What to do with a defined benefits pension lump sum.

NotTightJustCareful

A friend is asking me advice on what she can do with a lump sum she will received at retirement in Sept 24 at age 66. She will a defined benefit pension rising with inflation plus a 85K lump sum and the the full state pension. She is very healthy.. She has no SIPP or ISA's. She has some savings in a saving account , less than 20K . She works part-time on a salary approx £25K per year. She wants the majority of the lump sum to be given to her 2 daughters when she dies.
Whats the best plan of action ? Max out a SIPP  as shes can use 3 years back years allowance and the rest in an ISA. Does she invest the SIPP is all stocks - global index fund and leave a cash reserve in an ISA. Does she leave some money in trust fund for her daughters perhaps ? 

Marcon

NotTightJustCareful said:

A friend is asking me advice on what she can do with a lump sum she will received at retirement in Sept 24 at age 66. She will a defined benefit pension rising with inflation plus a 85K lump sum and the the full state pension. She is very healthy.. She has no SIPP or ISA's. She has some savings in a saving account , less than 20K . She works part-time on a salary approx £25K per year. She wants the majority of the lump sum to be given to her 2 daughters when she dies.
Whats the best plan of action ? Max out a SIPP  as shes can use 3 years back years allowance and the rest in an ISA. Does she invest the SIPP is all stocks - global index fund and leave a cash reserve in an ISA. Does she leave some money in trust fund for her daughters perhaps ? 

With all due respect, why is she asking you for advice? Wouldn't she be better getting some proper professional advice, given the amount of the lump sum?

dunstonh

Whats the best plan of action ? 

It is impossible for anyone to answer without details.
Maybe not taking the pension commencement lump sum is a better option. Or taking less of it.

Max out a SIPP  as shes can use 3 years back years allowance and the rest in an ISA. 

If she is a significant high enough as that transaction would require, then maybe she should be seeking advice.  Or have you misunderstood the carry forward rules?

Dazed_and_C0nfused

NotTightJustCareful said:

A friend is asking me advice on what she can do with a lump sum she will received at retirement in Sept 24 at age 66. She will a defined benefit pension rising with inflation plus a 85K lump sum and the the full state pension. She is very healthy.. She has no SIPP or ISA's. She has some savings in a saving account , less than 20K . She works part-time on a salary approx £25K per year. She wants the majority of the lump sum to be given to her 2 daughters when she dies.
Whats the best plan of action ? Max out a SIPP  as shes can use 3 years back years allowance and the rest in an ISA. Does she invest the SIPP is all stocks - global index fund and leave a cash reserve in an ISA. Does she leave some money in trust fund for her daughters perhaps ? 

If her earnings (for pension contribution purposes) are only £25k how can she utilise carry forward?

Albermarle

She can only gain tax relief on what are her taxable earnings in this tax year.
So the max she could add to a pension this year is £20K, and that includes contributions already made whilst working. The carry forward rule is not relevant in this case.

xylophone

If she has enough income  and savings for her needs, she might consider making gifts to her daughters now?

ukdw

Marcon said:

NotTightJustCareful said:

A friend is asking me advice on what she can do with a lump sum she will received at retirement in Sept 24 at age 66. She will a defined benefit pension rising with inflation plus a 85K lump sum and the the full state pension. She is very healthy.. She has no SIPP or ISA's. She has some savings in a saving account , less than 20K . She works part-time on a salary approx £25K per year. She wants the majority of the lump sum to be given to her 2 daughters when she dies.
Whats the best plan of action ? Max out a SIPP  as shes can use 3 years back years allowance and the rest in an ISA. Does she invest the SIPP is all stocks - global index fund and leave a cash reserve in an ISA. Does she leave some money in trust fund for her daughters perhaps ? 

With all due respect, why is she asking you for advice? Wouldn't she be better getting some proper professional advice, given the amount of the lump sum?

It does always seem a bit strange to me that by Law you must have must have advice to transfer out a £30k+ DB pension - but you can do what you like with the PCLS on a DB pension even it it is £85k or even £200k+

alanyau88

Impossible to answer properly but from the information you have provided, a SIPP does sound like a good option for her as it shields from inheritance tax. If she doesn’t need the money for day to day living
and the funds are invested in a diversified global tracker fund, the yes a SIPP sounds like an option with the rest invested into her own ISA.

NotTightJustCareful

Dazed_and_C0nfused said:

NotTightJustCareful said:

A friend is asking me advice on what she can do with a lump sum she will received at retirement in Sept 24 at age 66. She will a defined benefit pension rising with inflation plus a 85K lump sum and the the full state pension. She is very healthy.. She has no SIPP or ISA's. She has some savings in a saving account , less than 20K . She works part-time on a salary approx £25K per year. She wants the majority of the lump sum to be given to her 2 daughters when she dies.
Whats the best plan of action ? Max out a SIPP  as shes can use 3 years back years allowance and the rest in an ISA. Does she invest the SIPP is all stocks - global index fund and leave a cash reserve in an ISA. Does she leave some money in trust fund for her daughters perhaps ? 

If her earnings (for pension contribution purposes) are only £25k how can she utilise carry forward?

I think I have misinterpreted the rules on carried forward allowance. I thought she could use 25K from the previous 3 years regardless but it just increases the allowance in current year provided your salary can cover it, which it can't. She would need to earn £75K in the current year to allow that. Is this right ?

Sarahspangles

It’s her current year’s salary that matters.  She can carry forward Allowance but not Salary.

Albermarle

NotTightJustCareful said:

Dazed_and_C0nfused said:

NotTightJustCareful said:

A friend is asking me advice on what she can do with a lump sum she will received at retirement in Sept 24 at age 66. She will a defined benefit pension rising with inflation plus a 85K lump sum and the the full state pension. She is very healthy.. She has no SIPP or ISA's. She has some savings in a saving account , less than 20K . She works part-time on a salary approx £25K per year. She wants the majority of the lump sum to be given to her 2 daughters when she dies.
Whats the best plan of action ? Max out a SIPP  as shes can use 3 years back years allowance and the rest in an ISA. Does she invest the SIPP is all stocks - global index fund and leave a cash reserve in an ISA. Does she leave some money in trust fund for her daughters perhaps ? 

If her earnings (for pension contribution purposes) are only £25k how can she utilise carry forward?

I think I have misinterpreted the rules on carried forward allowance. I thought she could use 25K from the previous 3 years regardless but it just increases the allowance in current year provided your salary can cover it, which it can't. She would need to earn £75K in the current year to allow that. Is this right ?

It is a very common misinterpretation, we see it very regularly on the forum, so you are not alone.
Basically you can only get tax relief on this years taxable income.