Two pensions,25% interest free.

the_gardener

Earlier this year at 55 I cashed in a small pension of £13k as I am out of work.Having trouble with finding work, i got some jobseekers allowance which the nice people at HMRC said is taxable and have now said I will have to pay some tax on as it has taken me over the standard personal allowance which I understand.

I am now thinking of not going to bother looking for work now as was hoping to take the 25% of my large pension to pay off the mortgage and put some in the bank and to put the rest into a fund which will earn me enough per year equivalent to a small salary with annual growth. Will the pension provider when paying me the 25% tax free send the right code to HMRC so they will not hit me with emergency tax as I have already taken 25% of another pension.

Am i right in saying that I will be able to take the 25% tax free of my larger pension and then put the rest into a flexi access income drawdown pension which will enable me to take e.g 20k a year for the next 2-3 years and then buy myself an annuity when my pot increases. As taking 20 k for the next three years I will only be paying tax on around 7k per year.

Marcon

…hoping to take the 25% of my large pension to pay off the mortgage and put some in the bank and to put the rest into a fund which will earn me enough per year equivalent to a small salary with annual growth. 

What happens in the years when the fund makes a loss…?

Will the pension provider when paying me the 25% tax free send the right code to HMRC so they will not hit me with emergency tax as I have already taken 25% of another pension.

HMRC will send your pension provider a code (not vice versa) after you have taken some taxable cash from your pension. If you are only taking tax free cash from this second pension, there's no tax levied on it, emergency or otherwise!

Why would you withdraw the full 25% in one go if you are just going to 'put some in the bank' - will that get you a better outcome than leaving some of the tax free element until you actually need it?

Am i right in saying that I will be able to take the 25% tax free of my larger pension and then put the rest into a flexi access income drawdown pension which will enable me to take e.g 20k a year for the next 2-3 years and then buy myself an annuity when my pot increases. As taking 20 k for the next three years I will only be paying tax on around 7k per year.

If you're taking £20K a year from the pot, it's going to have to be pretty big to withstand that sort of withdrawal and still show growth. If you're only 55, it could have to provide the wherewithal to last you another 30+ years.

the_gardener

I am a bit confused even after the chat with moneyhelper.If i were to take 20% of my tax free and leave the rest in a drawdown fund,how would they take the remaining 5% tax free off the remaining amount in the fund and its and also would I get also 5% tax free of the money that the fund has accumulated whilst in the drawdown fund?

My pension fund usually does about 10% per year minimum, so the remainder after i have taken the tax free amount should be enough to give me a medium income with interest from isa and savings account giving me an extra 6k a year for a few years which will then merge with government pension at 67.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82162868#Comment_82162868

When your pension pot has not been touched, it is known as being 'uncrystallised' . When you take some tax free cash, some or all of the pot is crystallised to provide that. Here is an example.

Pension pot £200K - uncrystallised . You request to take £30K tax free cash.

The provider crystallises four times £30K, with the end result as follows.

You get £30K tax free cash in your bank account : £90K is now crystallised in a drawdown account, anything you take from this is taxable income. Then £80K is left uncrystallised.

From this uncrystallised £80 K, you can still take up to 25% tax free. If it grows to £90 K, you can still take 25% of that.

However no matter how much the crystallised part grows you can take anymore tax free cash from it.

QrizB

My pension fund usually does about 10% per year minimum

It might've done that recently, but it's unlikely to last forever. What would you do if it dropped by 30% tomorrow and stayed there for 5 years?

DRS1

Have you looked at what your big pension would currently buy if you took the 25% TFLS and used the rest to buy an annuity? Is that maybe not enough, which is why you are hoping to let it grow for 3 years?

If you are putting off buying an annuity because you want a bit more to start with and then a lower amount you could always buy two annuities - one for life at the lower rate and a second fixed term annuity to top you up for the 3 years.

Just be careful that the lifetime annuity is not a level annuity - that will get eaten away by inflation.

FatherAbraham

https://forums.moneysavingexpert.com/discussion/comment/82163073#Comment_82163073

Just be careful that the lifetime annuity is not a level annuity - that will get eaten away by inflation.

I'm increasingly surprised by the degree of fear of level annuities shown in discussions here.

Having the same capital value as an increasing ability, the starting level is normally significantly higher. This bears acknowledging.

Many early retirees will find their income suddenly increasing later in life when the index-linked state pension commences. Some retirees will require less disposable income as they age.

One's personal discount rate may exceed inflation.

A further point to note is that in an environment of enduring fiscal repression, level annuities are more tax efficient.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82163185#Comment_82163185

Well the main reason people are concerned about level annuities is that they tend to assume someone receiving an annuity will be spending it.

If you spend £10k a year now and get yourself a level annuity of £10k then you are OK for this year but what about next year when you spend £10300 but your income is still £10k? Maybe you have other resources but if all you have is your pension pot and you spend all that to get your £10k level annuity then you are going to regret it.

Sure you may say you just need to apply a bit of common sense. But the difference between the level annuity rate and an RPI increasing rate can be significant and make the level annuity very attractive.

You will also note that I was saying the lifetime annuity (providing the floor level of income if you like) should not be a level one not the fixed term annuity which would apply to top up the income for the early years.

Nebulous2

https://forums.moneysavingexpert.com/discussion/comment/82163185#Comment_82163185

For someone on a public sector pension, retiring 5 years ago on 31st March 2021, they would have had 5 increases each April since then with a cumulative total of 27.8%.

A £10000 starting pension would now be paying £12,780.

That's only 5 years. Someone starting at 55, now 60, could easily have another 30 years of inflation to face.

That's why people worry about level annuities.....

Secret2ndAccount

But the starting value of the level annuity would have been £15,000 instead of £10,000. At age 55, it would be closer to £16,000 starting value.

So the gold plated public sector pension would be nowhere close to catching up yet.

If your spending plan is a steadily decreasing glide curve, level annuity is an approach. My slight problem with it is that you are trading away certainty. If inflation runs rampant, you might regret your choice.

Maybe an RPI annuity for the bills, then a level annuity for fun money. But perhaps the SP is your RPI annuity.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82163185#Comment_82163185

Also it should be taken into account that many people taking annuities, do not really understand a lot of the issues, such as the effect of inflation.

So a considered decision to buy a level annuity as it suits you, is fine. ( I am thinking about one myself for just one of my pensions) However I wonder how many people just see how much more the initial payment is for a level annuity, and just go for that one on that basis, without thinking through any future implications?