“What’s the best way to use my two pensions?”

MArtin wray

I’ve done another of those Portfolio Theories things from the Times. I was  billed a pensions expert, which suggests I’m something that Steve Webb and Ros Altmann aren’t. My apologies to the two real pension experts in the article!

My 150 words got a bit cramped, so – on my blog – I’ll give you what I submitted which you can find at the bottom!

As for Martin, he and his dog look to be train lovers, which suggests he knows how to enjoy himself, the most important advice I can give him is to get on with having a good time! Article below – original in today’s Sunday Times.


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Martin Wray, 56, from Berkshire, works in the sales department of a pharmaceuticals company, but is looking to retire in June next year.

He earns £63,000 a year and has two company pensions. One is a defined-contribution pension from the company where he has been for four and a half years, to which he has been adding voluntary contributions when he can. The pension will be worth about £186,000 when he retires.

The other pension is a final-salary scheme from his previous employer, another pharmaceuticals company, where he worked for 25 years. He has been told that if he draws on this pension from the age of 57 he will be able to take an annual sum of £22,500 for life and a lump sum of £149,000. However, if he waits until he is 62 to claim he will get an annual sum of £32,500 and a lump sum of £215,000.

Martin is financially comfortable. He has no mortgage, his wife is retired on her own final-salary pension, and his children are grown up.

“I think I will have a good standard of living when I retire, but the different advice I’ve received is confusing,” he says. “Should I take my second pension when I retire or wait a few years?”

He says he is also concerned that if he waits to access his final-salary pension he could breach the lifetime pension allowance and face tax implications.

Steve Webb, director of policy at Royal London, an insurer

“If Martin takes his final-salary pension early, he will lose £10,000 a year for the rest of his life and get a reduced tax-free lump sum. Assuming he is in good health, this could be poor value, especially as he has no need for the money now.

“He could put his defined-contribution pot into a drawdown investment policy and take a quarter tax-free upfront. This would support his lifestyle for a year or more, and he could use income from the rest of the pot to support him until he is ready to take his defined-benefit pension. Any income under the annual personal allowance of £12,500 is tax-free.

“Although his pension pots could bring him close to the Lifetime Pension Allowance (LTA), which is £1.05 million, the only implication of going slightly over would be a tax bill on any excess. This is not a good reason to lock into a much lower pension now.”

Ros Altmann, a former pensions minister 
“If Martin is retiring at 57 because of ill health, then taking both pensions would give him financial security. If his health is excellent, that may not be the best option.

“He needs to be mindful of the 55 per cent tax charge if he exceeds the LTA. There are good reasons to start the final-salary income next year. He will have an extra five years of guaranteed income, although he will have to pay tax on this, and taking £22,500 at 57, rather than £32,500 at 62, helps keep him under the LTA limit. That is because of the way the tax system assesses the value of a final salary pension: multiplying the income by 20, plus any tax-free lump sum. So taking it next year gives a value of £599,000 [£22,500 x 20 is £450,000, plus a tax-free sum of £149,000].

“Adding in the £186,000 defined-contribution pot gives £785,000, well below the LTA. However, if he waits until 62, the final-salary pension value would be £865,000 [£32,500 x 20, plus a £215,000 lump sum]. Adding the £186,000 would breach the LTA.

“So Martin might consider taking the final-salary pension next year, but keeping the other pension, which he could still add to, gaining extra tax relief to build a larger fund. The defined-contribution pension can be passed on free of inheritance tax too.

“However, he and his wife could live for 30 or 40 years. Their final-salary pensions won’t cover additional costs if one or both move into a care home. Building up extra savings for care is something most people forget about, but may be another reason to keep the defined-contribution pension intact.”

Henry Tapper, pensions adviser
“Martin will get a 30 per cent pay cut if he takes his gold-plated pension at 57 — ouch. He should wait until 62. As for his other pension pot, next year he could cash out £46,500 tax-free, and get about £28,141 a year for five years with the remaining £139,500. This is the safety-first option.

He may prefer to stay invested and draw down up to £40,000 a year until 62, a quarter of which would be tax-free. This may mean he exhausts his £186,000 by 62, but he will have the prospect of cash and a lifetime income from his second pension.”


Martin says
“Thanks so much. This has given me reassurance that my thought processes are right. I hope the advice helps others too.”


Henry’s submitted response below

Martin, you’ll get an immediate 30% pay-cut if you take that gold-plated scheme at 57 – ouch! Take your DB pension at 62!

As for your pension pot:- next year you could cash out £46,500 tax-free. Retirement Line can find today a flat £x for five years with your remaining £139,500. This is safety first.

You may prefer to stay invested and draw-down up to £40,000pa till 62. Under the Pension Freedom UFLMP option you’d get a quarter paid tax-free. More risk but perhaps more profit!

You may find you’ve exhausted your £186,000 by 62 but now you’ve the prospect of a cash, and a lifetime income from pension #2! In the mean-time you’ve had an easy-to-budget-with “bridging pension”.

If you want more pension at 62 you might look at what your scheme offers for taking less cash.

You’ve got state pension kicking in at 67 and you really don’t have a problem with the Lifetime Allowance.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to “What’s the best way to use my two pensions?”

  1. Robert says:

    Some differences of opinion here Henry?

    Steve Webb and yourself share the view that it is better for Martin not to take his final salary pension early whereas Ros Altmann sways towards him taking his final salary pension next year?

    The different advice Martin has previously received is confusing for him, but he says the advice here has given him reassurance that his thought processes are right.

    I wonder if he will follow the advice/guidance from the majority?

    That seems to be the best option to me.

  2. henry tapper says:

    It wouldn’t be the first time that Ros and I have had minor difference of opinion about what to do with DB pensions, but I’m pleased to see we are all three on roughly the same page – well exactly the same page in the Times

  3. Eugen N says:

    It is important how healthy he is, and also his wife. The Times should have asked him about this. He looks healthy in the picture, but sometimes pictures could be deceiving!

    The second issue is how much he would need. As in previous case (Hong Kong lady), this is something that seem to get lost. At age 67, he would also get a £7,000 – £8,500 per annum state pension. There are 10 years to bridge to the state pension too, with 5 years to bridge to NRA for the defined benefit pension. To get to £186,000 in 5 1/2 years it looks he contribute approx. £22,000 per annum gross, with employer another £5,000 or so.

    It looks he spends about £33,000 net per annum, however in retirement he may have a bit more time in his hands!

    One important issue is to look at the commutation factor used for PCLS. If it is £20 at age 57, it may not be such a good deal, because for each 80p net of pension he gets £20. The pension he would get is 5%, and I would be at any time a 5% annuity rate index linked. To choose pension commutation for a healthy person, given annuity rates today and low sustainability withdrawal rates, he would need a commutation coefficient above 30 at 57 and above 25 at age 62.

    You were correct in your intuitive advice that a reduction of £7,040 per annum (it is not £10,000 or 30% as the £22,500 per annum gets indexed too) is too high for early retirement. At a 3% SWR in today’s low investment return environment, the lost £10,000 per annum would cost £235,000 when he is age 62. He would only get half of that in the five years, if he takes early retirement!

    Henry, The Times will not publish names of providers, and a 5 years fixed annuity is rather useless. The client could use some cash deposits paying 1.5% per annum and get a better result over a 5 years period! Lifetime annuities have value because of the lifetime guarantee, fixed annuity is a drawdown product with the money invested in very short duration gilts earning 0.3% – 0.5% per annum. Cash deposits in a cheap SIPP would do better, even a money market fund as it could give approx. 0.7% per annum after charges!

  4. henry tapper says:

    Eugen- if I had 1000 words – I would have expanded – but I didn’t. The beauty of these things is concision, people browse newspapers. Incidentally, the article on the lady from Hong Kong was the highest read Portfolio Theory ever – and the third highest read article in the whole paper that weekend! Some of that may be to do with your excellent contributions on Twitter!

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