Gain for over 5os - too good to be true?

nrsql · 10 September 2005 at 10:09PM

Sorry if this has been posted butcan't find it.

http://money.telegraph.co.uk/money/main.jhtml;jsessionid=LGZH4BF4PPRTNQFIQMFCM54AVCBQYJVC?xml=/money/2005/09/10/ccom10.xml&menuId=242&sSheet=/money/2005/09/10/ixfrontcity.html

Over 50s can take out 25% of pension contributions each year tax free from Apr 6th.
So for 40% taxpayer pay in £1000, get £400 tax relief, take out £250.
Result - paid £350 for a £750 addition to pension.
For 22% taxpayer pay in £1000, get £220 tax relief, take out £250.
Result - paid £530 for a £750 addition to pension.

I'm not a fan of pension funds but given this would probably start paying in when I'm 50 if it's still going.

isasmurf · 11 September 2005 at 1:36AM

I'm not sure if this correct. Perhaps an A-day expert (is there one?) can clarify for us!

My understanding is that you will only be able take a lump sum when you take benefits from any pension within the pension scheme, and the lump sum must be paid within 3 months of you taking those benefits.

I'm also sure that any lump sum you have already taken will count towards any future lump sum you take. I.e. you cannot always take 25% of the fund value at any one time, you will need to add what you have already taken to the current fund value and recalculate what 25% would be.

But then again I could be completely wrong...

nrsql · 11 September 2005 at 2:25AM

The article says
From April 6 onwards, those aged over 50 can take 25pc of their pension contributions - each year if they want - tax free, without having to start drawing their pension.

Suspect you might be right about having already taken the 25% - wonder how it's calculated though. You would still get 25% of the growth if the amount you've already taken was subtracted from the amount.
Whatever - it still looks like good value. A bit like the employers contribution in a company scheme.

isasmurf · 11 September 2005 at 11:15AM

nrsql wrote:

The article says
From April 6 onwards, those aged over 50 can take 25pc of their pension contributions - each year if they want - tax free, without having to start drawing their pension.

And...? You'll excuse me if I don't believe everything written by journalists.

I'm no where near being a Pensions expert, unlike some around here. I'm trying to educate myself about the new regime as best I can. I went by the Registered Pension Scheme Manual. It's not made any easier by the fact there appears to be 7 different types of "authorised" lump sum payments. The only one that I can see that fits the bill here is the Pension Commencement lump sum.

Section RPSM09104150 of the Registered Pension Scheme Manual says "A pension commencement lump sum may only be paid if the member has actually become entitled to a relevant pension benefit under the registered pension scheme making the lump sum payment." Apparently this is legislated for in [Para 1(3)(b), Sch 29][Para 34(2), Sch 10, of the Finance Act 2005!

I'm going away to read some more...

Okay... From my understanding of the RPSM it appears the article could be right! You can designate to take the benefits from all or part of your fund. Of the amount you take you can claim a 25% tax free lump sum (the pension commencement lump sum). The other 75% of the benefits you take will provide you with an unsecured pension through income withdrawal which will be taxed through PAYE.

disclaimer: this is based on my understanding of the Pension rules, and under no circumstances should it be taken as advice! You'll need to seek proper financial advice

Milarky · 11 September 2005 at 1:14PM

Impressively, and possibly quite by mistake, there is nothing to stop them from reinvesting the tax-free cash back into their pension to maximise the return. The effect is to give further tax relief on money that has already received maximum tax relief. This is clearly a virtuous circle, and the complex mechanics are explained in today's Your Money.

I've started a thread closely related to this headed: 'Unsecured' pensions, that links to two Telegraph articles from 5 September and 10 September.

As far as I can make out from what it being described, however, there is no crock of gold here, since it is theoretically possible to recycle a lump sum today - albeit when you get it with the rest of the pension - ad ifinitum. The Telegraph seems to have missed this obvious point [or else I have missed something that is obvious to them?]

[See my message #9 also.... What am I missing?]

What the Telegraph could be getting at is that is at present there are fairly strict limits on what you may contribute to a pension in any one year [from next April it will rise to 100% of income in that year] and since the lump sum only becomes available in any one year [i.e. that year in which you reitre] then the lump sum is likely to be several times one year's salary - effectively 'stopping' out the opprtunity to 'fully vest' [if I can put it like that] the lump sum. By 'recycling' the lump sum in each year of paying-in [as the new rules appear to allow] this can be achieved within annual limits....

[Any thoughts?]

nrsql · 11 September 2005 at 4:52PM

Yes - I ignored the "reinvesting the tax-free cash" as you're only investing further taxed cash - enabled to do it by extra funds available due to taking out cash from the pension fund but it's not that money that enables the strategy.

But still £750 for £350 might overcome my concerns about pension fund control.

clivehamilton · 15 September 2005 at 12:21PM

I think that the point in the Daily Telegraph was that from next 6th April the actual pension itself does not have to be taken. So if you were 50 or over and still working, therefore not needing the annuity income no longer would you have to take the pitiful % return at an early age. If read it correctly what you can now do is put in a lump sum, draw the 25%, re-invest the 25%, draw the 25% from that investment and so on and on again. This process stopping when some sort of minimum re-investment amout is reached.

nrsql · 18 September 2005 at 12:06AM

Bit misleading (I think) don't think the 25% reinvested is really a reinvestment.
add £1000 withdrawing £250 then adding £250 and withdrawing £62.50 is the same as adding £1250 and withdrawing £312.50. The only difference would be if the withdrawn amount was deducted from the annual contribution max calculation which I don't think is the case.

The advantage is just that you can add £750 to the fund and it only costs £350. Previously you couldn't do that without taking the annuity.

Haven't gone very deeply into this as I've always thought pensions were not good value but will do more research (hence this thread as a shortcut

) before I get involved if the option is still open.

Slim · 19 September 2005 at 2:00PM

There was a similar article in this weekend's Sunday Times.

Don't forget that the reinvestment of the 25% will itself get tax relief so gets grossed up in the pension scheme. This has to be allowed for when calculating a second tax-free 25%.

Peter_Dixon · 27 September 2005 at 10:30PM

Hi,
I have also looked at this and contacted the pension department at work. As a word of warning, it is advisable to also speak to your pension department of pension company because they have their own constraints which would limit the amount you could add to your pension and if you where able to you would have to fill in the appropriate forms and wait a long time for the remuniration from the tax man.

Also a lot of this is guess work and we will not know the details until the end of the year.

Paul_Herring · 3 October 2005 at 9:58AM

Slim wrote:

There was a similar article in this weekend's Sunday Times.

Don't forget that the reinvestment of the 25% will itself get tax relief so gets grossed up in the pension scheme. This has to be allowed for when calculating a second tax-free 25%.

[html]Deposit 25% Rebate Sum rebated
£10,000.00 £2,500.00
£3,205.13 £801.28 £705.13 £705.13
£1,027.28 £256.82 £226.00 £931.13
£329.26 £82.32 £72.44 £1,003.57
£105.54 £26.39 £23.22 £1,026.79
£33.83 £8.46 £7.44 £1,034.23
£10.85 £2.71 £2.39 £1,036.62
£3.47 £0.87 £0.76 £1,037.38
£1.12 £0.28 £0.25 £1,037.63
£0.36 £0.09 £0.08 £1,037.71
£0.12 £0.03 £0.03 £1,037.74
£0.04 £0.01 £0.01 £1,037.75[/html]

Gain for over 5os - too good to be true?

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