Pension - Tax Free Lump Sum or Not?

AuntyJean

I will be 70 soon and have to decide about a company pension (final salary) that has been left untouched from a previous company I worked for. 
At present I get the state pension and two other very small company pensions. I am still working part time but likely to retire within the next year or so. 
These pensions were activated because I needed the lump sums to pay off my mortgage. As I am still working I have been putting the monthly income into savings including £20k into a cash isa.
My savings mean that I have more than £1,000 limit in interest so am taxed on that. 
If I took the tax free lump sum I am not sure what to do with it (I have maxed out on Premium Bonds) so, it is likely it would sit in a savings account and I would be paying tax on the interest. 
I have one daughter and two grandsons so am concerned about inheritance tax implications too. She will inherit my house and all assets.  She suggested I take the money and spend it on holidays etc. but my partner and I are not really great holidaymakers.  
Leaving it in would give me a better draw down but would the interest be better there than if I take out the lump sum and invest it as I will taxed on that interest?

flaneurs_lobster

Has your partner made full use of their personal allowance, PSA and ISA allowance? Gifting them your surplus if they have spare capacity is one way to avoid additional tax.

Albermarle

Hopefully you have not lost out by delaying this pension until age 70.
Most have a normal retirement age of 65 . Some will increase the pension if you delay, but some do not ( apart from by inflation)

Separately you need to look at the commutation rate . This means you look at what would be the amount of the reduction in annual pension if you take the lump sum and divide that by the lump sum.
Normally it is around 20. Higher is good and lower is not so good value. as an approximation. 

QrizB

Albermarle said:

Normally it is around 20. Higher is good and lower is not so good value. as an approximation. 

A 70yo retiree might be happy with a slightly lower commutation factor, as they'll be expecting fewer future pension payments.

Vitor

IMHO the OP shouldn’t focus on “will I pay tax on the interest” but on the much bigger questions of guaranteed lifetime income and IHT planning. An IFA would probably say: don’t touch a DB pension unless you’ve got a very compelling reason. Of course if Reeves clobbers pensions with IHT that will shift the landscape. 

xylophone

Had you considered using the lump sum to make gifts to your grandsons in the hope of PETS?

Marcon

You seem to be heavily focussed on tax. Have you considered marrying your partner? Quite apart from the IHT advantages, if you die first then your spouse might qualify for a survivor's DB pension which would not otherwise be payable to them.

Otherwise gifts to charity would be worth considering, since that way they'll get the benefit of a tax break if you use Gift Aid (and you would too if you are a higher rate taxpayer - see https://www.goodtogive.co.uk/can-high-income-tax-payers-benefit-from-gift-aid-relief/#:~:text=Gift%20Aid%20for%20Higher%20Rate%20Taxpayers&text=High%20income%20taxpayers%20pay%2040,gross'%20amount%20of%20your%20donation.).

poseidon1

Reviewing a number of past posts by the OP including a recent one where she was considering going into the holiday let business, I believe she would benefit from an holistic overview of her aims and objectives from an IFA. 

An IFA can conduct  a  more effective deep dive into her financial and family circumstances (compared to this forum)  to help determine suitable courses of action for her specific situation given there maybe need for coherent estate planning as well as personal tax advice and modelling.

The forum is only getting piecemeal insights into her situation so perhaps only scraping the surface with advice/suggestions being offered.

AuntyJean

Thanks to those who recommended an IFA - They wanted around 10% of my fund pot to deal so just looking at options as everyone says I have to make the decision myself 

Dazed_and_C0nfused

AuntyJean said:

Thanks to those who recommended an IFA - They wanted around 10% of my fund pot to deal so just looking at options as everyone says I have to make the decision myself 

Your original post referred to a final salary pension.

There is no pot to take 10% from with a final salary pension, it's more like deferred salary.

Have you checked what happens with the money you have chosen not to take from the scheme normal pension age?  Or is 70 the normal pension age?

Albermarle

Vitor said:

IMHO the OP shouldn’t focus on “will I pay tax on the interest” but on the much bigger questions of guaranteed lifetime income and IHT planning. An IFA would probably say: don’t touch a DB pension unless you’ve got a very compelling reason. Of course if Reeves clobbers pensions with IHT that will shift the landscape. 

The Govt will introduce legislation in 2027 that will include unused DC pension pots in IHT calculations. This was announced in the last budget, and the legislation is going through the usual process. 

DB pensions are not involved, and can not be as there is no money to leave at the end.