UKC

Good evening

I took out a private pension in 1989?90 which I paid into for twelve years or so, and they became frozen at age 32/33 with no other contributions. I was contracted out of SERPS, so have been updated with the two products yearly.

Product 1. The main pension which I paid £40 into and can take this year

Product 2. The SERPS, which it says I can take in ten years when 65.

Do I have to wait until 65 to take the SERPS pension, or, can I take it this year with an appropriate drop in funds?

thanks a lotDave

If you were contracted out of SERPS (State Earnings Related Pension Scheme) then you won't have a SERPS bit added to your state pension.

Do you mean that the bit that would have been a SERPS contribution was put into the private pension; either with the main bit or separately?

Evening Michael, thanks. Yes I’ve researched into that and SERPS was abolished in 2002 anyway. I was working again just after then and it doesn’t seem to have affected my HMRC projection of state pension at 67.

Yes. It seems to have been created as two products. The second product, and larger one, is the SERPS portion that says 2034 on it. From what I gather, if it was of a certain type, perhaps not final salary related, then you can get it from age 55.

Ive emailed the company and am waiting for a reply and intend to get a pensions advisor soon.

Thanks a lot

Dave

You can take it early m as per pension freedom rules. But Wait until 65 as taking it at 55 is a poor financial decision unless you are going to die in next couple of years. 

I think there's a deduction calculation with the "new" (if you reach state pension age since 2016 IIRC) state pension for years when you're contracted out. Your state pension forecast will do an excellent job of not explaining it clearly.

Doesn't sound like it affects you but any SERPS contributions do also get factored into the "new" state pension but you don't get as much extra as on the "old" state pension.

I think for me the net effect of those two is I'll get about an extra £1 a week, which of course I'm joyfully looking forward to for when I get to 66, imagining all the extra things it'll pay for 🤣🤣🤣

Just a thought about your private pension - wasn't by any chance you working through a one-man service company (as a contractor) and it being an executive pension.

Because with those there are circumstances where you can get out more than 25% tax free (it depends on when the scheme started and the size of the fund compared with your "best" salary at the time) so it would need checking out. I had one that was sitting there not having been contributed into for over a decade and I made the surprising discovery that I could take all 100% out tax free. Guess what, I whipped it out pronto before any chancellor could change the pension tax rules.

Thanks for that advice Michael, much appreciated.

Dave

If your pension pot is below £30k( I think that is the number). Then yes it is tax free. That is the total across all your pension pots.  

The below £30k is something else. The executive pension thing allows greater amounts out tax free, but it's pretty obscure and doesn't apply in many circumstances.

Can't remember the exact rules but an executive pension plan is/was actually a company pension plan for individuals, typically directors so was potentially suitable for one-man service companies (typically IT contractors) until IR35 came along. The over 25% tax free bit would arise if your pension fund was small enough compared with your maximum salary (highest average of 3 consecutive years) whilst employed by your one-man company.

I had a few high salary years but also some fallow recession hit years so my fund was effectively (and actually) too small. Presumably this "loophole" was closed but only for new schemes, the legislation wasn't retrospective.

I can remember wondering what to do with the fund if I could get 30% or 35% out tax free. I was staggered when I was told 100% and took the appropriate action.

Sorry about the off-tangent thread hijack presuming it's not applicable to the OP.

This is not always the case. Consider the old style public sector pensions, typically 1.5x annual pension as a tax free lump sum, pension age of 60 and an actuarial reduction of 4% per year for early retirement. Excluding any taxation on the annual pension, the break even point for retiring at 55 rather than 60 is 72 years old. If you can afford to live on the actuarially reduced sum at 55, your spending is unlikely to be greater at 72 as age inevitably slows your activity.

You only actually profit if you live to 73years old which is hardly guaranteed.

Only last week I was talking to a friend who has a DB pension from his first 12 years working in the private sector, I was very surprised that his actuarial reduction was only 1.8%!? He is definitely taking it when he is 55, next year 

Excluding any taxation on the annual pension, the break even point for retiring at 55 rather than 60 is 72 years old. If you can afford to live on the actuarially reduced sum at 55, your spending is unlikely to be greater at 72 as age inevitably slows your activity.

For me it is probably more like 78 as only part of my DB pension will be taxed between 55 and 67, but nearly all of it will be after 67. 

All useful thanks Michael.

What I’m failing to grasp is that if I take say 25% of this £17k, does this mean that all my remaining, bigger pots will be fully taxed?

Or, do I get 25% of each pot tax free?

thanks a lot

Dave

That is all well and good until inflation has to be factored in. Anybody who retired early prior and during the recent inflationary period will have had all their forecasts blown to shreds. Most people worked on a few % points .

No your overall limit is upto 25% across all pots, but it’s upto you how much upto 25% you take . 
 

that 25% has a maximum limit to 25% of the current lifetime allowance limit.

Isn't it 25% of EACH pot?

The pension in my model, old NHS, teachers etc is index linked so the maths still stands.

Whilst these are no longer open, many still have them as a large chunk of their pension.

Index linked to what, I really question whether it catches up even within the public sector schemes, especially if you go early.

Yes, which is what I said. But you do not have to take the 25%, you can play around with the % to suit your personal requirements./ circumstances/ lifestyle etc.

Well you said "across all pots" I wanted to exclude any ambiguity on an import point, sorry if this seemed pedantic.

CPI it used to be RPI

As the old ones are linked (for older members) to final salary. I don't think the rate at which it increases after retiring affects Ennerdaleblonde's calculations. As they point out it's the actuarial reduction that is important in that calculation 

For me the important additional advantage in opting out of the pension scheme early has been that CPI has been significantly higher (20+%) than teachers pay rises for the last 14 years. So my pension is based on my salary in 2010+CPI compounded. 

That's true for many schemes. People who retired a few years ago will have higher pensions than those still working and contributing to the pension fund.

I'm dead jealous

Even with that do you consider it has kept pace....I doubt it.

It helps I am sure, and anyway most people do not have that type of index linking.

CPI. I have one from an earlier career and so have done the sums very carefully. It is very easy to model in excel.

At 55 you get 3x0.8 lump plus 0.8 pa

At 60 you get 3x1 lump sum plus 1 pa

Total income from 60 catches up with total income from 55 at 72.

The real break even point is somewhat later if taxation is included in the model, see Rob's post above.

Try it for yourself.

Depends what you are comparing it to.

Compared to the triple locked state pension, no. 

Compared to the recent  cost of living increases, not quite

Compared to the wages of those  now paying into the scheme, they would now need a 32% pay rise for them to catch up. 

It would be great if it was better. My only slight complaint is that it  isn't as good as the rate I signed upto, when I joined.

I'll be surprised if anyone currently working has a better deal. 

The index linking is obviously very import for the future value of the pension, but as Ennerdaleblonde's simple calculations indicate, it plays no part in our decision.

The important consideration is the actuarial reduction, his 0.8 is 5 years at 4%. As I said upthread this varies depending on the scheme. For a friend it is only 1.8%, they would replace that 0.8 with 0.91 and might break even by the time they get a letter from a King. 

It was pretty counterintuitive to opt out when our scheme changed as remaining in the scheme would have resulted in a reduction in my (and Mrs J's) pension even with additional contributions. 

Understandably a more common reaction than Neil's concern. 

That’s just for one of your pensions though, what about all the others where CPI does not apply , where do they figure.  
 

Just intrigued.  

My main additional pension is a money purchase scheme which has no actuarial reduction. I can access this at 55. I am not planning on buying an annuity with this but drawing down as necessary. There will be no index link, increases will rely on fund performance. I am happy with this as the final salary pension will finance the essentials. The rest is fun money.

Sounds very similar to me and quite a few people I know. My initial plan was to draw down between 55 and 60 as this could be done tax efficiently and then take my DB pension at 60. After crunching the numbers numerous times as I've acquired more information I changed my mind. Now I'll take the tax free 25% and my DB pension at 55. Not sure what the remaining 75% of my pot will be used for, but it could well be inherited tax free by Mrs J. 

What % have you used as a number on any growth in the fund as you draw down from that. 

You will need to work out your own to satisfy your expectations. I used 2.7% growth above inflation. I determined this value through 40yr average inflation figures and average FTSE returns.

It gives an ok model with some inbuilt pessimism. My main pessimism is assuming state pension to be zero (unlikely but who knows ?). A good financial planner will have the software to provide a Monte Carlo analysis and give % chance of success.

That's about as much detail as I am prepared to give in public.

Do you mind me questioning your thinking on the 25% tax free?

My current plan is to include this in the annual draw down as it will grow with the portfolio. What advantages do you see to taking it in a single lump?

Interesting.  I would suggest that is too high a number.  3% is typically what investment advisers are working too when doing forecasts. 2.7 plus inflation is probably to high % in comparison. They use to work to 5% until a few years ago.  

Drip feed it into ISAs so growth is then tax free again. That is one option. 
 

use it for income for first few years instead of drawing down. 
 

or other options …car etc. 

Not at all, I'd much rather realise I'm wrong before making a decision. 

For me, the short answer is I have plans to spend the money and also being naturally cautious I'm concerned that 25% allowance is more likely to be reduced (or even abolished) rather than increased in the future. 

More generally, I can see an advantage in what you describe. But my  DB pension will be higher than the personal allowance so I  don't think it makes much/any difference whether some of the 25% remains invested in the pension or not? Isn't it more about how well the pension fund performs v how well the fund (or whatever you invest it in) does? 

Thanks for the detailed reply. It's still tax free money so I currently plan to draw it annually as I don't currently have any large purchase plans.

Interesting thoughts about it's removal, I had not considered that but it will be accounted for in my pessimisms.

As an aside, do we know each other? Similar location, age, interests, even employment historys

I'm more pessimistic than you in that my spreadsheet only has my investments keeping pace with inflation. I also worry about the future of the state pension, but I can't see how can be reduced, only means tested. Which is another reason for taking a reduced DB pension earlier. 

Well you have a better idea if my name than I do yours😊 Although I do know a couple of other locals of a similar age who have the same name as me. Looking at your profile it was last century when I was employed full time out West. More recently it was Penrith/Carlisle.I felt a bit bad today when a couple of new staff mistook me of and OFSTED inspector. 

My 2.7 is used in my broad outline work. I have applied lucky, typical and unlucky scenarios using historic data which gives a better picture. Here I looked for best, worst and typical years to retire and applied the annualised data from them. Tedious but worthwhile.

I thought you added inflation plus 2.7 which is very optimistic . 2.7 on its own I can understand. 

I'd forgot to mention, probably because it is very much on the pessimistic side, but another reason for my change of plan was realising, after Mrs J's brother in law passed away, that her sister inherited all of his DC pension pot, with no penalty. Although our terms are much,much better than the current teachers scheme, if the same happened to me, Mrs J would get half my pension and because she already has her own, she would pay tax on that modest amount. I actually think amongst my friends with similar "split" pensions it's the main reason why we are taking our DB pension as early as possible and only accessing our DC funds if needed. 

DC fund belongs wholly to you and hence to your estate if you die. And I have a feeling that it doesn't form part of the estate for inheritance tax purposes.

DB fund belongs to the pension fund to which you have certain rights but the rights of your "dependents" (if you die) are different and almost certainly less.

So if you have both DB & DC pensions, what happens to your pension if you die should certainly come into your thinking.

Similarly, this should also be considered if you're thinking of deferring a DB pension. Actually, once you're old enough to take the pension early (still 55?) you should be finding out the difference between "died before taking pension" and "died whilst taking pension" because it may affect your decisions (especially if you're health deteriorates).

That's correct. Mrs J's sister got it all (not just 25%) tax free. I think there might be an age limit (75?), but it forms part of the thinking of friends who have kids and would otherwise be above the current IHT threshold 

Mrs J would get three months of my full pension and then half. Poor compared with say the 70% ICI pension of the 1990s gave to spouses, but much better than the 37% spouses of current teachers are eligible for. 

Another important point, I wonder what percentage of people, in say their early 50's, know the answer?