Can you help me help my friend?

System

This discussion was created from comments split from: Pension drawdown query.

Tryingmybesthonest

Hello

Sorry I don’t know how to create a new thread

I’m genuinely asking for a friend

Currently he’s on UC , has LWRCA & gets pip

He also works 5 hours a week total monthly income of £1800 he rents his flat

He has a pension pot of 74k -has already taken 25% tax free whilst at full time work

Currently he’s 65 so a couple of years until the state pension arrives

His family have an awful money issue at the moment

He’s taken advice which was heavy going from a FA

As to tax etc which he kind of understands

He’s undecided whether to take the pension as a whole sum & then live off it whilst waiting for his state pension as he understands if he takes say 14,000 after tax then helps his family he understands that they might think it deprivation of capital

Can any one help at all make sense

With out uc he’d live on £900 approx monthly which would just cover his all bills including food

Thank you

DRS1

@Tryingmybesthonest If you look at the right hand side of the page there is a red box with + Create New in it. I think that may be what you need.

No idea on the answer to the question. Others may well know but I am wondering if it might sit better on the Benefits board?

QrizB

@Tryingmybesthonest I agree this would be better on the Benefits board, but as we're here I'll have a go.

His family have an awful money issue at the moment

How awful? How much do they need? Do they need it all now or do they need it spread out over time?

Are they going to be able to pay it back eventually, or is this a never-see-the-money-again situation?

Currently he’s on UC , has LWRCA & gets pip. He also works 5 hours a week total monthly income of £1800 he rents his flat … With out uc he’d live on £900 approx monthly which would just cover his all bills including food

Will he be getting a full state pension once he gets to 67? Don't assume, has he checked?

https://www.gov.uk/check-state-pension

He’s undecided whether to take the pension as a whole sum

If he takes it all at once he'll pay 40% tax on some of it. If circumstances permit, he'd be better off taking some this tax year, then some next tax year and staying below the 40% tax threshold.

Grumpy_chap

https://forums.moneysavingexpert.com/discussion/comment/82058391#Comment_82058391

If he draws the full £74k in one go he will suffer a tax hit and have capital sufficient to mean ineligible for any means tested benefits.

Has he prepared a budget to help understand their financial position better? It will also help others make suggestions if that would be helpful. The lemon fool SoA (Statement of Affairs) is often recommended in the debt free wannabe area the forum.

sheramber

He has a total

Income of £1800 per month

If he can live on £900 per month what does he do with other £900?

Could he use that to help his family?

Brie

If he takes the pension even in small chunks this means he's increased his income and that means his UC will be reduced and may stop all together. I don't know how this affects the LWRCA but that may stop as well. And depending on when his claim started it may be very difficult to get these benefits back at the same level if he runs through all the pension money.

Is he getting anything else like council tax reduction, housing benefit? All those may be affected in some way as well.

Pip shouldn't be affected.

As I understand it he can't be made to take his pension prior to State Pension Age so it may be in his best interest to just leave things as they are. I know we all want to help our family but unless it's absolutely life or death then I think he needs to look after himself.

huckster

Family have a awful money issue at the moment?

I would think very carefully before using any money from pensions.

What professional legal advice have the family obtained?

Altior

It's a bit late now but regardless of the purpose, the most tax efficient way to access the dc pension is to withdraw sporadic lump sums before reaching state pension age, and utilise them within the DoC rules (paying off debt for example).

If he is due to get the full state pension then anything taken out of a dc pension will be taxed at least 20% under current rules (after reaching sp).

He can still do it for two fiscal years, which is better than nothing. The exact amount each year will depend upon the amount of worked earnings.

NedS

His assets held inside of the pension are disregarded for means-tested benefit purposes until he reaches state pension age, after which he will be expected to draw an income from them. The moment he withdraws money from his pension, that will need to be declared to UC and will affect his benefits, potentially ending his entitlement to claim UC.

As others have said, taking the full amount from the pension in one go is incredibly tax inefficient and will also end any entitlement to means-tested benefits (UC). This would be a financially awful decision for him to take.

If he takes any amount which takes him over the £6,000 capital threshold, and then gives money away to help out family (regardless of the reasons), that would also be seen as deprivation of capital and would affect his UC claim. He would be treated as if he still has that money, and depending on the amounts involved this may also end his UC claim.

There is little point in taking a small income from his pension now, even in a tax efficient manner, as this would reduce his entitlement to UC, he would be no better off and no more in a position to help his family financially than if he had done nothing.

A pension pot of £74k is not very large. It sounds like he is going to need this money for his retirement. To be blunt, he is not in a financial position to help his family at this moment no matter how awful their money issues may be.

Altior

My understanding is that a lump sum can be drawn with no requirement to declare it, as long as it is used within an AP. Anything unused would be merged into existing capital. It's very important to ensure that withdrawals are sporadic and vary in amounts, so that it can't be considered income under the law.

It would likely be subject to emergency tax on the first withdrawal, which can be easily reclaimed.

Ideally the tfls would have been left alone to be used post sp, but the individual may have been poorly advised.

The simplest option is to use lump sum withdrawals to settle debt, to avoid any dalliance with perceived DoC, but there is not enough information to know if that is viable for the individual discussed in the OP.

Your task as an individual is to extract pension funds that attract as little income tax as possible. That's the modern purpose of a private pension to be honest, otherwise you may as well have it in an ISA. The window of opportunity are the years between pension access and sp.

Edited to add that an annuity is a consideration, and the rates are good currently. But definitely not if the individual is a recipient of UC.