Pensions

[ThePlotter]

I have four company pensions the first of which is due to pay next month when I am 60.My question/s is/are what are the pros and cons of taking a lump sum and reduced pension.

Also I understand that a lump sum is tax free but the pension itself (being income) is taxable,so how is the tax paid,is it deducted at source,do i have to contact my tax office or what .

 

[602]

Hi,

My wife's Civil Service pension is taxed before she receives it, with her tax coding taking into account both her state pension and her CS pension.

At 60, you will not be receiving state pension yet. I have no idea how they will share the tax burden over four pensions, but I doubt that you will be the first.

602

 

[602]

Hi,

My wife's Civil Service pension is taxed before she receives it, with her tax coding taking into account both her state pension and her CS pension.

At 60, you will not be receiving state pension yet. I have no idea how they will share the tax burden over four pensions, but I doubt that you will be the first.

602

 

[Dave_374330759]

A lot depends on how long you expect to live and how much trust you've got that no is going to come a stuff you at some time in the future.

In my opinion take the tax free lump sum then if anything goes wrong (pension scheme going bust, government changing the rules again etc) then at least you'll have had some of it and managed to deprive the government from some of the tax that they are going to take from you for the rest of your life. You can spend it on what you want and if needs be invest it somewhere else.

The tax is taken at source and it's easy if you've only got one income because the tax is easy to calculate. If you have multiple incomes then you'll have to fill in your tax returns and the taxman will guesstimate what tax you have to pay and apply a code to one of the sources to try and take it all from one, then at the end of the year you'll have to pay/reclaim any discrepancy. It took me four years before it all got sorted out.

 

[ThePlotter]

So far you seem to be confirming my thoughts in that the lump sum is equal to around 16 years of the pension reduction excluding any interest i would get on the lump sum.Or to put it another way I would need to be 76 before I started to be worse off.ultimately I will have 5 pensions,two from banks,one from insurance co ,civil service pension and the state pension.So the tax issue is a worry

 

[ProfJohnL]

Hello Plotter

With the deepest respect for those who have contributed to this thread, I strongly suggest that you seek professional advice from someone who you know to be approved to give financial advice.

This is likely to be your income for the rest of your life, and it must really be the most prudent thing to have any scheme professionally checked.

 

[ThePlotter]

Thanks John,this pension is from my past employment with Midland/HSBC

 

[Dave_374330759]

refering to JohnL's comment, If you are in a properly constituted final salary pension scheme you generally have to take what they give you and the only alternative options are to take a tax free lump sum or possibly defer payment. Alternatively you may be in a scheme in which you have to invest in an annuity.

I would agree that professional advice is worth having but over the years I just managed (by three weeks) to avoid having 30% of my AVC's being wiped out by the demise/incompetance of Equitable Life and presently my company pension scheme is now under the tender mercy of the Pension Protection Fund and several of my colleagues who decided to defer their pensions have now been totally stuffed by the pension cap imposed by the PPF - some are even having to repay some of what they've already been paid because of the PPF rules.

I even know a few who have fallen off the twig before they've even had a sniff of their pensions.

The trouble with pensions and investments they are long term and there are too many variables that can thwart the best laid plans, especially when the banks, insurance companies and not least the bloody government try to take a dip in to your pot.

My opinion, for what it's worth, is to take some and enjoy it while you can, coz someone somewhere will try and take a share if they can.

 

[Guest]

Plotter,

Tax on pensions is relatively simple. Basically you add up everything you will get paid, including all bank interest and if it exceeds the tax allowance of

 

[Dustydog]

Hi Plotter

Be very careful! John L is quite right but be aware there are some real idiots who profess to be financial advisors with no qualification.

If it's the sums, then you need to find someone with an actuarial background. You will have to pay a fee so think carefully exactly what it is you want to know.

Like me you appear to have done the "equalisation calculation " and concluded the break even point is when you are 76.

Will you reach 76? How fit will you be at 76? You may wish to discuss your future mortality with your doctor; nothing wrong with that and indeed it may influence your final decision.

Say one of your pensions is a money purchase so you have to buy an annuity you can take a commutation of 25% tax free cash. If you choose not to and drop dead ( God forbid, touch wood etc) then your wife will never see that cash. It all goes back into the providers/ insurers coffers.

As a start may I sugest you contact each Pension provider and ask them for a very detailed calculation how each pension is arrived at plus a detailed analysis of the various options open to you.

With money purchase I am sure you will know you can buy the annuity from another approved financial body.

Think well ahead before making any decision. There is no going back!

Cheers

Dustydog

 

[Guest]

Dustydog is not entirely correct. The majority of money purchase schemes nowadays come with a minimum of 5 years guarantee. This means that even if you 'snuff' it on Day 1, then it pays out to your spouse for 5 years. You can elect to increase this or as mentioned by me, elect to have a spouse's pension paid as well fort eh duration of their life. The other thing to note is that you can also elect to have it 'index linked' so it will increase each year in line with the RPI. This may, or may not be a good thing as sometimes inflation can be low. However, it does mean that it will match cost increases. Taking the money and putting it in the bank is unlikely to match inflation, so it becomes less valuable each year.

The other thing to note is that if the total of all your pensions does not exceed

 

[ThePlotter]

now getting confused

 

[Mikey1]

Dont talk about pensions to my sister,she is 48 and was retiring when 50(she has worked since 16 and was a working mum,chucked as much into her work pension as she could afford)in 2011 her birthday is in June,the Government have changed the rules from March 2011 so she cant take her pension until she is 55.

Not a happy bunny!!!

 

[Mikey1]

Sorry correction the Government changed the rules from April 2010

 

[Jennifer_374461363]

This does very much depend on your circumstances, such as how much total pension income you will have eventually, the benefits offered by the pension scheme, and the commutation rate....how much pension you have to give up to receive the lump sum. A poor rate is

 

[Jennifer_374461363]

Regarding tax....Scotch Lad has given a very comprehensive explanation, but I believe it may be possible to choose whether your personal allowance all comes off one pension (the largest one) or whether it is divided between the various pensions once you are getting them all paid out.

If you are still employed then I would think tax at 20% will be deducted from the pension payments at source, but you will probably get some paperwork from the provider on which you will give them information about your situation.

As said, it does take quite a while to start running smoothly, so be sure to keep back enough to pay the tax if necessary!

 

[Dustydog]

Scotch Lad

See my post . I refer to the commutation dieing with you. If you choose not to take the cash lump sum then it's no good your widow trying to get it when you are dead.

Plotter has done his equalisation calculation and for him it is 76.

So one may argue there is merit in him securing as much cash lump sum as possible to protect his spouse. Five years payment to the widow after an early death will still not usually be greater than the commutation.

All these comments prove the importance of seeking the "correct" professional advice.

Cheers

Dustydog

 

[James3]

I was in a similar position and eventually after listening to many so called advisors I went to Hargreves Lansdown (see their web site for info) They specialise in pensions and have a very good reputation. I now manage my own pension investments via their online system. see their SIPPS schemes. It would be worth having a look. I know several other of my ex work friends who now use this company. Just my suggestion which may help.

 

[xtrailman]

plotter

You have two options, take a tax free lump sum (most popular option)and a reduced pension, or a increased pension, along with increased tax.

If you have no real need for the lump sum, you may take the straight pension.

You take a gamble each way, no financial "expert" such as those who brought the banking sector to its knees, can tell you how long you will live.

And that's the key, will you die young, or still be around at 90?

Realistically your active and healthy period is probably just after retirement. This is when you may want more ready money.

So really its your choice. I took the lump sum, along with 99% of my work mates.

The lump sum is invested only in safe accounts, no stock market shares, i have lost a lot of money in the stock market, being guided by experts.

My own pension scheme has also, greatly reduced its stock market content, no investing in safer investments.

By careful investment, my life savings have remained buoyant, despite spending, on a new car, house extension etc.

So you can see why the lump sum is attractive.

 

[Guest]

I agree taking the tax free lump sum is very attractive, provided you do not 'blow it'on the 3rd runner at Kempton unles you are very very lucky. However as soon as you invest it in any bank account the interest it generates is subject to tax, even with the miserly rates on offer in some places. But you also have to remember that any interest rate less than about 4% means the value of the capital is being eroded due to inflation, whereas taking it as pension income means it will increase each year with RPI. I too have lost money in the stock market, however if I look at my total figures over the last decade I have made profit, and each year generated income of at least 3.5%, sometimes more, so have usually always beaten bank accounts. If you wish to beat inflation, then you have to take a risk somewhere, and also do consider what will happen if Brown devalues the Pound even more. Just think of how many euros you could buy in 2007, and then how many in 2009. What will it be in 2010, 2011?? And it is not just holidays, as mauch of what we buy is in euros, the cost to us goes up.

Anyway, assuming Plotter has worked all his life then the 4 schemes will amount to 10 years max each, or variations of that. Each will pay out based on his salary on leaving each scheme and the length of time with each pension provider. As mentioned each pension provider has their own ways of paying, whether it be taxed at source, or gross. If Plotter is currently working then his tax code will adjust to cover all the pensions, if he is not then he completes a tax return and the IR will assess him for tax, to be paid direct by him. Each scheme will advise him prior to starting to pay out, how they will pay him, whether it be monthly in advance, monthly in arrears, or even quarterly, and they will also advise the tax position. If he sends (copies)of all the documentation he receives, to his tax office they will advise him what needs to be done.

 

[C_374479958]

My advice for what it is worth, make an appointment with an Independent Financial Advisor and he/she will tell you all your options. They will explain what to do with your pensions, there are other options than buying an annuity

 

[Dave_374330759]

A lot depends if you want some cash up front - in my case it paid off the mortgage and since the pension scheme is now in the Pension Protection Fund all RPI increases have been stopped for any pension earned before 1997, which in my case is most of it. So whatever you do is listen to advice but don't put it all in one place and make sure you get to enjoy some of it coz you don't know what's going to happen in the future.

 

[ThePlotter]

Thankyou one and all a great deal of advice all I need to do know is sit down and work through it.

I have worked for 42 years so the pensions are split across that + the state pension.

In the recent past with the then interest rates I could have easily put the lump sum in the bank and the interest would each year have made up the reduction in pension,not so easy now with todays lower interest rates.The ration of reduction to luimp sum is circa 1:17 ish.

I have no mortgage or debt but my saving were reduced when we were both off work due to wifes cancer also we have shares in both HSBC and RBS due to working there so these are no performing well.

 

[Suzac]

Just a point which I can't see anyone else has mentioned. If by any chance you have underlying health problems and you have a pension fund which has to be invested in an Annuity then shop around because it is possible to get enhanced pensions from certail providers. If you have been paying into an AVC pension fund you don't have to invest in their Annuity schemes.

 

[ThePlotter]

Thanks all I think I may go down the route of the lump sum just checking out interest rates