As I approach 55, and the first opportunity to take my Defined Contribution pension, I keep going back to the same questions about pensions that I feel I should either find out more about, or make a decision on. I’ve listed them here, not necessarily looking for answers, just trying to get them out my system:
Do I take my DC pot at 55, even if I don’t retire then?
This is so I can get my hands on the 25% tax free sum, before the Government come in and reduce it. When it comes to pensions we almost all take it as read that the endless tinkering on this potential cash cow by whichever bunch of inadequates happen to be in power will just never stop. But why? Why can’t they leave us in peace and let us do our sums against a background of stable assumptions?
If I do take my 25% cash Lump Sum, do I “recycle” it back into personal SIPPs to get some tax relief?
This is where pensions begin to get complicated – even when you’re trying to keep it simple. There’s also a “moral and ethical” aspect to doing this which, frankly, as long as I’m not breaking the law, I’ll consider for all of two seconds before I do it. My bigger problem, I feel, will be “Can I be bothered”? working it all out and then taking the necessary administrative steps. Which leads me to my next question:
Do I get Professional Pensions Advice?
Can I get it for free, is my rejoinder to that one. Isn’t all relevant information available on the internet anyway? Of course – but how much of it is “fake news”? There seem to be so many shades of pension options that I’m never sure if what I’m reading applies exactly to me. It’s like when the newspapers do those tables of how the budget will affect you, and they pick about six different groups – singles, married couples, pensioners, students and so on – estimating their incomes and expenditures. Never once in history has any one of these sub-groups applied exactly to my situation.
Assuming I take my DC pension at 55, and my cash free lump sum, how much then do I drawdown?
Firstly, what are the damn rules on drawdown? What’s the minimum I can take a year? What’s the maximum? Will I still be working? Is it beneficial to continue working? Should I go part time? If so, what’s the most tax efficient approach?
Am I in danger, when taking all my pensions into account, of exceeding the Life Time Allowance?
Absolutely no idea. I’ve taken the “protection” available, although I’m not quite sure what this means. I can’t seem to get an estimation of what my Defined Benefit pot is worth, or will be worth when I decide to take it. I’ve written three times to the provider to get some guidance only to eventually be informed of a sum of money that I’m due per annum. But is that if I took it at “normal retirement age”? And is it in today’s money? No lump sum options are given either. I used to get a really clear statement every year about this pension. Now I have to write and then wait two months for a rubbish response.
How much will I need to live comfortably in retirement anyway?
Well, I’ve come to answer on this one. It’s: How long is a piece of string?
What’s the best Spreadsheet to estimate (a) what my pensions will be worth and (b) how I might take them over thirty years?
An easier question might be how many spreadsheets do I have trying to work through these scenarios? I’m only certain that it’s too many. I do have a “definitive” effort sitting on Google Docs, but that only serves as the model that I compare all the others to. It will also only be “definitive” until I find one that I think surpasses it (i.e. gives me a better outcome).
Will the State Pension be means tested by the time I get there?
If there’s anything that the last General Election taught us it was that if you mess with Pensioners benefits they will vote you out of office. They won’t even give up on a free bus pass, for Gawd’s Sake, so no, I predict that this isn’t about to happen anytime soon.
What are the rules when it comes to pensions and inheritance?
Answering this question means I have to contemplate the fact of my own death. Which I currently refuse to do.
Haven’t I anything better to do with my time?
This is always my final pension question after hours of wrestling with the above ones.
13 thoughts on “My Top Ten Pension Questions”
My starters for 10
(1) Do I take my DC pot at 55, even if I don’t retire then?
Yes, at least the 25%.
(2) If I do take my 25% cash Lump Sum, do I “recycle” it back into personal SIPPs to get some tax relief?
No, since you will pay tax on it when you take it out again, although you could if you think you will be in a lower tax bracket when you take it out again, but see (3) and consider (5).
(3) Do I get Professional Pensions Advice?
(4) Assuming I take my DC pension at 55, and my cash free lump sum, how much then do I drawdown?
Nil, until you need to.
(5) Am I in danger, when taking all my pensions into account, of exceeding the Life Time Allowance?
See (3) above.
(6) How much will I need to live comfortably in retirement anyway?
Nothing to add to your answer.
(7) What’s the best Spreadsheet to estimate (a) what my pensions will be worth and (b) how I might take them over thirty years?
Does this matter, as long you can live on 4% ish of your total investments (after tax)?
(8) Will the State Pension be means tested by the time I get there?
Hear what you say but maybe plan on the basis that at some stage the answer will be ‘yes’.
(9) What are the rules when it comes to pensions and inheritance?
I really think you should consider this, see (3) above.
I am in a similar position to you (approaching 55, made redundant almost 2 years back, took some time off (it was great) and gone back to work but part time only (even better). Unlike the Brexit slope, I reckon I will land in a better place than the UK does after Brexit..
Unfortunately, the answer to many of these questions is …… “it depends”. Everyone is different. My answers will be different to yours. Mine would be…
3) No (I have done the exams (5 out of 6 done so far) but work in IT and not as an IFA. I just found the subject interesting and its much cheaper to get the qualification than pay an advisor: win-win)
4) No – I will use ISA savings and take my DB at 60, leaving DC as inheritance/holiday money.
5) Yes. Need to manage this to avoid LTA – there are ways.
6) Depends on the life you lead. You can either retire when you are ready (and live as you want) or retire early and accept living a touch more frugally. Its your choice.
7) Do it yourself if you have the skills/time/inclination. It will enhance your knowledge and be invaluable to friends of same age. Plenty of pints to be bought for you here.
8) Don’t count on the SP.
9) It is complicated. a)Teach yourself, b) get advice or c)phone a friend (in that order of preference). Consider it a challenge to optimise what you give to your descendants and out of the hands of the government. The ethics of tax avoidance is maybe a subject for a post at some point 🙂
10) It depends. If you find this sort of stuff interesting, then great. If not, see 9b or 9c) and go down the pub a bit more (or other hobbies).
Being made redundant was in hindsight the best thing that could have happened to me. Job was becoming a pure process-driven box-ticking risk-management role (and yes that was IT). Took my chance to train as an IFA (originally considering doing that as a job either with a IFA firm or for a charity. In the end I went back to IT as a contractor so lost the politics of the industry. So its possible to study and work at same time (admittedly easier being part time). I know have much more confidence in my knowledge and have the feeling of achievement.
But as I said at the start, everyone is different even if they experience similar life scenarios. Each to his/her own.
Great blog. Keep up good work. An enjoyable read.
Out of interest, what exams are you taking? And are they more useful/interesting than just reading e.g. Monevator?
I think you’re asking the wrong questions, or at least, the right questions in the wrong order…
I think the first question is – how much do I need, and how much do I want to live off? I know it’s a piece of string kind of question, but you do at least need to have an idea of both your essential minimum and your desirable levels of spending. All else flows from that.
As far as the when and how of taking pensions and your other detailed questions, clearly a lot depends on your precise mix of assets – pension income, pension pots, investments in ISAs, etc… (and your wife’s, I am assuming this planning exercise is a joint enterprise). For what it’s worth, I probably wouldn’t rush to crystallise the DC pot and take the tax free cash for the sake of it (i.e. just to sit in a taxable investment account).
Since you have both DB and DC pensions, and may have possible LTA issues, it could be worth taking advice from a fee based financial planner, to help you understand the best timing and sequencing of taking your various pensions-and they will liaise directly with your pension providers to get the valuation information needed. It will cost, but cocking it up could easily cost more. I had a similar piece of work done and it uncovered a serious error with my AVCs that I almost certainly wouldn’t ever have noticed. It’s also quite helpful to get an objective pair of eyes on the situation if you are going round in circles – sometimes the obvious can be elusive!
At some point no doubt you’ll reach a zen-like calm about it all….but then the blog won’t be such a good read 😉
I thought I’d worked out the string sizing problem…then I read Your Money or Your Life by Joe Dominguez and the chapter “How much is enough? The nature of fulfilment” changed that considerably for me. It’s a great book if you haven’t already read it.
Regarding the exams I am taking, I am studying for this:
I read monevator too and I find they are complementary. Both are useful and interesting (at least to me).
In the end it will save me money (as I won’t really need so much of an IFA’s advice) and I have definitely saved myself more than the cost of the course. And it’s given me confidence that I am on the right track in terms of my finances. The main difference between me and an IFA is that they are authorised by FCA and could execute on the plan, whereas I cannot. They will have much more experience and access to systems for supporting the role. I in theory could only give “guidance”. But that’s fine for me.
It boils down to :-
Do you trust any govt. of whatever nominal political stripe to look after your best interests better than you can? Or phrased perhaps more entertainingly: Ask yourself the Question ”Do I feel lucky?”
If you have the gift of a good brain, be as independent as possible, because it’s unlikely anyone other than yourself will care about you better than you can.
I understood both DB and DC should be providing an annual statement which includes the LTA amount of the pot.
And I read somewhere that if one takes DC pension early, then the max one can continue to contribute to pensions drops from 40K to 10K p.a. For some reason this ‘rule’ does not seem to apply to DB pensions cashed in.
Can’t comment on all your questions but here’s my thoughts on some. I think my strategy next year when I reach 55 is to take enough of the tax free lump sum from the DC pots to put into mine and wife’s ISA. So that’ll be £40k. Because really that’s the process for me, to transfer all the money from pension pots into ISA pots in as tax efficient way as possible.
For the first time ever I have had the services of a Financial Adviser (to transfer my DB CETV to DC). I am staying with him for a year to give it a go and see if he offers value over and above what I could do myself. Well, six months in and its a resounding NO! All he’s done is put this part of my pension in a high-fee actively managed fund that frankly is doing no better than what I would have done myself. And he’s also charged me 1% for the pleasure. So I will be back to self-managing this myself next year with my own spreadsheets (which answers another of your questions!).
And one last thought…. no way will any government reduce/remove the state pension as that is the biggest single way to ensure political suicide. I’m sure it will be tinkered with in future years but I would count on it still being there.
Hope that helps and cheers.
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Just to add a little something. I think Mark is right that once you’ve taken “flexible” benefits you can only pay in £10,000 pa to your pension. However I don’t believe that the PCLS (i.e. the 25% tax-free amount) counts so long as that’s all you take.
But…does your LTA protection not void if you pay anything into a pension subsequently? So I would check that your current re-employment doesn’t include a pension contribution (by you or the firm – take care not to get caught re “auto-enrolment”) or you may have lost the LTA protection. The rules are different for “Individual” protection (where you can build up more pension) and “Fixed” protection (where you can’t). You don’t say which you took.
Perhaps the safest route is to take the PCLS and feed it into your ISA, as Neil noted, assuming your current employment doesn’t pay you enough to do that out of income.
OTOH the inheritance aspects of pensions are now so much more attractive that you might feel it’s better to leave your funds there (except possibly the 25% tax free element). I was intending to use my SIPP to cover me between 55 and 65/67 when State and DB pensions kick in. I can take c£16k pa tax free (25% tax free and another £11,500 to use up the Personal Allowance). But maybe I should use my ISA instead to minimise IHT by spending assets that are within my estate (ISA) rather than ones that are not (SIPP)? But it’s a nice problem to have…
Regarding the state pension, i suspect it will be ‘death by a thousand cuts’. No individual bit of tinkering being particularly malevolent but the change from now to in X years time being significant (could easily see a situation where it ends up being means tested and not available till we are somewhat older).
I am a decade or so younger than you so this is more of a problem for me…
@Richard – the £10k is being cut to £4k from April 2018 – http://www.thisismoney.co.uk/money/pensions/article-4693504/Delayed-cut-pension-tax-relief-on.html
Thanks Weenie – I’d not spotted that the “on hold” drop to £4k had been re-instated. I wish they’d stop tinkering…