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final salary pension question(3 Posts)
My DH has three pensions, 2 deferred final salary pensions and one contributory pension that he is paying into now. Both final salary pensions have a tax free lump sum and smaller pension option or no lump sum and larger pension. Is there a limit on the overall amount of lump sum he can take on retirement - eg is it an amount per pension or an amount overall from both pensions added together? And will he still have to buy an annuity with the contributory one he is currently paying in to or am I right in thinking the law has changed and he will have other options - and if so what are they?
He is 57 and in a stressful job so is trying to work out if he can afford to retire before his state retirement age of 66 and what the implications of doing so are.
Hope that made sense... I know what I want to ask but am unsure I can clearly put it into words - pensions make me feel as though someone has poked a finger into my brain and given it a stir, and my DH is even worse!
Not a financial adviser but may be able to help a bit.
With his final salary deferred pensions, the tax free lump sum is approx 25% of the pension from that scheme. You'd have to check with his scheme the rate they use convert pension to lump sum.
The contributory pension I assume is DC? If so, again you should ask his scheme but he could take the whole lot as cash - all but 25% would be subject to tax.
Some schemes offer drawdown which allows you to take a series of payments from a DC scheme. Not all schemes are offering this however, so if your DH wanted this he might first have to transfer to a scheme that offers it.
You're right that compulsory annuities are a thing of the past.
Is the current one Defined Contribution? You only say contributory and Defined Benefit (like Final Salary) can be contributory - in fact, usually is these days I think. I'm guessing you mean Defined Contrubition though, as you're differentiating it.
If so, you can access a DC pension from age 55, so he can already access that if he retires early. He can take 25% of it tax free. Thereafter it's taxed according to his normal allowance. Think that's about £11K. So if he's not working at not drawing the FS pensions, he could drawdown from the DC up to £11K a year after the 25% before paying tax.
With regards to the FS - yes, it's 25% of each. Has he checked the scheme retirement age for them? As at least one is likely to have been set up before the change to SPA to 66, could well be available without actuarial reduction from 65, or maybe even earlier. Has he asked whether he can take them early with actuarial reduction? (often 4% per year taken earlier)
If I were him, I'd see an IFA and look at how quickly I could take the FSs, and whether the DC would bridge me until then.
In the meantime, start living on the equivalent pension income now, and save every penny above that - gets him retired sooner, and proves the income is OK!
Also have a look into his state pension forecast - with two FSs I expect he has contracted out of some years. So worth checking whether hanging on at work (or buying additional years) will make much difference.
What is your own pension situation? If you don't have one and you're a non tax payer, you can consider putting £2880 a year into a SIPP and having it increased to £3600 by the government. A nice little extra if you do it for a few years before he retires and has the money to do it.
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