Pension whilst still working

[iainl]

Due to imminent divorce, I need to activate my pensions (2 x final salary, kept as they are, plus a 3rd I intend to take as a flexible drawdown) but keep working for another 3 years or so to pay down a significant chunk of a new mortgage I'll need to take out. The original plan was to combine the incomes and throw as much as I could each month at paying off say a 3 year fixed rate mortgage to clear off as much as possible in those 3 years with a known interest rate.

I hadn't really thought about future payments into a new pension scheme during the working/retired period. It's been suggested I actually put money into that instead to take advantage of the tax angle but surely I'll only save on the £4k MPAA allowance? After that I'll be paying tax anyway (I'm a higher rate tax payer)? A rough calc suggests I'll be paying about £3k interest on a 60k mortgage over 3 years and saving around £1800 tax and NI on the 4K MPAA so about £5.4k over the 3 years. Does that sound right?

[Bryn Walker]

Hello. Yes that sounds about right. You have other possible options especially with the ridiculous CETV's being offered at the moment. You might even be able to 'become your own banker' making the mortgage issue less stressful.
All the best,
Bryn Walker
www.indigotrustees.co.uk

[ben_power]

Unfortunately this isn't an easy answer as it's a complex situation, without understanding what the specifics of your defined benefit and the defined contribution schemes as well as your wider financial circumstances there is no answer.

If you have not accessed pensions flexibly then generally the MPAA won't be in place. As long as you are working you will retain the £40,000 annual allowance as a higher rate taxpayer and also have the ability to potentially utilise carry forward from the previous 3 tax years. You could benefit from higher rate tax relief whilst working and then only pay 20% when you retire assuming you become a basic rate taxpayer as well as being able to draw 25% from the pot.

If you're already a higher rate taxpayer you will pay 40% tax on the pension incomes generated. In addition to that, if you are employed and an active member of your works pension scheme you will probably incur an annual allowance charge as the combination of yours and your employers contributions may easily exceed the £4,000.

I would be very surprised if drawing the pensions as income now would be beneficial. PM me if you would like some further support.

'Become your own banker' is a truly scary statement. Whilst transferring out of defined benefit schemes 'can' be a good option for some people but for the vast majority it would be very unwise. Only this month the regulator had tightened rules around this to try and reduce the amount of people being enticed by the large CETVs. Risk is everything, you have none with a DB you have it all with a DC. In my experience I would say a DB transfer is only suitable for 1 in 20 clients I help. Always, and I mean always assume it is not in your best interest, you have to seek financial advice on all CETVs about £30k anyway so hopefully a decent IFA would explain the risks involved. A little bit of 'knowledge' can be a very dangerous thing when it comes to pensions.