Pension time - what to do?

[Thorby Bislam]

It's come time for me to take my NRA 60 pension and I've got a few questions, if I may share. I was Ill health Retired four years ago so I'm out of the loop regarding current thinking. I know, go to an independent advisor, I will. But you guys may well have more 'hands-on' experience than some chap unconnected with RM. So if anybody who's taken their pension recently or who is about to would care to respond, I'd be grateful. Basically, I'd like to build a variety of responses from different sources before I make that final, irreversible decision.

Big question: Maximum lump sum or maximum payments? What's the pros and cons? I know that the lump sum is tax free but just how much tax is levied on pensions? How much of a difference is it likely to make?

Related question: How big a sum can you have and still qualify for benefits? Because it's not that big a pension.

Does the NRA 60 end when you turn 65 and NRA 65 take over, or does NRA 60 carry on with NRA 65 added on? (I know the supplement ends.) The options letter does not make this clear.

Anything else I ought to know?

[RobertT]

It's come time for me to take my NRA 60 pension and I've got a few questions, if I may share. I was Ill health Retired four years ago so I'm out of the loop regarding current thinking. I know, go to an independent advisor, I will. But you guys may well have more 'hands-on' experience than some chap unconnected with RM. So if anybody who's taken their pension recently or who is about to would care to respond, I'd be grateful. Basically, I'd like to build a variety of responses from different sources before I make that final, irreversible decision.

Big question: Maximum lump sum or maximum payments? What's the pros and cons? I know that the lump sum is tax free but just how much tax is levied on pensions? How much of a difference is it likely to make?

Most people tend to go for the lump sum but as a general rule and assuming average life expectancy for your age, taking the larger pension is often the best financial choice over time, particularly with final salary/index linked schemes.

Pension income is classed as earned income so the normal personal tax allowances will apply. From April 2015 the first £10,600 of income is tax free and anything above is taxed. There is no National Insurance to pay on pension income.

Related question: How big a sum can you have and still qualify for benefits? Because it's not that big a pension.

I’m no expert on benefits and lots of things will be taken into account, like income, savings, etc. But this might help:
http://www.entitledto.co.uk/" onclick="window.open(this.href);return false;

Does the NRA 60 end when you turn 65 and NRA 65 take over, or does NRA 60 carry on with NRA 65 added on? (I know the supplement ends.) The options letter does not make this clear.

The NRA60 and NRA65 are effectively two separate pensions and both will continue to be paid until you die. After that a widows pension may also be paid out.

[baldrick]

Big question: Maximum lump sum or maximum payments? What's the pros and cons? I know that the lump sum is tax free but just how much tax is levied on pensions? How much of a difference is it likely to make?

That depends on your personal circumstances, your health, your family's longevity history, and what you think your life expectancy might be. You say that you were medically retired. Does that mean you are in poor health and don't expect to live that long on a pension?
Sorry if this sounds morbid but that is what you need to think about.
If you convert lump sum to pension the conversion rate is about 23.7:1 (might vary a bit but that's what I got). I did convert most of my lump sum to pension. For £23,700 lump sum given up it meant I got £1,000pa more on pension. Taking into account that the pension should go up a bit every year. I reckoned that I needed to live about 17 years before I was 'in profit'. My dad lived to 86, and I am in fairly good health so I think I should make it into my 80's, unless I get run over or something. The lump sum would be likely to reduce in real value over the years with inflation.
Also a 23.7:1 conversion represents a rate of return of 4.2%pa on the sum I gave up. I would have been lucky to get a 2%pa return if I had put it in a savings account or savings bond. It does mean I have given up that money, but I was expecting to take VR so I knew I would get a lump sum then.
If however you still have a mortgage or debts to pay off, it might be better to use the lump sum to pay those off first.

You will not pay tax on any pension lump sum, but you might on the pension. How much you pay is dependent on your total income including pension. If it is less than about £10k pa you won't pay tax. On anything above that you would pay the standard tax of 20%.
I doubt that you would be on enough to pay the higher 40% tax rate which starts at £42k pa.

If you do not expect to be living long on a pension it would probably be better to take a smaller pension and a bigger lump sum, which you can leave to beneficiaries. The conversion rate for converting pension to lump sum was 1:17.75 when I took it, so for every £1 of annual pension given up I would have got £17.75 more on my lump sum.

You also need to take into account how much your spouse might get if you should die, but I don't know about that.

[nataddick]

The advice given by Robert and baldrick is sound.

However, I am approaching 60 and will be taking my NRA 60 benfits in July. I don't have the figures from RM yet but based on my last illustration I am assuming the cash commutation factor is in excess of 20:1.

I will be taking the maximum tax free cash that is available. I fully understand the arguments in favour of both options.

I plan to take the lump and invest it in such a way that it will enable me to 'draw down' the difference between the pension I would have received each year had I not taken the cash and the actual pension received having elected to take the cash.

For example let's say the lump sum was £15,000 and the difference in pension was £750 p.a. If I take the pension and continue working or when I draw my state pension the £750 will be treated as income and will be subject to basic rate tax at 20%. Therefore I would only receive £600 net of tax. I will draw this sum down in year 1 and then repeat the 'draw down' each year thereafter.

Taking the lump sum means that my wife has access to the balance of the tax free pot at any time should I die before her. She would then get the widow's pension that is the same amount, irrespective of the decision to take the lump sum or not.

As long as I can achieve a return on my lump sum that matches the inflation link on the pension payable then this is my preferred option. It means that the £750 top up to my annual pension is tax free which helps to mitigate the impact of the increase that would have been applied to the pension without having taking the lump sum.

It takes a disciplined approach not to spend the cash but it is a technique commonly used in financial planning.

Everyone's personal and financial position is different and there is no 'one size fits all approach' and as you say the decision is irreversible so take your time and consider your options carefully.

The following links may help :-

https://www.moneyadviceservice.org.uk/e ... h-lump-sum" onclick="window.open(this.href);return false;

http://www.which.co.uk/money/retirement ... y-pension/" onclick="window.open(this.href);return false;

[Thorby Bislam]

Thanks fellas, this has been some help. You've answered some questions and posed others.

Pension income is classed as earned income so the normal personal tax allowances will apply. From April 2015 the first £10,600 of income is tax free and anything above is taxed.

Is this £10,600 per annum?

You say that you were medically retired. Does that mean you are in poor health and don't expect to live that long on a pension?
Sorry if this sounds morbid but that is what you need to think about.

TB: My IHR was because of Osteoarthritis. I've put on some weight since leaving RM but basically, my core body is pretty healthy but everything from the knees down is jiggered. I'll probably die in my 70's. Say about 15 years left. (Gulp!)

If you convert lump sum to pension the conversion rate is about 23.7:1 (might vary a bit but that's what I got).

TB: The options letter from RM says "the amount of lump sum provided for each £1 of pension commuted is £20.35." a rate of 20.35:1 then?

I plan to take the lump and invest it in such a way that it will enable me to 'draw down' the difference between the pension I would have received each year had I not taken the cash and the actual pension received having elected to take the cash.

TB: I don't understand what the 'draw down' is and the options letter makes no mention of it. I'm guessing it's something only available to current RM employees, right?


As long as I can achieve a return on my lump sum that matches the inflation link on the pension payable then this is my preferred option.

TB: This is the BIG one. The crux of the matter. The links provided mention annuities and ISAs. RM pension plan (or at least C plan) is paid direct to the member. You do not have to buy annuities like in private plans. At the moment ISAs are only offering around 2%. Do RM still do premium bonds? If they do I expect the interest rates will be much the same. Some research required I think.

[RobertT]

The advice given by Robert and baldrick is sound.

However, I am approaching 60 and will be taking my NRA 60 benfits in July. I don't have the figures from RM yet but based on my last illustration I am assuming the cash commutation factor is in excess of 20:1.

I will be taking the maximum tax free cash that is available. I fully understand the arguments in favour of both options.

I plan to take the lump and invest it in such a way that it will enable me to 'draw down' the difference between the pension I would have received each year had I not taken the cash and the actual pension received having elected to take the cash.

For example let's say the lump sum was £15,000 and the difference in pension was £750 p.a. If I take the pension and continue working or when I draw my state pension the £750 will be treated as income and will be subject to basic rate tax at 20%. Therefore I would only receive £600 net of tax. I will draw this sum down in year 1 and then repeat the 'draw down' each year thereafter.

Taking the lump sum means that my wife has access to the balance of the tax free pot at any time should I die before her. She would then get the widow's pension that is the same amount, irrespective of the decision to take the lump sum or not.

As long as I can achieve a return on my lump sum that matches the inflation link on the pension payable then this is my preferred option. It means that the £750 top up to my annual pension is tax free which helps to mitigate the impact of the increase that would have been applied to the pension without having taking the lump sum.

It takes a disciplined approach not to spend the cash but it is a technique commonly used in financial planning.

Everyone's personal and financial position is different and there is no 'one size fits all approach' and as you say the decision is irreversible so take your time and consider your options carefully.

Yes there’s more than one way to skin a cat! Although I do think there’s potentially an inflationary risk to your capital nataddick! Because although you might be getting an income from your lump sum that’s roughly equal to what you would have got from a ‘full pension’, your lump sum will slowly be eroding in real terms, whereas the pension income will be compounded year on year.

Personally I’m still a few years away from retirement yet, but have a decent AVC pot tucked away and plan to fund my lump sum with that and so maximise my guaranteed pension income.

But it’s horses for courses and as long as you make the correct decision for yourself then that’s all that matters.

[baldrick]

Pension income is classed as earned income so the normal personal tax allowances will apply. From April 2015 the first £10,600 of income is tax free and anything above is taxed.

Is this £10,600 per annum?

Yes, £10,600 pa is tax free from new tax year on 6 April 2015.

If you convert lump sum to pension the conversion rate is about 23.7:1 (might vary a bit but that's what I got).

TB: The options letter from RM says "the amount of lump sum provided for each £1 of pension commuted is £20.35." a rate of 20.35:1 then?

That is the conversion rate if you are converting pension to lump sum. I was quoted £1 pension converted to £17.75 lump sum. Which would be a conversion rate of 17.75:1. You seem to have been offered a better conversion rate to me. That might be because I was in RM Pension Plan A/B which has a standard lump sum, and you are apparently in Plan C which doesn't.

[RobertT]

The personal tax allowance is £10,600 per year from April 2015. So only income over that amount is taxable.

Drawdown is just having a pot of money whether it be in a personal pension, an ISA or any other savings vehicle that you choose to dip into. Over the course of time the money will slowly be depleted unless the growth rate is higher than the amount withdrawn.

What you do with your lump sum is up to you ultimately. You could just spend it or you could use it to try and increase your retirement income. There are a variety of places you could put it:

ISA’s – cash or stocks & shares
Premium bonds – although you don’t get interest as such, just the possibility of some winnings
Unit trusts
Investment trusts
Normal building society savings accounts & bonds, etc
And probably loads more

Wherever you decide to put it, it’s important to try and put it somewhere that offers an interest rate that’s higher than inflation, otherwise your money is effectively going down in value.

[Thorby Bislam]

It's all a real big gamble, isn't it? Inflation is pretty low at the moment and interest rates are negligable. But sign up now to a low rate and inflation may well rise. My big fear is that taking my pension might end up with us being worse off. Guess it's time to roll the dice.

[heapsy]

It's all a real big gamble, isn't it? Inflation is pretty low at the moment and interest rates are negligable. But sign up now to a low rate and inflation may well rise. My big fear is that taking my pension might end up with us being worse off. Guess it's time to roll the dice.

Currently Halifax are offering the following on ISAs 1yr fixed 1.4%, 2yr 1.6%, 3yr 1.75% 5yr 2% These are not great rates but do, just about beat inflation. The trick is to put equal amounts into each bond. Rolling over or withdrawing interest and or capital as required. You quite right that it is a gamble and that is why you need to split the total of your lump sum. I am some years off 60 but have been working on just such a plan. In time the rates WILL start to increase which will help to negate or even beat inflation completely. It isn't perfect but every little helps as one supermarket puts it. Hope this helps. Incidentally, you may find that an ordinary fixed rate bond that is taxable, may actually beat an ISA. A strange quirk or rate rigging by the government / banks / building societies? You decide.

[Thorby Bislam]

Good thinking there, Heapsy.

[Thorby Bislam]

Just come back from CAB. They advise that for maximum return, I should take a lump sum of £6,000 and live quite comfortably on pension and benefits. Bit of a bummer there. I was hoping to get away from benefits forever but I don't have enough years in for that.
Like baldric said, it's betting on how long one is going to live. According to my (and CABs) calculations, If I die in the next seven years, max lump sum would be the best option. If I live longer than ten years, it'd be max pension.