Pension Plan. Are my assumptions right?

Moby wrote: »

I thought if I work until 2016 I will have done 25 years. 25 years and my age when I would plan to take my LGPS, (60) is 85. I think the rules are that the actuarial reduction would apply to post 2008 pension but pension accumulated before then would be paid without the actuarial reduction and tthe actuarial reduction would not apply to the lump sum because the lump sum was accumulated pre 2008 when the pension rules changed............. I think?

I'm am also paying into a SIPP so that I can retire at 60 and defer taking my LGPS until I am 63 when I will satisfy the 85 rule. My reading of the rules is exactly as you state above - no actuarial reduction for pre-2008 pension and then reductions applied at differing levels to the post-2008 pre-2014 and post 2014 pensions due to the fact that the retirement age was 65 rather than 66 until 2014. (This took some working out but I think I've got there).

The suggestion to not crystallise the SIPP pension and take a proportion of the 25% lump sum each year instead, so raising the annual amount available outside taxation, is very welcome - I hadn't thought of that as an option. Thanks to those who clarified this.

Moby wrote: »

I'm in my early 50's ... In order to bridge the gap I'm also saving in a SIPP and ISA's ... I can live comfortably on £13 500 a year (all in) ... If I use my SIPP from say the age of 56 onwards ... for say 5 years making sure the drawdown keeps me under the tax free threshold....say a drawdown arrangement of £750 a month? I would then top up the difference between this (ie 9K per annum) and the £13 500 I need to live on using ISA savings. I would therefore not pay any tax?

While drawing on the pension it's also good to move money into a S&S ISA as fast as possible so later you can draw tax free income out of the ISA towards the end of your plan.

To do that you might start by taking £10,500 / 0.75 = £14,000 initially, as an uncrystallised funds pension lump sum (UFPLS). UFPLS is the new in April 2015 way to take money out of a pension pot without crystallising the rest. 75% of that is taxable but within your personal allowance, the rest tax free. That's £500 more than your target income so set that £500 aside towards using your ISA allowance.

That leaves £14,500 of ISA allowance to fund that year. You can do that by taking a 25% tax free lump sum from some more of the pension, crystallising another £14,500 / 0.25 = £58000. You use the 25% tax free £14,500 of that to fund the rest of the ISA and leave the remaining £43,500 in drawdown but with no income taken in the first year (you could take income from it and reduce the amount but I'm trying to keep the calculations simpler).

In the second year you can do the same sort of thing. Eventually you'll run out of uncrystallised pension funds and start taking income or capital out of the ISA to stay tax free.

Depending on how long you plan to do this you can consider a little VCT use to take money out of the pension faster. If you're going to do it for say 6-7 or 8 years then doing some VCT funding using taxed money from the pension in the first year will let you sell the VTC in years 6-8 without losing the tax relief, using the tax free proceeds of that sale and the ongoing tax free VCT income to reduce the potential for income tax. You might say take out £30,000 of the £43,500 that would go into drawdown. You have £30,000 * 0.2 = £6,000 of basic rate tax to pay on that. You spend £20,000 to buy some VCTs (say four of them). The VCTs get 30% tax relief capped at the income tax you actually pay in the year. So £20,000 of VCT is due £6,000 of tax relief. Tell HMRC and they will adjust your tax code to give you that relief during the tax year, so you'll get the money from the pension tax free. You can use the UFPLS to fund much of the buy and I'm assuming that you have enough money around to finance the rest for a while.

VCTs invest in smaller companies and won't be suitable for most people. You seem to have resources and planned resources to use them a little.

What I'm trying to do with the VCT use is to get you as much as possible out of the personal pension before the work and state pensions start. Then you can perhaps consider some lighter VCT use to eliminate the income tax on them as well if you like. Or not, up to you.

The VCT use probably won't be useful to you if you retire at 56 and get the DB pension at 60. That's because of the five year rule for VCTs and 6-8 years is better. It's more useful if you can go longer and get more pension as a result.

Moby wrote: »

2. Am I right in thinking that with the new pension rules it now makes sense for me to pile as much of my income as possible into my SIPP until I retire .....instead of sticking a portion into NISAS?

Yes. You can benefit from the tax relief and get all or most of the money out of the pension tax free. Even more can be taken out if you want to use VCT investing to help.

Well, it starts out modest, but there are creative things that you can do to increase it. For example, you're in your early 50s so you'll be 55 with access to pension pots soon. So you could do things like:

1. Borrowing living expense money on 0% for purchases credit cards, then replacing that with balance transfer money. Then paying the living money you're not spending into a pension to get the tax relief. Can take out the money at 55 to repay the borrowing.

2. Mortgage, or equity release into pension, same repay after 55 plan.

It doesn't get a lot of attention but cash deposit accounts are permitted investments in pensions and those have the same lack of risk as usual outside a pension. With only a few years to go to 55 you can stick the money into a pension and get decent returns even using savings accounts, no investment risk needed.

If your wife is younger you could borrow from her to do this and repay her after 55.

The £40,000 a year or earned income cap on annual contributions will be a factor, since it also includes the work pension contribution value. But there is carry forward of unused allowance from the last three years to boost that to get you to the total of your earned income.

There are restrictions on how much recycling of the pension tax free lump sum can be done, with the limit £10,000 in a twelve month window. However, one of the other rules is that there has to be an increase in pension contributions facilitated by it within the window of two years before the tax year in which you take the lump sum, that tax year and the two years after. If you start out at £40,000 a year or higher before that window you'll end up reducing contributions, not increasing them, so won't be affected by the limit when it comes to time to take out lump sums.