Reply With QuoteI’m no expert but will she not loose a large part drawing it at 55?
I’m 53 and have retired I’m sure if I draw mine before I’m 60 I stand to loose 5% per year
I know we have financial/pension people amongst us, and I'm after some guidance for my partner.
She reaches the grand old age of 55 in November, she has a financial salary pension and a money purchase pension from when she worked for the same company, ( she no longer works for them and is sort of retired ).
In the final salary scheme she has approx 250K transfer value and approx 65K transfer value in the money purchase scheme, I say approx as these figures were obtained a couple of years ago.
We know roughly what her options are, we think, basically she can withdraw the lot, 25% tax free and get hammered on the rest at 40%, ( not the best move ), take a lump sum from the final salary scheme and a small pension for the rest of her natural life, this is where it becomes less clear, what other options are open to her.
I know it depends on personal circumstances, ( and I'm allowed to divulge some of this, lol ), and I know getting financial advice is advisable, but it would be nice to be armed with some info before going down this route.
I’m no expert but will she not loose a large part drawing it at 55?
I’m 53 and have retired I’m sure if I draw mine before I’m 60 I stand to loose 5% per year
Any money taken out of a final salary scheme willl lose RPI inflation protection that it retains in the DB scheme. So if you take 25% out tax free and don’t spend the cash, think about that.
If the annual pension is less than £12.5k you will not pay any tax anyway, at least until the state pension kicks in at 67.
I’d be looking for an arrangement where you maximise tax free allowance going forward, but also retain what you can in the DB pension for inflation protection.
Not many investments guarantee to keep up with inflation without any risk. DB is one of them, up to 5%
Key points to check
- to start getting paid at 55 from pension there are a couple of requirements that you need to be able to fulfill. Check those (I cannot remember what they were off hand)
- you need to confirm what multiple would be (and therefore value) if she was to take 25% tax free. Then it simple maths on what she would do with the money as regards investment etc as where breakeven would be vs keeping as final salary scheme, how confident she managing investing herself etc
Final Salary DB Schemes are rare and valuable these days. I would not transfer out the DB to the DC scheme even though the numbers seem attractive (there is a reason the transfer value is so high).
As said - there are penalties to starting a DB pension early - and it tends to be exponential - your wife needs to check the pension age on the DB scheme - maybe it's 60 maybe different - you can get a quote once a year from the pension scheme for free what you can get and if you take 25% tax free maximum amount which reduces the pension payments.
Also - once you start drawing a pension you are limited to what you can continue to contribute 4K per annum at the moment. Up to that point you can contribute all of your salary to the pension scheme if you wish. The DC can be topped up if she has a salary.
The DC - you can drawdown until it's gone. 25% of the amount is tax free the rest is taxable. Work out what income you want each year and consider other income / asset sources - downsize the house, sell the cat etc
I strongly suggest getting pension advise from PensionWise - which is free. You need to think holistically. I did a post on my plans here - you're welcome to see that thread..
“ Ford... you're turning into a penguin. Stop it.” HHGTTG
This. You would have to have very specific requiremnts to be worth cashing in a Final Salary DB scheme. I did this 18 years ago, but it was simply because I could transfer into another, better Final Salary scheme.Originally Posted by MartynJC (UK)
To answer a couple of points made, the final salary scheme closed whilst she was still working and changed to the dc scheme, hence why she has both.
No thoughts of transferring from db to dc, we already worked out that would be a bad move.
She is currently waiting for figures from the db scheme showing pension at 55.
I would think it really comes down to the numbers.
A family member is in the position of being offered 30+ times the estimated annual pension on their final salary - but if they die their wife only gets a very reduced pension from that. If they took the pot and put it in a SIP they have much more control and flexibility, and the possibility/risk of increasing their pot and annual distributions - or losing the lot ;)
It's just a matter of time...
She’s not going to be able to transfer out of the FS scene without taking advice. And finding an advisor willing to do it is going to be difficult and expensive (3%+ of transfer). What is the retirement age of the FS scheme? Taking it early will result in a reduction of 3-5% of the pension per year early.
It's individual. Was a no brainer fore, I got x32 transferring our of the DB final salary scheme which in effect doubled my pot, I'm now living off it comfortably and the pot is still growing , I couldn't have retired without doing it.
Yes I know I lose the gaurantees etc but you are only young once, working at 55 stinks, glad I did it.
I doubt you'd get the same offer now, I think it expired after 3 months she needs to check that.
All I can say is I don't know anyone who has regretted moving to a SIPP, but I know a lot regret not doing it . We have George Osbourne to thank
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You are right it’s individual/ I also transferred out- 47x pension. It will not be better for MOST people- large compensation claims being paid for British Steel employees who were ill advised by rogue advisors. As I said advice needs to be taken from a suitably qualified advisor. Giving up a guaranteed RPI increasing income is not to be taken lightly
Yes you are right, many people will be advised to keep the DB guarantees . But I think the British Steel scandal was more about the investments they were moved into as much as it was the concept of moving to a SIPP in itself ( happy to be corrected ), plus theor advisor didn't make them aware of the risks ( think they lost money because the investments went bad )
I went with a regulated Quilter adviser , we meet every 6 months and I'm in LS 80 which he moved me into after my risk profile changed.
I'm aware of the risks but wanted the freedom to extend the house and take money out when I wanted . The whole process was to ensure I had thought it through and aware of the risks . As it stands I'm doing very well our of LS80, I'm aware that can change
47x wow, never heard of that, my colleagues mostly got x20 odd and a few of us lucked out with over 30
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Excuse my ignorance, but when you say x this or x that, is that x what your yearly pension would be at a certain age? That then defines the pot you'll be transferring?
With the money purchase pension in particular, one of the most short sighted things to do is just to take the tax free cash - because you can. If you actually need it then fair enough and I mean really need it, not just think you need it. I think this is as important as the rest of the things you discuss with your adviser for various reasons, especially if IHT is applicable, but also for future growth.
Historically taking the TFC at the outset was the done thing, under the changes in the last few years, people tend to exhaust other assets before pensions. All depends on individual circumstances but in short the wealthier you are, the less likely you are to touch it. Consider taking money from less tax efficient areas if possible.
Yes.
It's just a matter of time...
Not wishing to derail the Ops thread, but is that advice typically valid if you don’t take the 25% cash from a DB pension, but end up paying 20% tax on the additional income?
No it was more relevant to money purchase pensions, with potential IHT being one concern. DB schemes operate differently, though I’ve known of people not commuting their pension for a cash element because they’ve worked out that the extra income will far outweigh the cost of extra tax and return they could get on the cash invested elsewhere. I guess it all depends on your tax rate, how long you’ll live and various other circumstances, although as a guess I’d imagine that 90% or 95% take the tax free cash.
Too complex to say here in a post but a very very basic example - someone has 600k in a money purchase pension, takes the 150k tax free cash and effectively increase their IHT liability by 60k (40% of 150k). They have say 300k in the bank and investments and property income so have no need of the cash, possibly even the pension income as well (obviously if income is less than personal allowance you’d utilise that). Let’s also say that they don’t touch their fund and it doubles over 10/15 years, they can’t take any of it tax free as they already crystallised it. If they had left it, the TFC element would have doubled as well. As I said very basic example which is why advice is so important.
Would it not make sense to take out £50k a year meaning £42k net (£8k in tax) and stick that money into a fund? Even if you do not need the cash? Because £50k is the max amount before 40% tax applies and whether you take out today or next year there will always be 40% to pay above £50k so may as well take out the max you can at 20% tax each year and stick into isa and other source?
As an aside I'm frequently baffled at when people wait to have large pots before retiring with more money than they could ever use and then die at say 85 with £800k left or whatever. What a waste they could have spent that earlier by retiring sooner.
No it doesn’t makes sense to do that, but if that what suits you then it’s right for you.
I have said ‘if’ someone has an IHT issue then you are moving money from just about the most tax efficient area into an taxable area and we’re talking 40% with IHT.
As for your comment about being baffled, some people choose to spend everything they’ve got and aren’t worried about leaving money to people. Others say they haven’t worked all their lives paying 40% tax to want to give the government 40% more on death and want to leave their assets to their children as tax efficiently as possible. From personal and professional experience those people who leave large pots tend to utilise other assess, they aren’t going without.
OK fair enough. I guess the IHT will be an issue for some people and not for others. On a personal basis when I retire I want to 'convert' all the funds in my SIPP into ISA/readily available ASAP but IHT won't be an issue for us so I guess that's why
IHT may be an issue by the time you retire. That aside I’d still recommend you get advice before you do anything at retirement, you may be enlightened. You may also look back and wish you’d taken it years before retirement as it may have altered your planning for the better.
I don't think many people just instantly take the full 25% tax free, most I know take a chunk for stuff straight away, we have , for an extension etc . It's not fixed, unless you take the whole 25% straight away. The non crystalised pot continues to grow if you part take it, that's why you shouldn't take it all out in one go.
Had the final salary scheme been better at 55 ( it was ok at 60 ) I may have stuck with it , bit tbh, my risk profile is high and want to live a little. For most people the security of a fixed income protected is a lot to give up for most particularly of it's all you have . We had the fail safe of my wife's 35 yr civil service pension.
This is what the process is supposed to take you through, the risks entailed and what's right for you . I didn't care, just wanted freedom and my own control over my finances.
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I see these options:
Option 1
DB: At chosen retirement age - Take 25% tax free - which triggers the DB pension starting - that gives a reduced annual pension paid monthly according to the terms of the DB scheme.
DC: At chosen retirement age - take monthly draw downs of £xxxx/month - 25% will be tax free and the remainder will be taxed as taxable income - whatever band that applies to, to top up the DB pension
Option 2
DB: At chosen retirement age - Take 0% tax free - which triggers the DB pension starting - that gives a maximum annual pension paid monthly according to the terms of the DB scheme.
DC: At chosen retirement age - take monthly draw downs of £xxxx/month - 25% of which will be tax free income and the remainder will be taxable income - whatever band that applies to, to top up the DB pension - adjust the DC drawdown as needed for income needs - maybe until State Pension age when that kicks in.
For me - I took option 1 - for DB scheme,
Option 3
DC: took 25% tax free as a lump sum from the DC scheme - which crystallised the remaining funds. But did not draw on the remainder. - I may leave that to my daughter as she has not had an opportunity to build up a pension herself - If I die before 75 its a completely tax free lump sum that can be used for a pension or whatever. But that time it could build to quite a nice sum if left alone for 15 years on stock market trends (Need to check with wife on that!)
For me it was the right decision as we were buying a home (effectively my tax free elements have been used to fund a house purchase). If you don't need the capital I would suggest Option 2 as this maximises your income?
Last edited by MartynJC (UK); 3rd September 2021 at 21:46.
“ Ford... you're turning into a penguin. Stop it.” HHGTTG
Just a comment on the above….you don’t take 25% TFC in a DB scheme because there is nothing to take 25% of. You commute part of your pension for cash and different DB schemes have different commutation rates. Also a male commutation rate will be different to a female commutation rate.
Very interesting reading on this thread as we are mid 50s and my favourite past time is planning my retirement finances. Lots of useful info thanks all.
So many factors affecting choice, current age and health, other partner pension, home ownership, outgoings, risk profile, how you lead your life, what tastes you have, what you want our of life now v later, dependants and their support etc etc etc
The government guidelines require a pension advisor to carry out a full risk assessment and advise accordingly.
I was in a stressful job and couldn't be arsed anymore, that overode all concerns I had v financial risk, I needed to quit for health reasons and thanks to George Osbourne and a generous transfer amount I went for it.
It's fair to say the freedom at 55 to drawdown what you want and take money out when you want comes with significant risk but I don't regret it for one second.
What I dont do, is try and manage the SIPP myself , I pay someone 1% to do that
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This is a good summary:
https://www.moneyhelper.org.uk/en/pe...enefit-pension
Transferring a DB scheme will require advice. There is a reason for this as there is a requirement to understand the risks and benefits of such an approach.
An adviser will require insurance to offer advice on such transfers and actions.
This is expensive and the regulator makes it challenging to do so. Even as an insistent client there is a reluctance to advise in favour of it these days. It was a lot easier 10 years ago when I did it. It worked for me but I know many people, even though they want to do it today, are struggling to find somebody to transact it for them and are stuck with the DB scheme.
You need to plan your finances properly to understand your requirements for funds to statistically probable end of life. You need to consider all of your assets including property in this. Also note, circumstances change with legislation such as proposed changes to capping care cost council claims, NI payments, income tax etc.
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This is me!
Don't forget you can crystallise amounts taking the tax free cash but leaving the rest still in the SIPP.
Eg you could crystallise 45720, take a quarter tax free and withdraw 12570 so you are withdrawing 24k tax free a year and leave the remaining in the crystalised part of your SIPP. You can keep doing this until you have crystalised all of your SIPP and then use your state pension to cover your tax. Numbers are purely for example but I'm doing this for 10 years until SPA.
Yep, same, non crystalised pot still grows
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