Taking income from pension and investing in ISA

browniej

I'm looking for some help here.

I have just turned 50 and am able to take my pension which currently has a fund of around £150k. Next April the door slams shut and my pension is stuck until I'm 55.

I don't need the income just now as I'm still working part-time (basic rate taxpayer) but wondered if it was a good idea to start moving some of the money out of the pension and into an ISA?

I did read the thread that was closed recently where one poster who is an IFA said no and another poster said yes so now I'm confused.

bendix

Why does the door slam shut?

If you've turned 50 already, then you can access it anytime.

dunstonh

I did read the thread that was closed recently where one poster who is an IFA said no and another poster said yes so now I'm confused.

I didnt say no. I said in most cases.

Currently the money is sitting in a pension tax free. No income tax, no capital gains tax, no inheritance tax. If you crystallise the funds by taking 25% now then the fund itself becomes chargeable to tax on death. You can never draw another lump sum from that part of the pension again (even it doubles in the next 10 years).

Your pension could have guarantees or may not be able to do income drawdown and require it to be transferred. If there are guarantees, these would be lost and the transfer could incur charges.

The transaction you are thinking about is considered high risk by the regulator. The liability insurers that cover IFAs advice also treat it as high risk. Whilst that doesnt mean it will be wrong for you it does mean that statistically,the chances are that it is more likely to be wrong than right.

The general rule of thumb with pensions is that if you dont need them you dont take them. Remember that the same investments in an ISA are available in a pension. So, there will be no difference in the returns. You then have to look at charges and consequences and potential benefits of doing the transaction to see which is best. If you do the transaction, you also need to be aware that there is no going back later to undo it. Its cast in stone.

EdInvestor

dunstonh wrote: »

Currently the money is sitting in a pension tax free. No income tax, no capital gains tax, no inheritance tax. If you crystallise the funds by taking 25% now then the fund itself becomes chargeable to tax on death.

On the other hand a fund in drawdown can be returned to beneficiaries on death minus 35% tax.The conventional route involving purchase of an annuity means you lose the capital completely.The 25% can remain and grow in a tax free environment throughout.

You can never draw another lump sum from that part of the pension again (even it doubles in the next 10 years).

But all the 25% is available, capital and income tax free.

Your pension could have guarantees... If there are guarantees, these would be lost

Valid point, everyone should check this.

and the transfer (to drawdown)could incur charges.

It's not impossible that you can reduce future charges if you pick a low cost drawdown provider.Avoiding 'advice' will cut charges.Advice is not really necessary to achieve a drawdown transfer, the admin is quite easy.

The transaction you are thinking about is considered high risk by the regulator. The liability insurers that cover IFAs advice also treat it as high risk.

This refers to drawdown taking an income, not drawdown taking 25% and leaving the rest invested.

EdInvestor

bendix wrote: »

Why does the door slam shut?

If you've turned 50 already, then you can access it anytime.

No, if you turn 50 on April 1 next year and fail to vest your pension before April 6, the clock will reset and you will have to wait until you are 55.

dunstonh

On the other hand a fund in drawdown can be returned to beneficiaries on death minus 35% tax.The conventional route involving purchase of an annuity means you lose the capital completely.The 25% can remain and grow in a tax free environment throughout.

Or left invested uncrystallised and on death the full fund value paid to the beneficiary with no tax at all deducted.

It's not impossible that you can reduce future charges if you pick a low cost drawdown provider.Avoiding 'advice' will cut charges.Advice is not really necessary to achieve a drawdown transfer, the admin is quite easy.

Using an IFA can be cheaper than DIY using HL. The biggest provider of income drawdown plans has most of its funds on a 1% AMC assuming commission. On fee basis you can get that down much further.

This refers to drawdown taking an income, not drawdown taking 25% and leaving the rest invested.

No it isnt. It is treated the same way and is exactly the same thing. The only difference is the level of income you take. Nil or whatever. Drawdown is drawdown.

purch

I did read the thread that was closed recently where one poster who is an IFA said no and another poster said yes so now I'm confused

Which is why you should be seeking the advice of a suitably qualified IFA who will be able to ascertain your own unique individual situation and requirements, and will be able to advise accordingly.

Any opinions stated on this forum are only generic opinions, whether from a qualified person or not, and should not be relied upon as basis of any major decision relating to your own circumstances.


P.S. It is quite obvious that this is a 'planted' question, placed here in order to spark a little controversy and possibly an argument.........but I thought I'd post anyway :rolleyes:

EdInvestor

dunstonh wrote: »

No it isnt. It is treated the same way and is exactly the same thing. The only difference is the level of income you take. Nil or whatever. Drawdown is drawdown.

If you are not drawing anything down (ie taking nil income) this is hardly the case.

dunstonh

If you are not drawing anything down (ie taking nil income) this is hardly the case.

If you dont take an income its called unsecured pension or income drawdown.
If you do take an income its called unsecured pension or income drawdown.

So, either way its income drawdown and the consequences of the action (for example, death benefits) are the same. You are still crystallising the pension whether you take an income or not.

EdInvestor

In the OP's case, at the moment he has 100% of his money in the pension and if he dies before aged 75, all that money goes to his beneficiaries tax free outside the estate.

If he goes into drawdown, 25% of the money comes out of the pension and goes into the tax free ISA.The rest remains invested in the drawdown.If he dies before aged 75, the money in the drawdown goes to his beneficiaries outside the estate but minus a 35% tax charge. The money in the ISA becomes part of his estate.

Unless you are using the pension as a form of tax free life cover (which a lot of rich people do, of course) this difference in death benefits probably doesn't resonate terribly strongly.Where the contrast becomes much more stark is the choice between and annuity or drawdown, the one involving total loss of the fund, the other loss of 35% of it.

Not many people are very happy about handing over their life savings to an insurance company in return for an income which until very recently was much the same as the interest you would get on a standard savings account.

There are better ways of gambling on how long you might live.

dunstonh

Not many people are very happy about handing over their life savings to an insurance company in return for an income which until very recently was much the same as the interest you would get on a standard savings account.

The annuity provides a guarantee for life. Not many people are willing to risk their major or possibly only source of income (apart from state) on investment returns which could see their income drop in retirement.

Personally, i would do income drawdown. However, I do far more annuities as the average person just doesn't have the appetite for risk that drawdown has despite the potential rewards that are available. The risk should not be underestimated. Look what happened with endowments when complacency about the risk set in.

A good question to ask yourself is if you could afford say a 40% drop in your retirement income because the value of the investments dropped. That may go some way to help you decide if its appropriate for you or not.

However, that is irrelevant in this thread as the OP has said they dont want the income.

Where the contrast becomes much more stark is the choice between and annuity or drawdown, the one involving total loss of the fund, the other loss of 35% of it.

The annuity will only be a total loss if you dont buy any guarantees. Value protect can return the unpaid part of the pension fund minus the tax.