be good because that helps you anyway.

Good luck! You're right on the edge of either way being best so it's a tough one.