Re: Questions I need to ask
Anyway some things to know
If you are thinking about taking your pension for the first time, understand that it can take a long time from the moment you initiate that, to actually getting your first pension payment. 2-3 months is not uncommon.
Thus plan ahead.
How the process works
Requesting A Valuation
At some point you are going to ask for a VALUATION or ILLUSTRATION of your pension benefits.
Your pension provider doesn't send out rough guesses or "something like this" illustrations. Once you ask for a valuation they go to work on a formal basis. To do a valuation they will first send YOU a form to complete in which you must declare what other benefits and pensions (if any) you have.
Nothing will happen until and unless you complete and return that form.
When you do I suggest that you ask them for the specific valuations you want. I asked for:
1) Valuation on taking full pension without any lump sum
2) Valuation with a full 25% lump sum taken
All depends what you want.
Most providers will give you only ONE such valuation in a certain period (like 6 months). If you want more than that then they will charge you significant fees for doing so. Therefore be clear what valuation you want from the get go.
When it comes the valuation will tell you formally and exactly how much your total pension pot is currently worth and what your monthly pension payment would be at that point (plus any lump sum details you asked for).
There is a date associated with that valuation which is binding. The valuation will be valid for a certain time period which they will state on it.
The valuation will also come with various forms for you to complete SHOULD you choose to go ahead at that point and take your pension.
You can do nothing, forget the forms and walk away. The valuation will lapse in time and that's that. Later on you can ask for another valuation and do the whole thing again.
Or, you can choose to take your pension at that point in which case you MUST fill in the various forms.
There is a form where you must state what lump sum you want (or no lump sum)
There is a form for you to complete to provide your bank details where pension payments will go
There is a form where you MUST agree that you won't use any pension lump sum payment as contributions for another pension (known as recycling).
You send all that lot off and then after another few weeks they will sort it all out.
The time between receiving a valuation and you deciding to take your pension and completing/returning all the forms can sometimes be weeks or months.
However the valuation you got is formal and binding and relates to the specific date that the valuation was done for.
That means if you go ahead with the pension the payments and monies you get will be those you would have got if you have taken the pension from that special date, which is nice!!
i.e. if your valuation relates to 1st Oct and on 1st Dec you decide to go ahead and take your pension then you will ultimately get your pensions payments all back-dated to 1st Oct.
You'll get any lump sum you asked for plus you will get an initial inflated monthly pension payment which includes all the back pay.
However it will likely also be deflated due to tax. It's fairly typical that initially the pension company doesn't know what tax code you are on or should be on. So you start off on an emergency tax code which means you pay more tax than you should. It's just a temporary thing. After maybe 2-3 monthly payments the tax office thing gets automatically sorted and you'll get your next pension payment inflated with the tax refund included.
Implications for Tax
I don't know your personal circumstances so don't know how tax will effect you.
However, be aware and understand that the amount of money you take as a lump sum obviously affects the size of you monthly pension payment. If you take no lump sum then obv your monthly payment is the maximum it can be. If you take the full 25% lump sum then the monthly payments are the minimum.
The tax that you will have to pay IS ONLY WORKED OUT on the monthly pension monies. The lump sum you take is always tax-free.
So this can affect your decision about how much (if any) lump sum to take.
All depends on your circumstances, whether you are working, have other income, are paying tax already and so on.
There's no point opting for NO lump sum if that then means you're going to pay a load more tax on those maximum monthly pension payments. You can take a lump sum (tax free) and then keep the monthly payments down to the point that they won't then take you over the tax threshold for how much you can earn tax free in a year.
I don't work so for me it made sense to take the full lump sum. I get it all tax free and I put it into savings/investments which guarantee me a decent percentage of interest every year. That interest on my lump sum savings nets me another £100 a month cash !!
If I hadn't taken the lump sum I'd be paying more tax as the payments would take me over the yearly tax allowance.
I hope that makes sense. I can't provide much by way of practical example figures but so long as you understand the principle you'll work it out.
This is a decent question for you to ask any independent advisor who will assess what tax you already pay and determine whether its best to take a lump sum or not.
To be honest, regardless of all that, I was inclined to take the lump sum anyway because if there's another financial collapse then potentially the value of your pension could be affected. If you grab your 25% lump sum now, it's real cash in YOUR hands that you can put where you want it. You just need to be disciplined and treat it as part of your monthly pension money (which it is) and not go spending it on stuff.
Make the lump sum work for you imo. Lock it away safe and let it generate 5% or so in interest.
Ok, that'll do for starters . . . .