Avoiding paying tax on large pension payout

[Reluctantadult]

What's the best thing to do with a large pension payout, in terms of avoiding paying tax? It's currently invested in stocks and shares but for various reasons relative is questioning whether that's the right choice now. Any suggestions appreciated, including anything they can read up on.

Hi Op

Would strongly advise you post on the Money Savings Expert Retirement Planning board - really knowledgeable and helpful people on there including financial advisers.

https://forums.moneysavingexpert.com/categories/pensions-annuities-retirement-planning

Is the lump sum not the 25% tax free part of the pension?

I don't know all the details but think there was a larger than normal chunk of the pension given as a lump. There's other money mixed in from a house sale. It's all been invested in stocks and shares.

Advice will depend on the scenario - without details nobody can tell.

Is it from a DB or DC pension? Any particular scheme, I.e. Teachers Pension?

Was the property an asset of the pension?

what was the total value of the pension and how much was paid out?

How much other income in the year?

Does the detail of the original pension and stuff still impact things now, when the moneys been paid out and then invested? Genuine question!

Also, pension payouts other than state pensions are usually already taxed at the correct amount or, if it‘s the first payment, at a much higher amount as for some reason it is assumed the same payment will be made every month so there would not be further tax to pay.

The money was taken out from the pension and then reinvested?

I would like more details on the rationale for this but I don‘t see how the second would impact the first apart from that it may not have been a great idea.

I second the advice to post on the MoneySavingExpert pension boards.

My understanding is that there's not really anything that can be done to avoid tax on a pension payment that has already been made, but if the payment hasn't yet been made there may be different ways of taking it which will have different tax consequences. For example taking £200k all taxable at once will mean much of it is taxed at 45%, whereas taking it over 4 years means none of it is taxed at higher than basic rate (20%).

(assuming no other income)

OK, perhaps I didn't have enough information to ask the right questions here. Perhaps I shouldn't have mentioned that the original source was pension as it's also some house sale money, but the whole source thing was maybe a red herring. I think but might be wrong that the whole or majority of the private company pension was paid as a lump sum.

They've ended up now with £300k in stocks and shares. They're currently paying someone a couple of hundred a month to manage it for them. For various reasons they're now thinking is this worth it, is this the right thing to do with the money? But they don't know what else they could do with this money.

Maybe it wasn‘t a payout but a transfer?

So your question is not about minimising tax but about getting good investment returns and good value for any fees paid?

£200/month to manage £300k is 0.8%pa which is about "what it costs" for someone to do this. Can pay more, may be able to pay less.

If it's not a pension question then I recommend the Money Saving Expert board on savings and investments. Questions the investor will need to think about include what they want from the money, how much risk they want, and over how long a period. That will help them determine their strategy and/or inform a conversation with an IFA.

Meaningful Money is a great resource also.

This all depends on specific circumstances, but as a general rule the time to do tax planning around the liability attached to a pension withdrawal is before, not after the withdrawal has been made, so If the money has already been taken out from the pension, a liability will already have been triggered. Depending on when it was withdrawn there may still be some ways to lower the liability, but the person concerned will need circumstance-specific expertise or advice to work out whether that is even possible.

Whatever ongoing tax is due on an investment portfolio can be managed or minimised by selecting the right mix of ”tax wrappers”, and also by selecting certain types of underlying investments that are less heavily taxed, provided that these match the risk preferences and capacity for loss of the investor.

The average financial advisor probably cannot get investment results above the market return for a given risk profile, but the average financial advisor should be able to provide sound, detailed advice and explanations around investing in a reasonably tax efficient manner, while using only middle-of-the-road, standard tax wrappers and strategies, and unless the investor is already doing things pretty well, the tax savings should more than pay the advisor’s fees.

Having said all that, I personally would avoid any advice service that makes it difficult to discontinue the service without losing the benefits of past arrangements, or that make it difficult to withdraw assets from an investment vehicle managed by the advisor or their affiliates. Good advice should bring enough value to warrant continuing the service, without having to continue in order to avoid extras or tax penalties.

I think if someone has £300k floating around, it's probably worth paying an IFA/financial planner to advise them properly, based on the actual scenario/detail not a disguised snapshot posted on an internet chat forum where anyone who knows what they are talking about is usually drowned out by people posting nonsense.

And I say that as someone who normally says that 90% of people don't need to pay an IFA because they just need to spend a bit of time looking at/listening to Meaningful Money and the financial flowchart.

Maybe if it's the ongoing £200 pm they're objecting to, they could find someone else or negotiate a fixed fee for a set package of advice? But it will probably cost a few thousand anyway.

They might be able to get some free advice from Pensionwise, the free government advice service, but it's unlikely to give them all the answers unless they're willing to self manage/read and learn.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise

Thanks for the advice so far. I've done a bad poor with my actual question, sorry folks!! The bottom line question is, what's the best thing to do with £300k? Returns would be great, but more importantly it needs to be safe. It's currently invested. If they took it out of investment and put it in savings, would they get taxed on that?

Interesting to know that a couple of hundred a month to an adviser isn't unreasonable. That's part of the trigger for this but not the only one.

It depends on what type of pension they have and how they’ve invested the lump sum.
As a teacher, I received a tax free lump sum and get a monthly pension. I put as much of the lump sum into ISAs as I could, so don’t pay tax on the interest they make. My monthly pension is treated as income so is taxable like any other income.

Regarding paying tax on savings and investments, yes the interest earned on them counts as taxable. So if you earn say £1000 in interest in one tax year, you would have to pay some tax on that amount regardless as to whether you leave the interest in the account or not.

Keep it invested. Have a cash buffer, so in a down market they don't need to take money out of the investment, and a cash buffer may stop them worrying too much about falls in value of the investment.

The investment itself could be split into different buckets. There are various bucket strategies but think of it like making money not used for over a decade do lots of work and money which will be used in 5 years be at a lower risk level.

Money outside of a tax efficient wrapper (ISA, Pension) will possibly be subject to tax. There is a personal savings allowance, and a starting rate for savings, but those depend on the individuals circumstances.
Cash is not an investment. It loses money to inflation. So keep as much money invested as possible, so it has a chance of beating inflation.

I broadly agree, and has the previous poster indicated, how the money should be invested depends significantly on when the money is likely to be needed to cover living expenses. I personally think that the reason to hold cash or short-term bonds is to protect against capital loss, which will become permanent if that money needs to be spent before valuations can recover. The reasons to hold stocks and shares or in some scenarios longer-term bonds are: to achieve a higher nominal return, to protect against inflation, and to hopefully achieve some real growth after taxes and inflation in the value of the pot.

For my own investments, I tend to follow those views by keeping money that needs to be spent within 1-3 years in cash or short term bonds, keeping money (such as pension pots) that will only be spent in 7-10+ years or more mostly invested in higher-return but riskier assets such as stocks, longer-term bonds or property, and money that will get spent somewhere between year 3 and year 7 in a mixed portfolio that includes at least some short-term bonds or cash, some medium term and/or longer term bonds if interest rates are high enough to warrant that, and maybe a small amount of equities, in order to be exposed to a balance between inflation risk and capital loss risk.

Then, while there is no good way to know what the market will do next, we do always know what it just did, and for bonds in particular, we also know the return that will be earned if a specific bond is held to maturity (yield to maturity). So it is possible to take a view on valuation without that constituting market timing. For example, I held no long-term bonds at all during the period from 2009-2022 because interest rates were so low that I had zero chance to make any money while I would have carried a risk of losing money if interest rates went up. From today, it is still possible to lose money if interest rates go up further, but it is also possible to make at least some money if rates go down, stay flat, or go up slightly, so there is a reasonable argument for holding some long-term bonds today if they fit an investor's specific circumstances.

I used to work in pensions and the first 200,000 of the lump sum was tax free, this isn't in the uk, but trying to avoid paying tax on a pension lump sum strikes me as extremely dodgy.

The bottom line question is, what's the best thing to do with £300k?

Depends how long it's going to be invested for / how old these people are/ are they still earning or retired ...

If You don‘t want to take risks with the money then cash is the only option. You shouldn‘t take it out of the pension for that - now you can have cash funds in a pension. It would be madness to pay tax and put it in a bank account. And into your estate at the same time.
Speak to your financial adviser who can switch you to cash within the pension wrapper (if that is suitable).

Cash is a guarantee that it will lose value and not keep up with inflation though.

So it depends, as has been said before, what the purpose is that the money is for, how long, etc etc.

It depends on whether this person needs the money in the short term.

Untouched, cash does not lose value in absolute terms. £100 today is guaranteed to be £100 this time next year, in fact, it is likely to have grown to £105 in a basic instant access account.

However, if this person has invested all their money, what was £100 a year ago, could well be £95 now and £100 today could be £90 this time next year. It's currently not a good time for investing any money that is needed in the next few years.

Both retired, one early 60s, one early 70s.

Thanks for the advice I've been able to pass on some snippets of thoughts to them, I think actually they might be a bit reassured that what's being done so far is OK. And then can tweak.