Draw down one pension then start another

A question about : Draw down one pension then start another

Hi

I am thinking of taking my Final Salary pension later this year. I have plans for the TFLS but as I will continue to work I don't need the monthly payments. I know I'm lucky.

Because of my wages the monthly pension payments would be taxed at 40%.

Would it be possible to put the entire pension monthly payments into a new pension, avoiding all tax and when I finally do retire take another 25% TFLS?

Best answers:

• Yes.
  It's unlikely to be the best financial choice but the alternatives would depend on what you would use the lump sum for. Taking out or increasing a mortgage would probably beat taking a defined benefit pension before normal retirement age.
• I know cashing one pension in to take another is not a decision to take lightly. I'd be taking the pension 3 years early so taking a 20% hit all around.
  However I plan to buy a flat with the TFLS and as I live in the South East that should increase in value by about 20% in those 3 years.
  I will also have a 20% hit on the pension PA but I will have 3 year's worth extra in the bank to smooth that over.
  Once the pension is crystalised I will no longer have to worry about what Chancellors or CEOs do when they need a little extra cash and I can really plan my retirement!
• Then don't do it. Your plan does not make financial sense. You're taking a 20% drop in income for life and there's no way that even a 20% property gain in the short term will be sufficient co compensate for that.
  You're also doing it in an general area that is starting to show signs of price drops according to studies of RICS surveyors. Not an encouraging sign of good market timing.
  Nothing wrong with buying property but you're not doing a good job of balancing the lifetime reduced income and market conditions with what interests you.
  If you want to do this, instead of taking the pension early, accumulate enough capital for a deposit on properties in cheaper areas of the country. That would also give you increased potential for diversification with more than one lower value property and reduced potential CGT liability because less of the gains on each sale would be above your annual CGT allowance.
  The cheaper non-SE property route would also leave you with more capital when you do reach normal retirement age, and a higher income to fall back on as a safety net. Both really good things to have when doing property investing.
• I had wondered whether you were reaching Scheme NRA later this year and so had decided to draw your pension, probably because you had reached the maximum 40/60. It appears that in fact you are considering drawing the pension early with a large actuarial reduction on both the lump sum and the pension for life.
  It just doesn't seem to make sense to do this only to purchase a property (which will could cost you money in insurance, maintenance, voids etc) and in another pension where you bear the investment risk?
• I've done the maths (I'm not comfortable putting the actual figures on a forum) and it doesn't look too bad.
  I think the next stage is a good independent financial advisor so I can get a good second opinion.
  Thanks to every one who said I should exercise caution.
• This refers to the maximum you can pay into a pension - that "annual allowance".
  This actually only applies until April when the new rules come in but you will still be limited to Ј10,000.
  It isnt an "allowance" as in them giving you money!
• I understood I can pay in 40k a year into a pension and the tax allowance means the pension company claims 20% relief and I claim the other 20% on my Self-Assessment Tax Return.
  The gov website suggests I wouldn't get any tax relief if I did a flexible draw down.
• There is something very wrong in what you believe your employer has told you. Flexible drawdown (and any other type of drawdown) specifically applies to defined contribution schemes, not to final salary schemes. The only times that drawdown could come into play would be (1) for any defined contribution AVCs you have within the scheme; or (2) if you transferred the scheme to a personal pension / SIPP (generally a very unwise thing to do). I would suggest your first step should be to talk to your employer again to clarify exactly what they mean.
  Regarding your wider plans, even if we accept your contention that the flat will increase by 20% if you wait, that would be covered by the 20% higher lump sum you would get by not having had the actuarial reduction and so you would come out level on the lump sum / purchase side.
  That then leaves you with the question of whether 3 years worth of reduced pension and 3 years worth of net rent on the flat, invested into a new pension, would give an income greater than 20% of the pension which seems very unlikely.
  As an example if the unreduced pension was 25k, the lump sum now Ј100k and you managed to get a 5% return on the flat after expenses then you'd be looking at giving up Ј5k pa of guaranteed, indexed income and hoping to replace it with a pot of Ј75k (3 years pension at the reduced Ј20k and 3 years of Ј5k rental profit on the flat). That's nearly 7% after-inflation return which you'd have to take one hell of a lot of risk to have any hope of achieving.
  To make your route make sense you either need to be getting WAY higher than a 5% net profit on the flat over the next three years or the price of the flat has to increase significantly faster than the 20% actuarial reduction.