Final Salary to defer or not ?

Swagman_2

Hi All,

Hoping some of you with more knowledge can help illuminate the path were just about to walk down

My wife has a final salary pension scheme, of which she has been told she can start to claim once she is 50… and that is only 6 months away.

She is currently paying the higher tax rate (40%) in her current job, and would continue in this job while potentially taking her pension.

She can have a lump sum (tax free), and a monthly amount….. from the final salary pension.

The questions are: ( I hope you have enough info above to answer these)

If taking the monthly pension amount will cost us 40% of it to the tax man, what are the benefits of deferring this for a couple of years ?,

would this be a better course of action, rather than let the tax man get his hands on it ?

Could we still take the pension, but put it in another stakeholder, and reclaim the 40%, then draw on this when she perhaps only pays 22% tax ?, or can you only have the stakeholder when your 60 ? in which case we'd have to wait 10 years for it....

Or should we take all we can get now (you never know what will happen tomorrow), even with the 40% hit, and invest it wisely in some high interest accounts and ISA’s ?

Any help would be greatly appreciated… in this murky world of pensions…

Thanks All

jonathon_hart

Another point is that if your wife takes it at 50 it will probably count as early retirement and the pension will probably be reduced. What is the Normal Retirement Age of the scheme (as given in the scheme handbook).

It sounds like someone here has only given you part of the story. If you want specific advice for your situation then the only thing we can do is suggest you talk to an Independent Financial Advisor (IFA).

Jonathon

Swagman_2

I believe that the normal retirement age for this particular scheme, is 50.

Which she has been looking forward to for the last 10 years.... :T

but she now has a well paid job that she likes, just at the point when she was about to get it... so her retirement has kind of been put on hold...

The question is do we take it and use it, or defer it and use it later, and what are the benefits of the latter..

swiss69

As she will continue to work then she will be able to pay up to 100% of her gross earnings into a pension scheme (Any existing contributions should be taken into account - private or company) but most people are nowhere near the 100% mark. Where the money comes to fund this is pretty irrelevant as she is still earning. I also assume she is not close to the lifetime allowance either (currently £1.6m in funds.)

If you take the pension now then the income will be added to earnings and taxed at 40%.

Is there any benefit in deferring? ie how is the pension increased if she decides not to take it at 50?

jonathon_hart

You may want to phone the administrators to confirm if she can take late retirement, I've worked on an NRA 50 scheme before that didn't.

Swagman_2

Yeah we phoned to ask some questions today, hence why I posted asking some more in here, she can defer if she wishes, but the lady on the phone said, it doesn't pay you to defer, better to take the cash now.... which I thought was a little odd.....

this is an electricity industry Final Salary Scheme, I thought if you didn't need the money immediatly the best option was always to defer it, to let it grow a little more ??

but perhaps as my wife no longer contributes to this pot, it actually doesn't do her any good to leave it in ?

jonathon_hart

What increase does she get if she defers? It may be that there is only a low increase rate.

If the lady of the phone is only an administrator then she shouldn't really say that as it is bordering very very close to advice which she isn't allowed to give.

As it is a Final Salary scheme there is no "pot" as such. There is an amount of pension payable on retirement that increases will be applied to at a certain rate, e.g. RPI capped at 5% is a popular one.

Swagman_2

yeah there is wording on the leter we had saying "The pension and lump sum are guarenteed to increase bt 5% or the increase in the RPI if lower for leavers after 1st Jan 1986 (which she is) the GMP element will be increased inline with statutory increases".

And I take it that as she stopped paying into this scheme in 2000, her % of her final salary that will make up her pension, has already been decided ?

so staying in will only attract a small % increase to the lump and the monthly payments ?

CLAPTON

If there is no actuarial reduction in taking the pension early then its a no brainer to take it asap because the pension will be index linked anyway.

Swagman_2

well I had to look up what actuarial reduction was, but, no I don't think there will be as this final salary pension was always designed to kick in and pay out when hitting 50. which she will be in October...

I suppose your reason for taking it now would be that even though it will be only around £800 a month - 40%, this is better in our pockets than stuck in a pension scheme being defered gaining only 5% max ?

Lunar_Eclipse

Swagman wrote: »

even though it will be only around £800 a month - 40%, this is better in our pockets than stuck in a pension scheme being defered gaining only 5% max ?

Depending on how far into the 40% tax bracket your wife currently is, there may be a point at which she would be better off (or equally well off) working a few less hours for less pay (if possible) to bring the pension earnings into the 22% (?) bracket. Just a thought. No-one can enjoy their job THAT much surely? :rotfl: