SIPP & Pension guidance - IM Private Clients

[bhippy]

I'm 60 and have a company pension pot that's not making a lot of money just now. I also have a mortgage and by chance the 25% tax free lump is almost exactly what my outstanding mortgage is... I have a fixed rate ending in May, so the mortgage is only going to go one way....

Is it sensible to take that tax free lump and pay off the mortgage in its entirety? to be honest, I'm thinking of retiring on the remainder, but may decide to stay on at work for a while. If I do stay on, can I still contribute to the remaining pension and is 25% of those contributions available tax free at some future point?

Thanks guys.

[Stevil]

bhippy said:

I'm 60 and have a company pension pot that's not making a lot of money just now. I also have a mortgage and by chance the 25% tax free lump is almost exactly what my outstanding mortgage is... I have a fixed rate ending in May, so the mortgage is only going to go one way....

Is it sensible to take that tax free lump and pay off the mortgage in its entirety? to be honest, I'm thinking of retiring on the remainder, but may decide to stay on at work for a while. If I do stay on, can I still contribute to the remaining pension and is 25% of those contributions available tax free at some future point?

Thanks guys.

I'm sure there will be someone along that knows a lot more, but my understanding is that once you've crystallized any part of your pension (i.e. the 25%) then you only get tax relief on £4,000 per year as opposed to the £40,000/max salary you got before.

[bhippy]

Does that rule apply if you have separate "pots"? For instance if I transferred it to a different place and took the 25%, leaving the remainder untouched, then carried on paying into the company pension?

Otherwise, I may as well just retire having paid off the mortgage....

[Jockman]

bhippy said:

I'm 60 and have a company pension pot that's not making a lot of money just now. I also have a mortgage and by chance the 25% tax free lump is almost exactly what my outstanding mortgage is... I have a fixed rate ending in May, so the mortgage is only going to go one way....

Is it sensible to take that tax free lump and pay off the mortgage in its entirety? to be honest, I'm thinking of retiring on the remainder, but may decide to stay on at work for a while. If I do stay on, can I still contribute to the remaining pension and is 25% of those contributions available tax free at some future point?

Thanks guys.

Yes, full £40k so long as you have only taken the TFLS.

Yes 25% tax free from future contributions. You will essentially have 2 Pots - Crystallised and Uncrystallised.

[JulianPH]

bhippy said:

I'm 60 and have a company pension pot that's not making a lot of money just now. I also have a mortgage and by chance the 25% tax free lump is almost exactly what my outstanding mortgage is... I have a fixed rate ending in May, so the mortgage is only going to go one way....

Is it sensible to take that tax free lump and pay off the mortgage in its entirety? to be honest, I'm thinking of retiring on the remainder, but may decide to stay on at work for a while. If I do stay on, can I still contribute to the remaining pension and is 25% of those contributions available tax free at some future point?

Thanks guys.

Jockman has hit the nail on the head - your contribution allowance remains the same provided you are only taking the cash lump sum (or sums, if you have more than one pension scheme.

If you draw down anything other than this as income then your contribution limit decreases to £4k a year.

The next bit doesn't appear to apply to you, but may do to others reading: The rule is called the Money Purchase Annual Allowance and it is important to remember it only applies to Money Purchase schemes (i.e. NOT to Defined Benefit schemes) when taking Uncrystalised Funds Pensions Lump Sum (UFPLS) benefits. It does not apply when taking the tax free cash alone, even if you set up the UFPLS and do not draw from it. Old capped drawdown within GAD limits) do nottrigger this either.

bhippy said:

Does that rule apply if you have separate "pots"? For instance if I transferred it to a different place and took the 25%, leaving the remainder untouched, then carried on paying into the company pension?

Otherwise, I may as well just retire having paid off the mortgage....

It does. Once you have taken a flexible benefit (income, not the tax free lump sum) from one pot the rules applies to all of your pots.

To focus on whether it is sensible to take the tax free lump sum and pay off the mortgage entirely, unfortunately this becomes advice. What I can say however is that in doing so you will avoid a hike in your interest rate after the fixed term expires and achieve a very stong degree of financial security. The down side is that markets have had a bad time of late and funds you withdraw from a pension will not be there for any recovery. Having said this, 75% of your pension would still be there, so this is certainly well mitigated.

If you would like to chat this through further then please just ask here or contact Nik ([e-mail]) and we will be happy give the time to go through your options with you - regardless of what you end up deciding to do. For what it's worth, knowing this point I think you are pretty much on track to the best route for you anyway!

Cheers

Julian

[rlw]

Hi

We - me and mrsrlw - have taken advice and have been recommended a scheme which I don't quite understand with Royal London involving transferring our existing pension pots to allow us to draw down cash rather than taking an annuity (although there seems to be an element of that involved too).

Also involved is paying quite large sums to our advisor for what I believe is ongoing advice regarding withdrawals.

I am assuming that this advice is compulsory with a scheme such as this. Is this correct?

We are both over 65 if that's in any way relevant.

I am asking here, rather than our advisor, as he is just about to get the boot for so many reasons.

Thanks

Richard

[JulianPH]

rlw said:

We - me and mrsrlw - have taken advice and have been recommended a scheme which I don't quite understand with Royal London involving transferring our existing pension pots to allow us to draw down cash rather than taking an annuity (although there seems to be an element of that involved too).

Also involved is paying quite large sums to our advisor for what I believe is ongoing advice regarding withdrawals.

I am assuming that this advice is compulsory with a scheme such as this. Is this correct?

We are both over 65 if that's in any way relevant.

I am asking here, rather than our advisor, as he is just about to get the boot for so many reasons.

Thanks

Richard

Morning Richard, sorry to say this sounds pretty much par for the course - but easily fixed.

Firstly, you are absolutely right to say if you don't understand what has been advised you sould question and not proceed until you do and are happy. Financial advisers routinely recommend you transfer your pension elsewhere (one of their favourite providers usually) as part of anything you bring to them. This is often just part of their fee justification.

You should be able to do exactly the same thing with your pension where it currently is, but are probably even less likely to pay the adviser fees if you do not feel they have done something more than assist you in doing this.

Yes, the sums can be (and usually are) eyewatering!

Unless you are in a defined benefit pension scheme (final salary) then there is absolutely no requirement to take (and pay for) advice, though I understand some people are led to believe otherwise. If you are in such a scheme it is also highly unlikely that transferring out of it is going to be in your best interest anyway (there are some rare cases when thing may be the case though).

So first things first as to establish/ensure you are not already in such a scheme. On the basis you are not then it is a matter of exploring your needs and requirements, which is another say of balancing what you want with reality!

Typically your options are to take the tax free lump sum (or not) and then look at what to do with the remaining 75% of your pension fund(s). You can purchase an annuity, draw down an income from the funds whilst keeping them invested for future growth, mix and match or go for something more detailed and bespoke to your needs.

None of this requires you to move from where you are (except in very exception circumstances) or pay a financial adviser a single penny!

IF you would like to chat over what you have been present with now to gain a full understanding of it in plain English, and/or find out what exactly your options are going forward (from which you can pick and decide yourself from the position of being fully informed) then just get in touch with Nik ([e-mail]) and he will be more than happy to go over this with you on the phone, online or face to face. There is no charge/fee and most certainly no obligation!

The whole point is that the options and processes are actually quite simple, but only when laid out simply. The advice industry, in the main, has a vested interest in making thing more complicated than they are and keeping you in the dark about this so they can levy their excessive charges. What we are (and have been for many years now) doing is changing this and putting you in the position of knowledge that enable you to make informed choices without having to pay these fees.

Of course we hope you use us or the experience simply makes you recommend us to other who may go on to use us, but we do not sell or make any recomendation that you should/must follow, just fully inform you.

Cheers

Julian

[bhippy]

JulianPH said:

It does. Once you have taken a flexible benefit (income, not the tax free lump sum) from one pot the rules applies to all of your pots.

To focus on whether it is sensible to take the tax free lump sum and pay off the mortgage entirely, unfortunately this becomes advice. What I can say however is that in doing so you will avoid a hike in your interest rate after the fixed term expires and achieve a very stong degree of financial security. The down side is that markets have had a bad time of late and funds you withdraw from a pension will not be there for any recovery. Having said this, 75% of your pension would still be there, so this is certainly well mitigated.

If you would like to chat this through further then please just ask here or contact Nik ([e-mail]) and we will be happy give the time to go through your options with you - regardless of what you end up deciding to do. For what it's worth, knowing this point I think you are pretty much on track to the best route for you anyway!

Cheers

Julian

Thanks everyone. Julian, much appreciated. I'll drop Nik a line!

[mikeiow]

Stevil said:

bhippy said:

I'm 60 and have a company pension pot that's not making a lot of money just now. I also have a mortgage and by chance the 25% tax free lump is almost exactly what my outstanding mortgage is... I have a fixed rate ending in May, so the mortgage is only going to go one way....

Is it sensible to take that tax free lump and pay off the mortgage in its entirety? to be honest, I'm thinking of retiring on the remainder, but may decide to stay on at work for a while. If I do stay on, can I still contribute to the remaining pension and is 25% of those contributions available tax free at some future point?

Thanks guys.

I'm sure there will be someone along that knows a lot more, but my understanding is that once you've crystallized any part of your pension (i.e. the 25%) then you only get tax relief on £4,000 per year as opposed to the £40,000/max salary you got before.

Sorry, but that doesn't sound right.

Once you have crystallised part of the pension - taken 25% - then the remainder of that crystallised sum is subject to regular income tax, even if it has subsequently grown (or lost!) value.
The remaining uncrystallised amount portion can still later be crystallised for the 25% TFLS (tax free lump sum) against it's value.

So for example: you have a pot of £500k. You crystallise £100k to take £25k tax-free.
Now you have £75k "in drawdown", and £400k still in the pension.

At a later date you could crystallise another £100k (of that £400k) - giving you another £25k tax-free.
Now (assuming there was zero growth!) you have £150k in drawdown, and £300k still in the pension.


You sound like you are confusing things - once you touch ANY of the remainder after crystallising, THEN you are limited to putting only up to £4k into the pension - you have hit the MPAA (Money Purchase Annual Allowance)....

In my example above....imagine you now take £100 from the drawdown amount (leaving £149,900 in drawdown!).
At this point, you can no longer invest up to £40k in your pension, but only £4k (pa). That small (& daft!!) action triggered the MPAA.


Hope this helps!

[Stevil]

mikeiow said:

Sorry, but that doesn't sound right.

Once you have crystallised part of the pension - taken 25% - then the remainder of that crystallised sum is subject to regular income tax, even if it has subsequently grown (or lost!) value.
The remaining uncrystallised amount portion can still later be crystallised for the 25% TFLS (tax free lump sum) against it's value.

So for example: you have a pot of £500k. You crystallise £100k to take £25k tax-free.
Now you have £75k "in drawdown", and £400k still in the pension.

At a later date you could crystallise another £100k (of that £400k) - giving you another £25k tax-free.
Now (assuming there was zero growth!) you have £150k in drawdown, and £300k still in the pension.


You sound like you are confusing things - once you touch ANY of the remainder after crystallising, THEN you are limited to putting only up to £4k into the pension - you have hit the MPAA (Money Purchase Annual Allowance)....

In my example above....imagine you now take £100 from the drawdown amount (leaving £149,900 in drawdown!).
At this point, you can no longer invest up to £40k in your pension, but only £4k (pa). That small (& daft!!) action triggered the MPAA.


Hope this helps!

More than happy to be set straight

[Jockman]

Remember you are assessed against the LTA every time you crystallise. £100k is just below 10%.

If LTA rises to £2m in the future you’re still regarded to have used up just below 10%.

[mikeiow]

Jockman said:

Remember you are assessed against the LTA every time you crystallise. £100k is just below 10%.

If LTA rises to £2m in the future you’re still regarded to have used up just below 10%.

& remember there is the punitive final check against any uncrystallised funds at age 75.....google for plenty of examples - pretend to be a Professional (not consumer) & read AJBell's take here

[Carbon Sasquatch]

mikeiow said:

& remember there is the punitive final check against any uncrystallised funds at age 75.....google for plenty of examples - pretend to be a Professional (not consumer) & read AJBell's take here

There's also a test on growth of crystallised funds...... so if you don't withdraw any gains and spend them you'll get taxed.

[mikeiow]

Carbon Sasquatch said:

mikeiow said:

& remember there is the punitive final check against any uncrystallised funds at age 75.....google for plenty of examples - pretend to be a Professional (not consumer) & read AJBell's take here

There's also a test on growth of crystallised funds...... so if you don't withdraw any gains and spend them you'll get taxed.

Yes indeed, thanks for that point!
I suspect the trick with those would be to at least have withdrawn the growth of those crystallised funds.

[Carbon Sasquatch]

mikeiow said:

Yes indeed, thanks for that point!
I suspect the trick with those would be to at least have withdrawn the growth of those crystallised funds.

It's a complex one - I guess it depends on how significant those gains are and what your marginal tax rate would be at withdrawal.
I know of a case in my family of some spectacular gains in a self managed SIPP with specific stock investments. The person didn't need the money and would have been 45% income tax + IHT so decided to leave the money there & take the LTA tax hit instead.

[Jasey_]

rlw said:

Hi

We - me and mrsrlw - have taken advice and have been recommended a scheme which I don't quite understand with Royal London involving transferring our existing pension pots to allow us to draw down cash rather than taking an annuity (although there seems to be an element of that involved too).

Also involved is paying quite large sums to our advisor for what I believe is ongoing advice regarding withdrawals.

I am assuming that this advice is compulsory with a scheme such as this. Is this correct?

We are both over 65 if that's in any way relevant.

I am asking here, rather than our advisor, as he is just about to get the boot for so many reasons.

Thanks

Richard

To add to what Julian said when Mrs jasey wanted to take her 25% lump sum from her existing pension they didn't offer flexi drawdown so if you wanted to take the 25% from their pension but not take an annuity you would need to transfer somewhere else first. This was Prudential and they started giving us a load of old tosh about having to take advice and they couldn't help but knew someone who could for a fee.

Julian can't give advice but I can - contact Nik and he'll explain it all to you without obligation.

Getting money out of a pension that suits you rather than the pension company appears to be much harder than it should be.

[mikeiow]

Jasey_ said:

To add to what Julian said when Mrs jasey wanted to take her 25% lump sum from her existing pension they didn't offer flexi drawdown so if you wanted to take the 25% from their pension but not take an annuity you would need to transfer somewhere else first. This was Prudential and they started giving us a load of old tosh about having to take advice and they couldn't help but knew someone who could for a fee.

Julian can't give advice but I can - contact Nik and he'll explain it all to you without obligation.

Getting money out of a pension that suits you rather than the pension company appears to be much harder than it should be.

That is *good* advice!
Individual pension schemes can and do have various limitations: you might be "allowed" to do something, but it doesn't mean your specific scheme will let you!!

[JulianPH]

mikeiow said:

Jasey_ said:

To add to what Julian said when Mrs jasey wanted to take her 25% lump sum from her existing pension they didn't offer flexi drawdown so if you wanted to take the 25% from their pension but not take an annuity you would need to transfer somewhere else first. This was Prudential and they started giving us a load of old tosh about having to take advice and they couldn't help but knew someone who could for a fee.

Julian can't give advice but I can - contact Nik and he'll explain it all to you without obligation.

Getting money out of a pension that suits you rather than the pension company appears to be much harder than it should be.

That is *good* advice!
Individual pension schemes can and do have various limitations: you might be "allowed" to do something, but it doesn't mean your specific scheme will let you!!

Thanks Mike and Jasey (how are you doing guys - coming to Portimão?!)

'Advice' is a regulated term in the eyes of the FCA, not an everyday word. It specifically means to make a personal recommendation on a product or course of action in relation to having fully explored you personal cirsumstances.

Advice in the normal everyday sense it to inform, guide and suggest in pretty much exactly the same way, but making a personal recommendation and charging you and arm and a leg for it.

For the sake of clarity we therefore do not use the word 'advice', lest it be taken to carry its FCA regulated meaning. We therefore provide 'information and guidance' - which amount to exactly the same thing but with you making the decision at the end of the process of being fully informed, not us doing it and charging you for it.

We offer this for free to PHers and whether you decide you want to use us for your investments or not is entirely up to you - there is absolutely no obligation.

Most financial things are pretty simple when you know and follow the rules. We enable you to do just that!

Cheers

Julian

[anonymous-user]

Not sure if anyone can help us with this!

'er indoors retires in July and has been paying into a pension scheme arranged by her employer. She works at a care home and has been there for about 8 years. We always knew that this pension would not be worth a fortune but.....
Total payments in from employee, employer and tax relief are a little under £5k, total value of the 'pot' is about £80 more, so in effect the pension provider has taken their management fee and lost 'er indoors any gain from her pension! I feel that this 'pot' after 8 years investment really should be worth £7/10k ish.

Is there any way we can shame the pension provider into doing the right thing, please?

As an illustration, I transfered a previous employer's pension belonging to 'er indoors to a SIPP managed by Intelligent Money in 2019, that has grown in value by almost 30%.....

[leef44]

JB99 said:

Not sure if anyone can help us with this!

'er indoors retires in July and has been paying into a pension scheme arranged by her employer. She works at a care home and has been there for about 8 years. We always knew that this pension would not be worth a fortune but.....
Total payments in from employee, employer and tax relief are a little under £5k, total value of the 'pot' is about £80 more, so in effect the pension provider has taken their management fee and lost 'er indoors any gain from her pension! I feel that this 'pot' after 8 years investment really should be worth £7/10k ish.

Is there any way we can shame the pension provider into doing the right thing, please?

As an illustration, I transfered a previous employer's pension belonging to 'er indoors to a SIPP managed by Intelligent Money in 2019, that has grown in value by almost 30%.....

When the contributions are made into the pot, does the fund default to treasury deposits as a minimum risk fund and they you have the choice as to how you invest it?

If so then this could explain why the returns are so low after offsetting the management fees.