Can I Draw My Serps Pension at 55
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Times Money Mentor hosted its first pension webinar on June 5, and it proved a huge success. More than 500 people tuned in to watch it live, and we had dozens of questions from viewers.
"Pensions: planning ahead and simplifying your finances" was our third webinar, following similar events on the housing market and family finances with the Olympian Greg Rutherford. If you missed the webinar, you can watch the full event below.
Hosted by Gemma Godfrey, executive editor of Times Money Mentor, she was joined by Romi Savova, founder and chief executive of PensionBee, and Kate Palmer, senior money reporter for The Times and The Sunday Times.
They discussed a range of issues, from how to manage your retirement savings during the coronavirus crisis to consolidating your pension pots and preparing for the transition from work to retirement. The trio also answered lots of viewers' questions.
Our webinars are all free to attend, and we have several more in the pipeline. To keep up-to-date about upcoming events, sign up to our email newsletter.
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We asked Romi Savova to help answer some of the questions that you sent to us after the webinar in this special Pension Clinic. Nathan Long, senior analyst at Hargreaves Lansdown*, Steve Webb, the former pensions minister and partner at pension consultants LCP, and Ruth Emery, editor of Times Money Mentor, also answer some of your queries.
My income has been hit by Covid-19. Should I still pay into my pension?
Thank you for an informative webinar, it was most helpful. I have several pension pots, and a number of different income streams. I was made redundant in 2016 and have a deferred local government pension based on 14 years' continuous service. I am also contributing to a workplace pension with M&S, who I work with part-time. I don't benefit from any tax relief as my earnings there are below the tax threshold [some pension schemes operate a "net pay arrangement" which means that staff who don't pay income tax do not get pension tax relief].
I also do freelance work. I am not currently paying any of this income into a pension, which under normal circumstances varies monthly, from about £500 to £3,500. It has been hit by Covid-19 though, only temporarily I hope. What would you suggest?
Romi Savova, chief executive officer of PensionBee, replies:
"It is important to work out how much you need for your retirement based on your future plans. As a first step, you need to understand how much you have in total and what sort of income that will generate in retirement. A pension calculator can help you see how much you may get in later life based on your total pension savings right now.
"If you do choose to make contributions to your pension, make sure you receive tax relief. If your total earnings are below the tax-free personal allowance (£12,500 for 2020-21) you need to look for a pension provider that operates a "relief at source" arrangement. This means that even if you don't pay income tax on your earnings, for every £1,000 you pay into the pension, the government will add another £250. PensionBee is an option, but there are also others. You might also consider asking your current employer if it can divert your pension contributions to such a provider as well."
Our How much should I pay into a pension? Q&A should also help.
Should I start paying into my pension again?
I am a 59 year man with £100,000 in a Scottish Widows Retirement account, of which I have already cashed in 25% of its value previously. I have not paid into this pension for nearly three years now, and its value has fallen during that time. Would you advise that I restart payments into this until my retirement age of 65, or leave this as it is and invest short term somewhere else?
Romi Savova replies:
"It can be a good idea to contribute to a pension during a market downturn. Our research has shown that pension contributions during a downturn can boost a pension's long-term value by up to 70%. This is due to the generous tax relief applied to pensions – for every £1,000 a saver puts into a pension the government adds at least another £250 – and due to historically low savings rates in cash-based products.
"Remember that if you do take more money out of your pension pot – beyond your 25% tax-free lump sum – then the amount you can pay back in drops dramatically. In this instance, the money purchase annual contribution allowance will apply, meaning the maximum you can pay in during the tax year 2020-21 is £4,000. If you don't withdraw any more cash, you can normally contribute up to £40,000 (including the tax-top up). These allowances apply to all your private pensions, not just your Scottish Widows one."
What's the difference between pension providers?
Is there any major differences between workplace pensions? In addition, as we don't get a choice of providers (and therefore pension fees) in workplace pensions, would it be beneficial to invest into a private pension too?
Ruth Emery, editor of Times Money Mentor, replies:
"There is quite a bit of difference between workplace pensions – for example, they all offer different investment options (some may only give you 5 or 6 different funds to choose from, while others have hundreds), while fees can vary a lot. If you're paying into your company's pension scheme, you normally don't have much of a say about which pension provider it uses to run the scheme, but if you don't like the pension scheme (perhaps you think it's too expensive, or too restricted, for example not offering ethical funds) you should speak to your HR team as it should take your feedback on board. Also, it's possible your company may agree to pay its pension contribution into a different provider of your choice, if you're unhappy with the existing workplace scheme.
"In terms of investing in a personal (private) pension in addition to the workplace scheme, you could do this, if you find a pension that you like (maybe it's cheaper). Just check that you have already maximised any employer contribution first. For example, your company may have a matching policy where it will match your contribution up to, say, 8% of your salary. So if you're currently paying 5% of your salary into your workplace scheme, and then you choose to pay an amount which is about 3% of your salary into a personal pension, you'd be giving up that extra 3% from your employer (which is effectively free cash) by not paying that money into the workplace scheme."
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Should I stay in my pension scheme – even though I've reached the lifetime allowance?
Is it wise to stay in a defined benefit scheme when you have reached your lifetime allowance, but still have three years to retirement?
Nathan Long, senior analyst at Hargreaves Lansdown*, replies:
"This is a great question and very hard to answer without all the details. Benefits in excess of the lifetime allowance (which is the maximum you can have saved in all your pension pots, set at £1,073,100 for 2020-21) are taxed at 55% when taken as a lump sum so the instant reaction from many people is not to exceed the limit.
"The answer is more nuanced though based on the options offered by your employer. The decision will depend on whether you can opt out and get a salary boost to compensate you, or whether opting out means you build up no further pension and get no extra pay. As an extreme example, if your employer covers all the cost of your pension accrual, but won't compensate you for opting out, why would you stop accruing benefits? In that example you're only getting 45% of the accrual, but if you opted out you'd get no accrual at all. The reality of the situation will determine the best route to take, but it's a great example of when paying for financial advice can be really worthwhile."
How does "carry forward" work?
I am paying additional voluntary contributions (AVCs) this tax year, which will take me over the £40,000 annual allowance. I believe I can do "carry forward" and use my unused allowance from the past three years. However, can I repeat this next year (subject to still having available unused allowance) or do I only get one chance to use the unused allowance?
Romi Savova replies:
"You can use your carry forward for as long as you have unused allowance remaining. Your contributions will first use up this year's annual allowance and then the earliest year's annual allowance and so on. Do bear in mind that any contributions from your personal bank account must also still stay below your annual earnings to be eligible for tax relief."
Is my state pension forecast correct?
I am 64 and according to the gov.uk website my predicted state pension at 66 will be £212 a week, after being in full employment so far for 48 years. How accurate is this forecast? I have always been suspicious that it sounds too good to be true! My concern is that I was "contracted out" of the additional state pension (SERPS) for a period in the eighties and nineties and understood that the government would reduce the enhanced state pension benefit to cover this. However, I cannot find any disclaimer on the government website about the accuracy of my predicted pension; they do however acknowledge that I was contracted out. I would like to understand if the predicted value of my state pension takes this into account. If it doesn't, I feel that the website could be very misleading.
Sir Steve Webb, the former pensions minister and a partner at the pension consultants LCP, replies:
"The flat rate of the new state pension is currently £175.20 a week, so if someone is forecast to get more than this it will be because they built up a big "SERPS" entitlement under the old rules and they are able to get a higher rate of pension as part of the transition from the old state pension scheme to the new scheme.
"In this case, the government looks at the pension someone would have got as at April 2016 under the old rules, including basic pension plus SERPS, and if this is more than they would get under the new rules, this is the pension they can expect to get. Where someone was contracted out of SERPS for a period, allowance for this should be made as part of the 2016 calculation. In your case, the predicted value for the state payout indicates a relatively large SERPS pension, which would normally suggest a relatively large number of years at a decent wage in non-contracted-out employment. However, if your employment was mainly contracted out it would be worth getting this figure checked with the Department for Work and Pensions. You can ask the department to give you a detailed written forecast, which should hopefully flush out any error."
Should I take part of my defined benefit scheme as a lump sum?
I am fortunate to contribute into a defined benefit pension via my employer BP. I could draw my pension in two years' time, at age 60, but I actually hope to continue working for at least a couple of years longer. I believe I could take 25% of my pension as a tax-free sum (in exchange for a lower monthly pension) but, in all honesty, I can't see how I would use or need such a large sum of money. It could run into six figures. Do you have a view on whether commuting part of a defined benefit pension is advisable?
Nathan Long replies:
"Taking a tax-free lump sum should be seen as the default when accessing a defined contribution pension – the only question really is whether you take your lump sum all in one go or stagger it over time. The same isn't true when it comes to accessing defined benefit pensions. That's because it often works out that you have to give up quite a lot of valuable, guaranteed income to free up the tax free lump sum. The terms vary from scheme to scheme, but it's fairly common to have to give up around £1,000 of inflation-proofed annual income to get £16,000 of tax-free cash. It would cost over £35,000 to buy that same income as an annuity for someone aged 65, based on current rates.
"Of course, taking the lump sum gives greater flexibility and should allow you to pass more on to any family members either in the short term or when you die, so weighing up your priorities here is important."
When should I access my AVCs?
My wife and I have a number of additional voluntary contributions (AVCs) that are worth about £280,000. We are both aged about 70. Our other income is sufficient for our needs, so we have not accessed the AVCs. When is the best time to do so? We have two married children (with grandchildren) who are both in good financial health.
Romi Savova replies:
"Additional voluntary contributions (AVCs) are contributions you make to your employer's pension scheme to build up an additional retirement fund. Like with any kind of workplace or personal pension, there is no obligation to access these AVCs at any time.
"Pensions can be very beneficial as they sit outside of your "estate" – so if you have any money remaining in your pensions when you die, they will not be subject to inheritance tax. You could choose to leave your pension to your children or to your grandchildren (or anyone else), but it is wise to make sure your pension provider knows your wishes and that these are consistent with your will. If you were to pass away before the age of 75, your pension would pass tax-free to your beneficiaries. If you pass away after the age of 75, your pension will be taxed at your beneficiaries' highest rate of income tax."
We have lots more on this topic in Should I cash in my pension?
Do I have to pay tax on my defined benefit transfer value?
I am currently in a defined benefit (DB) scheme and due to retire in a year's time so getting my ducks in order! I'm thinking about transferring my DB scheme into a personal pension to do drawdown [taking money out of the pension flexibly, rather than receiving a fixed income for life from the DB scheme]. I have no dependents, and have other assets to fall back on.
I know there is no additional tax to pay if I keep the DB scheme where it is. But if I move it, the transfer value is £1.2m. In that case, will there be tax to pay, as it exceeds the lifetime allowance, even though this is not money that I originally built up in a personal pension?
Nathan Long replies:
"The quick answer is that if you transfer, it's your pension value (when you access the pension, die or at 75) that will be assessed against the lifetime allowance, rather than a multiple of your income as is currently the case. The lifetime allowance is set at £1,073,100 for 2020-21 – any savings above this threshold are taxed at 55% when taken as a lump sum.
"A DB scheme can be particularly valuable if you have a spouse or civil partner, as it will often continue to pay a pension income to your partner – or a dependent child – after you die. Whilst having no dependents can be a reason to transfer your pension, it won't necessarily make it the right route. Transfer values from defined benefit pensions often undervalue the income that you are giving up which is why they are rarely advisable. In fact if you are keen on a transfer you may want to ask your scheme if it will allow partial transfers, as you can keep some of your benefits in place while transferring a part for additional flexibility. Ultimately, the rules stipulate you'll need to take advice to transfer a scheme like this, but advice in complex situations like this can be costly and so getting some information first is worthwhile."
Got a question for our mentors? Drop us an email at questions@timesmoneymentor.co.uk
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Can I Draw My Serps Pension at 55
Source: https://www.thetimes.co.uk/money-mentor/article/pension-clinic-we-answer-your-questions/
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