Pension advice

[Stu-nph26]

My old man is retiring in May and has a private pension, it's not a huge sum buts he's been told he can draw down 25% tax free and reinvest the rest at 6% (this seems very high to me I need to check maybe he got the figures wrong) with the Prudential. He wants to take the full lot but will be hit with 40% tax. is there anything he can do to minimise the tax, like drawing it down every year to stay under the 40% tax bracket for example? Any ideas?

[anonymous-user]

Yep
I expect his pension provider will have all the options on their website.

[TooMany2cvs]

Stu-nph26 said:

My old man is retiring in May and has a private pension, it's not a huge sum buts he's been told he can draw down 25% tax free and reinvest the rest at 6% (this seems very high to me I need to check maybe he got the figures wrong) with the Prudential. He wants to take the full lot but will be hit with 40% tax. is there anything he can do to minimise the tax, like drawing it down every year to stay under the 40% tax bracket for example? Any ideas?

He can't take the full amount out of a pension once it's in there - not least because it's income he wouldn't have been taxed on in the first place.

He needs proper independent financial advice.

[Stu-nph26]

TooMany2cvs said:

He can't take the full amount out of a pension once it's in there - not least because it's income he wouldn't have been taxed on in the first place.

He needs proper independent financial advice.

Ok great he has someone from the Prudential coming out but I guess he needs someone independent

[Liggle]

If he has over £30k in his pension pot its a legal requirement to have signed off financial advise, not ideal, but its a safety measure for people who are unwise with money. I am going through this same process at the moment with my parents.

https://www.gov.uk/government/uploads/system/uploa...

[JulianPH]

Stu-nph26 said:

TooMany2cvs said:

He can't take the full amount out of a pension once it's in there - not least because it's income he wouldn't have been taxed on in the first place.

He needs proper independent financial advice.

Ok great he has someone from the Prudential coming out but I guess he needs someone independent

This is not correct. He can take the full pot if he wishes, but as you have rightly said he should do this in different tax years to avoid the higher rate of tax.

[PurpleMoonlight]

TooMany2cvs said:

He can't take the full amount out of a pension once it's in there - not least because it's income he wouldn't have been taxed on in the first place.

He absolutely can providing he is over age 55. It's called an Uncrystllised Funds Pension Lump Sum. As the OP points out 75% is taxable in the tax year of payment though.

OP, your father needs a drawdown arrangement. 25% can still be paid as a tax free lump sum and the balance drawn down to suit his needs and tax planning. Prudential likely have something to suit, but if not others do and a SIPP can be used too.

A chat to an IFA would indeed likely be useful.

[PurpleMoonlight]

Liggle said:

If he has over £30k in his pension pot its a legal requirement to have signed off financial advise, not ideal, but its a safety measure for people who are unwise with money. I am going through this same process at the moment with my parents.

https://www.gov.uk/government/uploads/system/uploa...

It's 'advice' and it only applies where a guarantee applies to the existing pension arrangement, eg a defined benefit arrangement or a guaranteed annuity rate.

[Stu-nph26]

Thanks guys this is really helpful he's worked all his life and has no idea about this stuff so I just want to make sure he doesn't lose 40% to the taxman. Best options looks like 25% now and draw down the rest at 20% year on year until he has it all

[Ozzie Osmond]

Stu-nph26 said:

Best options looks like 25% now and draw down the rest at 20% year on year until he has it all

Why does he want to "get it all out as quickly as possible"?

What's he going to do with the money once he's got it out?

Will he have other income, for instance State Pension?

What's his age? When does/will his state pension start?

Married? Does the other half have an income?

[Stu-nph26]

Ozzie Osmond said:

Why does he want to "get it all out as quickly as possible"?

He lost a really close friend just after he retired and worries the same will happen to him so wants to enjoy it as in his words "you never know what's round the corner"

What's he going to do with the money once he's got it out?

Not much really just put it in an ISA or something instant access

Will he have other income, for instance State Pension?

He's 65 in January his only other income will be state pension

What's his age? When does/will his state pension start?

65 pension starts May 2017

Married? Does the other half have an income

Married to my mam who currently recieve state pension they have no debt own own home etc

?

[TooMany2cvs]

Stu-nph26 said:

Ok great he has someone from the Prudential coming out but I guess he needs someone independent

The guy from the Pru can only sell him Pru products.

[Stu-nph26]

TooMany2cvs said:

The guy from the Pru can only sell him Pru products.

Yea I know it's more about what option to chose at this stage than which product

[JulianPH]

Stu-nph26 said:

Ozzie Osmond said:

Why does he want to "get it all out as quickly as possible"?

He lost a really close friend just after he retired and worries the same will happen to him so wants to enjoy it as in his words "you never know what's round the corner"

What's he going to do with the money once he's got it out?

Not much really just put it in an ISA or something instant access

Will he have other income, for instance State Pension?

He's 65 in January his only other income will be state pension

What's his age? When does/will his state pension start?

65 pension starts May 2017

Married? Does the other half have an income

Married to my mam who currently recieve state pension they have no debt own own home etc

?

In that case he is simply getting it of one thing and putting it into another. I can't see the benefit in paying any tax on that if the money is not needed for something specific.

If there is no debt to pay down why doesn't he take his tax free cash and then draw an income from the balance?

I don't know the sums involved with the pension but if he took the income at say 4% or 5% (after the tax free cash had been deducted) would that also all be tax free (if his only other income is the state pension)?

Remember, its not like it used to be. If he is not going to buy an annuity then the money is always there to be withdraw at any point. That is very different to what happened to his friend.

[Stu-nph26]

JulianPH said:

In that case he is simply getting it of one thing and putting it into another. I can't see the benefit in paying any tax on that if the money is not needed for something specific.

If there is no debt to pay down why doesn't he take his tax free cash and then draw an income from the balance?

I don't know the sums involved with the pension but if he took the income at say 4% or 5% (after the tax free cash had been deducted) would that also all be tax free (if his only other income is the state pension)?

Remember, its not like it used to be. If he is not going to buy an annuity then the money is always there to be withdraw at any point. That is very different to what happened to his friend.

Great advice I think that's what he'll do I didn't realise he can withdraw it at any time. He could even take X amount each year up to the 40% tax bracket if he wanted.

[Ginge R]

Stu-nph26 said:

Thanks guys this is really helpful he's worked all his life and has no idea about this stuff so I just want to make sure he doesn't lose 40% to the taxman. Best options looks like 25% now and draw down the rest at 20% year on year until he has it all

It'd depend too, on his estate planning measures. Understanding the regulation is one thing, applying it is another. If he doesn't need the tax free cash, why take it out of a pension (where it may, or may not, be performing well) anyway, and drop it into something financially harsh, like a crappy cash ISA? Is it better off where it is for the time being, or does he have a good use for the money?

He can take fillets of tax free cash (say, 5% at a time) as income if he wants. I'm not saying it's the right thing to do, but certainly something you could both consider and if need be, reject. One benefit to keeping as much in the pension as possible is that it's an incredibly benign tax 'wrapper'/environment in which to have money.

Don't forget, he doesn't have to draw from it until he has 'had it all' out. Sure, it's nice to be buried with a quid left in the bank, and we all want our parents to have a chilled and comfortable retirement, but having a modern pension doesn't mean it dies with you, hence my first point about estate planning/Inheritance Tax. edit: It depends on circumstances of course, and that caveat is important, but a safe drawdown rate at the moment - for many people - is c3.75/4% from the value of a fund.

Edited by Ginge R on Sunday 25th September 13:51

[Stu-nph26]

Ginge R said:

It'd depend too, on his estate planning measures. Understanding the regulation is one thing, applying it is another. If he doesn't need the tax free cash, why take it out of a pension (where it may, or may not, be performing well) anyway, and drop it into something financially harsh, like a crappy cash ISA? Is it better off where it is for the time being, or does he have a good use for the money?

He can take fillets of tax free cash (say, 5% at a time) as income if he wants. I'm not saying it's the right thing to do, but certainly something you could both consider and if need be, reject. One benefit to keeping as much in the pension as possible is that it's an incredibly benign tax 'wrapper'/environment in which to have money.

Don't forget, he doesn't have to draw from it until he has 'had it all' out. Sure, it's nice to be buried with a quid left in the bank, and we all want our parents to have a chilled and comfortable retirement, but having a modern pension doesn't mean it dies with you, hence my first point about estate planning/Inheritance Tax. edit: It depends on circumstances of course, and that caveat is important, but a safe drawdown rate at the moment - for many people - is c3.75/4% from the value of a fund.

Edited by Ginge R on Sunday 25th September 13:51

Great advice Ginge I think the 25% is for him to enjoy a few holidays etc but I think you're right about the remainder might be worth keeping it where it is and taking fillets as and when he wants

[Ozzie Osmond]

^^^ You're on the right track.

[Stu-nph26]

Ozzie Osmond said:

^^^ You're on the right track.

Cheers just need to talk him out of withdrawing the lot and taking a 40% hit

[Ginge R]

Ask your adviser about dripfeed drawdown. Remind your dad, having it outside the fund is potentially a bit like your money going outside in a winter blizzard, wearing just shreddies. It has to be somewhere until its used, so why not keep it suitably invested in the pension.