Private pension. I don't understand!

[Pondrew]

Re Pensions mine is a Local Government pension so feel lucky I could get out of the 9 to 5 dreary world at 58.

I think with any pension you soon find out the tax man is your mortal enemy. If you have any kind of private pension think carefully if your deciding to cash it in as a lump sum and the tax implications. I had an additional small private pension that I stopped paying into years ago and it just sat there maturing and decided to cash it in all in one go as it wasn't a massive amount and thought hell I deserved it. I was still stung to the tune of 7 grand tax I think it was so still pretty galling.

Even my Local Government pension tax free lump sum as it was paid to me 2 months late it accrued a couple of hundred quid interest which the HMRC have advised me I will need to declare after next April. So interest on a tax free lump sum may possibly be taxed depending how much total interest I've accrued on savings. Simply put there out to get you no matter how hard you've worked

No offence Tim, but you public sector workers and your (mostly) final salary pensions are living in a different world to rest of us.

There is no comparison of a public sector pension scheme and a private one. They are chalk and cheese. Council pensions are managed 'in house' by dedicated teams of Council employees.

Only the very very wealthy private sector workers could afford to retire in their fifties. As said, no offence meant, but you have no idea about the 'real world' when it comes to pensions.

Public sector pensions are funded by the taxpayer, the rest of us have to fund ourselves (and rely on global markets).

 

[Mr Tidy]

No offence Tim, but you public sector workers and your (mostly) final salary pensions are living in a different world to rest of us.

There is no comparison of a public sector pension scheme and a private one. They are chalk and cheese. Council pensions are managed 'in house' by dedicated teams of Council employees.

Only the very very wealthy private sector workers could afford to retire in their fifties. As said, no offence meant, but you have no idea about the 'real world' when it comes to pensions.

Public sector pensions are funded by the taxpayer, the rest of us have to fund ourselves (and rely on global markets).

No offence Andrew but I worked in the private sector all of my career and all of my pensions are final salary schemes - but financial services (insurance in my case) schemes tended to make up for lower salaries with better (and often non-contributory) pensions.

I stopped working at 56 because I took my workplace pensions early but was never very very wealthy - I just live within my limited means!

A self-employed mate of mine bought a 2nd house for his pension fund which has probably worked out better than relying on global markets.

 

[buzyg]

If you can draw down enough tax free lump sum to buy a property, then there is still a good market out there. Overall you won't see any more income than putting money into an inuity type product and of course you have to manage property. The benefit is, you still have the option to sell up or leave money to others. The system is designed so that we can't leave too much for our kids though, so be mindful of that.

 

[TitanTim]

Re Pensions mine is a Local Government pension so feel lucky I could get out of the 9 to 5 dreary world at 58.

I think with any pension you soon find out the tax man is your mortal enemy. If you have any kind of private pension think carefully if your deciding to cash it in as a lump sum and the tax implications. I had an additional small private pension that I stopped paying into years ago and it just sat there maturing and decided to cash it in all in one go as it wasn't a massive amount and thought hell I deserved it. I was still stung to the tune of 7 grand tax I think it was so still pretty galling.

Even my Local Government pension tax free lump sum as it was paid to me 2 months late it accrued a couple of hundred quid interest which the HMRC have advised me I will need to declare after next April. So interest on a tax free lump sum may possibly be taxed depending how much total interest I've accrued on savings. Simply put there out to get you no matter how hard you've worked

No offence Tim, but you public sector workers and your (mostly) final salary pensions are living in a different world to rest of us.

There is no comparison of a public sector pension scheme and a private one. They are chalk and cheese. Council pensions are managed 'in house' by dedicated teams of Council employees.

Only the very very wealthy private sector workers could afford to retire in their fifties. As said, no offence meant, but you have no idea about the 'real world' when it comes to pensions.

Public sector pensions are funded by the taxpayer, the rest of us have to fund ourselves (and rely on global markets).

No offence taken Andrew :wink: No I don't really have a clue on Pensions, think all I was trying to say is if you have any kind of pension lump sum you're thinking of cashing in do look at the tax implications carefully and get financial advice if you can which I didn't on the private pension I had. It was still a shock how much you pay out.

Yes I consider myself lucky. I knew at 17 when I went into Local Government it was basically a job for life, redundancies back then was unheard of and the pension scheme I knew was decent. They also paid for me to attend University for 4 years on a day release something they don't do now so always grateful for that. Especially when I had no clue on a career.

Having said that people seem to think a Local Government Pension is a golden gate, it can be if you work the full term but in my case I didnt, I've still been penalised for taking my Pension early. It wasn't like I hit 58 and thought I can put my feet up with no money worries ever. Still had to think long and hard that I could live a reasonable life if I took the Pension early. I decided to ask for my figures at 57 and worked out what my monthly Pension would be and basically lived on that for 12 months whilst working to see if it was workable before making a final decision. Still meant living within my means and changing lifestyle as I'm simply not on the income I was in employment.

For me it meant retiring before 60 no matter what. My dad passed away at 62 so never saw any retirement and two former work colleagues have passed away this year at 60 and 56 so it was just a priority to finish work if I could no matter what. Like Mr Tidy has said just a case of living within your means and cutting back on things and taking on board lifestyle changes to make it work for you. For me making those adjustments and going without certain things is worth it.

Tim.

 

[DevonPaul]

No offence Tim, but you public sector workers and your (mostly) final salary pensions are living in a different world to rest of us.

There is no comparison of a public sector pension scheme and a private one. They are chalk and cheese. Council pensions are managed 'in house' by dedicated teams of Council employees.

Only the very very wealthy private sector workers could afford to retire in their fifties. As said, no offence meant, but you have no idea about the 'real world' when it comes to pensions.

Public sector pensions are funded by the taxpayer, the rest of us have to fund ourselves (and rely on global markets).

I agree the Pensions are very different, Defined Benefit schemes put the risk on the employer (Rolls Royce was once regarded as a Pension Deficit Company with an Engineering arm), Defined Contribution (DC) relies on market returns and the investment choices of the individual. And Historically these have been poor, partly constrained by choice of Funds, but also personal choice. People tend to ignore their pensions. When I was a Pension Trustee we offerred members the option of carrying on with the default 'With Profits' fund (which were in the press as poor performers) or moving into a range of market options. less than 2% of people changed. The dotcom bust was recent news, and the 2008 Financial Crash was in full swing, so caution and inertia prevailed. As it turns out over the last 15 years the Global fund increased several fold more than the With Proifits one.

But you are only partly right, there is much more to the different schemes.

Local Govt pensions are not taxpayer funded, although they are pretty much the only Public Sector ones that aren't.
Secondly they aren't managed 'in house' by Council employees. Sure they have an administration section, same as any pension provider, but the Assets are managed by large investment houses who historically have made a lot of money for mediocre performance, pretty much like the Private sector

Lastly, anyone going at 58 would get a 35% or so reduction in their pension according to the reduction tables. Annoyingly I took mine 9.5 years early in Jan last year when the reductions for early retirement were higher, although I did get a 10% inflation linked increase And it is the last part that is the biggie, once in payment a DB scheme is risk free, and buying an index linked Annuity from a DC pot is expensive. The flipside is with a DC scheme these days you get the choice of Drawdown and keeping your pot.

However another thing to note is the salaries, In 2002/3 my wife was offerd double her Council salary to move to a Private firm doing PFI bids, although this was unusual. I took a 30%+ paycut to move to Local Govt, but at 37 hours rather than 40, more holidays, and their pension cotribution on top of my 6% being worth circa 20% (that was the pension contribution required from the employing company of TUPEd out employees to keep them in the LGPS), it made the hourly rate about the same. And there's the difference, if everyone in the Private Sector chucked 26% of their salary into Pensions every year, then early retirement would be much more common. But that doesn't happen very often.

I only joined the Council in about 2008 at 42, did 10 years but very sensibly transferred in my previous 5 year pot of DC Pension (which I'd been putting 20% into anyway) which I think turned out to be a good idea. However the bulk of my income still comes from 'Global Markets', PEPs and ISAs maxed for decades before Pension Freedom was an option (ISAs are taxed on the way in, Pensions on the way out, and I was damned if my hard earned savings were going to go on an annuity). I was also lucky to have a father who invested himself, and I too took an interest.

But to drag think back to your original question.....

I have a 100% private pension, as I have worked for myself forever.

Suddenly in the last couple of months it has started to rise quite sharply again; I am talking 1% in a week!

Does anyone know why this would be? I have no idea how this financial wizardry works. I don't see the world economy suddenly getting stronger and certainly not the UK.

Sounds about right. Vanguard to a Global Tracker fund (actually an ETF) which much of my money is invested in. The ticker is VWRL, and there is an accumulation version VWRP. This fund effectively replicates every share in every market, it holds shares in 3700 different companies. The UK is a small part of the Global economy and has performed very badly over the last 20 years, hence a lot of UK centric Pension pots have not fared well. You can look at this chart and see how it fluctuates, set the chart style to 'percentage', it often changes by 1% or more in a day.

https://www.hl.co.uk/shares/shares-search-results/v/vanguard-ftse-all-world-ucits-etf-usd-acc/share-charts

One of the advantages of managing your own money is it is easy to see what it is worth, the disadvantage is seeing your wealth drop by a year or so of takehome pay the day after the Brexit vote or by 3 years in a fortnight during the Pandemic, but if you can watch a year's money come and go in a week and not get too bothered, then self management is a lot better than paying some Fund Manager or IFA to do it for you

Paul

 

[DevonPaul]

Don't know if you have ever had to deal with inheritance tax cos that is a really good one.
A person works all their life, pays income tax, etc, then if they happen to die with more than £325,000 to their name, the HMRC want 40% of the extra.
And if you sell the deceased's property for more than the probate valuation; that's 28% capital gains they take!

Done a couple of these in the last 4 years so share your pain. Pay 40% when you earn it, 20% on the interest, and another 40% when you die.

It is not straightforward, but there can be up to £1M IHT exempt for a couple. Might be a bit late but often worth entering the Probate valuation for property on the higher side, avoids CGT on any significant gain and if there is IHT payable then you reclaim the overpayment if the realised sum is lower than the valuations.

As we're all getting on a bit, maybe we need a seperate board for Fiinances

 

[pvr]

What do you mean with the exempt bit for a couple? If one dies, isn’t the house free of iht for the remaining partner or did I read that wrong and it is about the children?

 

[Pondrew]

No offence Tim, but you public sector workers and your (mostly) final salary pensions are living in a different world to rest of us.

There is no comparison of a public sector pension scheme and a private one. They are chalk and cheese. Council pensions are managed 'in house' by dedicated teams of Council employees.

Only the very very wealthy private sector workers could afford to retire in their fifties. As said, no offence meant, but you have no idea about the 'real world' when it comes to pensions.

Public sector pensions are funded by the taxpayer, the rest of us have to fund ourselves (and rely on global markets).

I apologise for this post. It is none of my business what other people's financial status is and good luck to them!

It was a mix of beer (yes I know) and thinking about many of my family members who worked in the public sector. They have now been retired for longer than they worked and are on FSPs which I don't think is either fair or financially sustainable. They all worked at the Post Office, so no wonder stamps are so bloody expensive. And they all complain about how poor they are!

 

[pvr]

And we won’t mention train drivers …. :thumbsdown:

 

[Nanu]

Public sector pensions are funded by the taxpayer, the rest of us have to fund ourselves (and rely on global markets).

[/quote]Agree in part that us in public sector pensions schemes are in a totally different situation (I am lucky enough to have been in two and working on a third), however many moons ago I sat down and worked out how much I had paid in (Which was compulsory) and what I am now getting and having "retired" at 55 and taking that first pension, it will take me till I am 80 just to break even. Then the tax payer contributes.

The main benefits are that it is totally secure and the pension is guaranteed.

My sympathies go to those whose financial decisions can seriously effect their future quality of life.

 

[True-Blue]

What do you mean with the exempt bit for a couple? If one dies, isn’t the house free of iht for the remaining partner or did I read that wrong and it is about the children?

If the Will leaves everything to spouse then:

If the surviving spouse / civil partner is uk domiciled then on 1st death surviving spouse receives everything without paying IHT due to spousal exemption.

If the couple are not married or in a civil partnership then only the first £325k is exempt. This is a massive problem that many unmarried couples don’t know/understand!

If either spouse is non-uk domiciled at the time of death it’s more complicated.

The £175K residential nil rate band (RNRB) is available when the main residence is left to a direct descendant (there’s a definition which includes step children etc.).

If everything passes from Spouse A to spouse B on first death, and then from Spouse B to direct descendants on second death (and assuming the main residence is worth at least £350k) then the executors cain claim 2 x £325K NRB’s and 2 x £175k RNRB’s - which is where the £1m exemption comes from.

It’s potentially a lot more complicated than that depending on gifts made within 7 years of death. Technically gifts to discretionary trusts can have an impact on the final tax bill within 14 years of death

 

[Pondrew]

And we won’t mention train drivers ….

Not a fan are you mate?

 

[buzyg]

What do you mean with the exempt bit for a couple? If one dies, isn’t the house free of iht for the remaining partner or did I read that wrong and it is about the children?

If the Will leaves everything to spouse then:

If the surviving spouse / civil partner is uk domiciled then on 1st death surviving spouse receives everything without paying IHT due to spousal exemption.

If the couple are not married or in a civil partnership then only the first £325k is exempt. This is a massive problem that many unmarried couples don’t know/understand!

If either spouse is non-uk domiciled at the time of death it’s more complicated.

The £175K residential nil rate band (RNRB) is available when the main residence is left to a direct descendant (there’s a definition which includes step children etc.).

If everything passes from Spouse A to spouse B on first death, and then from Spouse B to direct descendants on second death (and assuming the main residence is worth at least £350k) then the executors cain claim 2 x £325K NRB’s and 2 x £175k RNRB’s - which is where the £1m exemption comes from.

It’s potentially a lot more complicated than that depending on gifts made within 7 years of death. Technically gifts to discretionary trusts can have an impact on the final tax bill within 14 years of death

Succinct as any explanation I have heard.

 

[Pondrew]

It’s potentially a lot more complicated than that

You're not kidding!
I am in the middle of a probate 'application' for my late mother. The application has now been submitted but we (my sister and I) still have no idea whether HMRC will deem my late mother's estate as being liable for IT or not! Despite both of us being trained accountants (me many years ago admittedly) and both of us dealing with money, accounts, VAT, PAYE, revenue stuff every day.
We don't know whether HMRC will class the estate under the £325k or £500k limit for IT. The rules are so ambiguous with words like "maybe, possibly, depending on....". We had to employ a probate lawyer to be on the safe side and the estate in question is very simple.

 

[pvr]

Yep, thanks for that explanation True-Blue

 

[pvr]

It’s potentially a lot more complicated than that

You're not kidding!
I am in the middle of a probate 'application' for my late mother. The application has now been submitted but we (my sister and I) still have no idea whether HMRC will deem my late mother's estate as being liable for IT or not! Despite both of us being trained accountants (me many years ago admittedly) and both of us dealing with money, accounts, VAT, PAYE, revenue stuff every day.
We don't know whether HMRC will class the estate under the £325k or £500k limit for IT. The rules are so ambiguous with words like "maybe, possibly, depending on....". We had to employ a probate lawyer to be on the safe side and the estate in question is very simple.

Why do you give them the option? Give them an option and they will make the worst decision for you. When I dealt with my FIL’s estate I just followed the calculation rules and decided it was outside IHT. They never commented as I guess they never knew.

 

[DevonPaul]

What do you mean with the exempt bit for a couple? If one dies, isn’t the house free of iht for the remaining partner or did I read that wrong and it is about the children?

OK, you are correct that anything left to a spouse (or civil partner) is exempt from IHT.

Also everyone has their own Personal Allowance (Nil Rate Band, NRB) of £325k to leave to anyone else. So if someone died in 2007 they could leave £325k to their kids and everything else to their spouse, and no IHT was due. However in 2008 (IIRC) the govt made the NRB transferrable, so if parent 1 dies and leaves EVERYTHING to parent 2, then when parent 2 dies they can use both NRBs when they die and the first £650k of their assets are IHT free.

Then the Govt pledged to raise the IHT threshold to £1m. However rather than do this simply and raise the individual NRB, Sir Humphrey and his mates came up with a fiendishly complex method that only benefits those with children and large houses.

So what they did is that on top of the personal NRB, they introduced a Residential NRB of £175k per person. Similar rules apply, if you leave your house to your spouse then they also get your £175k on top of their own so have another £350k they can leave outside of IHT.

However...... the RNRB only applies to your main residence, so if your residence is worth than £350k then the first £350k is IHT exempt and the rest goes into your general Estate, BUT ONLY if you leave the money to direct descendants. So if you have no children, you get no RNRB. If your home is worth less than the RNRB then you only get the value of the home discounted, unused RNRB can't be added to the normal NRB.

The good news is that if you downsize, or sell the home to pay for care fees, the full value of the original home is the value that is counted.

There's a reason I gave up the Financial Advisor courses and went into Genetic Engineering

 

[Pondrew]

Why do you give them the option?

It's not about giving them the option, it's the £175,000 RNRB which Martin spoke about above. My mother's will didn't specifically leave her property to her children, just her estate, which includes the property. So there is an argument there for both IT thresholds. Devil is in the detail (or not).

 

[pvr]

I have literally submitted my mum’s inheritance tax form last week (in NL) and grateful that there is non of this ambiguity (nor tax %).

 

[True-Blue]

Why do you give them the option?

It's not about giving them the option, it's the £175,000 RNRB which Martin spoke about above. My mother's will didn't specifically leave her property to her children, just her estate, which includes the property. So there is an argument there for both IT thresholds. Devil is in the detail (or not).

PM’d you’d mate