Pension Advice

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
16 replies 887 views
sabelusabelu Forumite
1.1K Posts
Part of the Furniture 500 Posts Combo Breaker
✭✭✭
I am a 40% tax payer and have around 50k to invest I am told if I invest this in a private pension I will get 40% back from the Government in tax relief i.e. 20K seems too good to be true. Apparently I can withdraw an amount from the investment every year.
It pays to challenge
«1

Replies

  • dunstonhdunstonh Forumite
    106.7K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭✭
    I am a 40% tax payer and have around 50k to invest I am told if I invest this in a private pension I will get 40% back from the Government in tax relief i.e. 20K seems too good to be true

    Correct. Providing you have the income to support a 50k contribution into a pension and get full 40% relief on it. If you don't, you will get part 40%, part 22%.

    You would pay the contribution net of basic rate tax. So on a 50k contribution, you would write the cheque for £39,000 and then claim the remaining 18% via your tax return.
    Apparently I can withdraw an amount from the investment every year.

    Careful here as you are describing drawdown but could equally be describing annuity purchase but using incorrect terminology. Once the money is in the pension, you effectively kiss goodbye to it (apart from death before annuity purchase). When you crystallise the benefits between age 55-75 (50-75 until 2010), you can take upto 25% tax free (of the current value) and the remainder can stay invested and provide an income or you can purchase an annuity. At age 75 you will need to purchase an annuity if you are still alive. There is still some things happening on the age 75 front which may or may not last much longer and currently its best to assume that you are going to have to purchase that annuity.

    Downside - you lose the bulk of your capital forever and annuity income is taxable. This Govt doesnt mind changing rules retrospectively and "tax free cash" may not last.
    Upside - 40% tax relief is a big chunk. Growth is free of income and capital gains tax and on death before retirement, the value of the pension is not included in the estate for IHT purposes. If you have children, you could increase the amount of working/children tax credits which you may or may not be currently getting. Under some circumstances, this can ramp the effective tax relief upto 72%.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestorEdInvestor
    15.7K Posts
    ✭✭✭✭✭
    At age 75 you will need to purchase an annuity if you are still alive.

    This is not a requirement at present.

    There are some murmurs from the Government about reinstating the old 'compulsory annuity at 75' rule because they say people are 'abusing" the new rules to avoid inheritance tax.

    The basic point is quite correct however - once the money goes into a pension you lose control of it forever.:(
    Trying to keep it simple...;)
  • dunstonhdunstonh Forumite
    106.7K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭✭
    Exactly why I said
    There is still some things happening on the age 75 front which may or may not last much longer and currently its best to assume that you are going to have to purchase that annuity.

    I wouldnt want to assume that it is going to be there. It is one of those areas you wouldnt invest £50k on the assumption that the current rules are not going to change as it is an area that is very likely to see some change.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • EdInvestorEdInvestor
    15.7K Posts
    ✭✭✭✭✭
    It seems that what's really bugging the Govt is not this IHT business, that's just an excuse.

    The real problem is that pensions are now more attractive since they ended compulsory annuities, so people are putting more money into them, which means the Govt has to fork out more upfront tax relief, which they don't get back until later when the person retires.

    So to stop this drain on the Treasury coffers they are hinting they might go back to the old annuity system.

    I suggest Sabelu should bide his time and use his ISA or invest directly for the time being: under the new A-day rules you can put the money in later and get the tax relief, so there's no rush, it can all be sorted later without taking such a risk.

    Perhaps he should even look at an investment bond - but beware that the charges don't add up to more than the tax saved - there won't be much tax to pay on a 50k investment, even for someone on high rate.
    Trying to keep it simple...;)
  • dunstonhdunstonh Forumite
    106.7K Posts
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    ✭✭✭✭✭✭
    I dont see why the treasury has such a big hang up with annuity purchase. It may be linked to gilts over the long term but I cant see what tax has to do with it. Sure annuity income is taxable but then on death the money dies with the individual and the spouse finds herself being paid pension credit. Whereas an investment with capital retained saves the need for pension credit and you could always bring the investment into the IHT regime if you did want to claw a bit more. Its better to get 60% of something than 100% of nothing.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • sabelusabelu Forumite
    1.1K Posts
    Part of the Furniture 500 Posts Combo Breaker
    ✭✭✭
    I have 20k in a Scottish Widows OOIC, 20k in Tesco shares (a good steady investment, and 10k spread between Morrisons, Lloyds TSB and BT shares. The last year has seen me get about 10% from these in growth and dividend.

    Could I sell these to invest in a pension that I would only have to write the cheque out for £39k, (the government would make up to £50k in tax relief) and still keep the 11k in these stocks. As a 40% taxpayer the I could then claim back 18% of the original £50k as well. Would the 18% be invested into the pension or would I get that back by cheque or through my tax code?
    So I would have a pension of £50k invested that really only cost me £30k?
    Then at 50 I could withdraw up to 25% per annum tax free and reinvest?
    Could I start the ball rolling again and invest in another pension.
    Can I self select the pension investments or better still rather than sell my surrent holding assign it to a self select pension and get the same benefits?
    It pays to challenge
  • EdInvestorEdInvestor
    15.7K Posts
    ✭✭✭✭✭
    sabelu wrote:
    I have 20k in a Scottish Widows OOIC, 20k in Tesco shares (a good steady investment, and 10k spread between Morrisons, Lloyds TSB and BT shares. The last year has seen me get about 10% from these in growth and dividend.Could I sell these to invest in a pension that I would only have to write the cheque out for £39k, (the government would make up to £50k in tax relief) and still keep the 11k in these stocks.

    Sure.What you need is a Sipp, a self-invested personal pension. This is a good low-cost online one for shares (and funds):

    https://www.sippdeal.co.uk

    (satisfied customer)
    As a 40% taxpayer the I could then claim back 18% of the original £50k as well. Would the 18% be invested into the pension or would I get that back by cheque or through my tax code?

    The latter.

    So I would have a pension of £50k invested that really only cost me £30k?

    Yes
    Then at 50 I could withdraw up to 25% per annum tax free and reinvest?

    You can only withdraw 25% once, not every year. After 2010 you will have to be 55 to do this.
    Could I start the ball rolling again and invest in another pension.

    Only if the tax free cash amount is less than 15k.
    Can I self select the pension investments or better still rather than sell my surrent holding assign it to a self select pension and get the same benefits?

    You can self select the investments in a Sipp.

    Transfer "in specie" ( ie without selling the existing investments) might be possible if you used a Sipp provided by the broker where you currently hold the investments. (eg Selftrade has a Sipp which is provided by Sippdealextra). You would have to ask.

    But I wouldn't let this aspect have a serious effect on your choice of Sipp provider, as the charge is unlikely to be massive.
    Trying to keep it simple...;)
  • sabelusabelu Forumite
    1.1K Posts
    Part of the Furniture 500 Posts Combo Breaker
    ✭✭✭
    At what level of earnings do you pay 40% tax now?
    It pays to challenge
  • EdInvestorEdInvestor
    15.7K Posts
    ✭✭✭✭✭
    dunstonh wrote:
    I dont see why the treasury has such a big hang up with annuity purchase. It may be linked to gilts over the long term but I cant see what tax has to do with it.

    The problem is seen to be related to the high levels of unused tax relief that could be tapped if pensions were seen to be more attractive - 34bn for basic rate taxpayers and 8bn for HRT.This would make a big dent in net revenues.As you note only some of this is retrieved later - much later.

    See column 26 in this link (from before the current more generous limits came in): http://www.publications.parliament.uk/pa/cm200102/cmstand/a/st020214/am/20214s07.htm

    Personally, I'd have thought that the best way to reduce this "threat" is to boost the attractions of ISAs where there is no upfront cost, by raising the annual limits.

    If they also dropped some of the restrictions on drawdown income, this could also generate more tax revenues. It's pretty clear that a lot of people now going into drawdown ( eg thru the Standard life Sipp) are going to actually take a pension income rather than hoard the cash - that is, they will be comfortably off, but not super rich.

    There is no real need to "nanny" such people. Rather they should be encouraged to take income and contribute to the economy by paying tax and spending the money.

    If the Govt is really concerned about people landing up on benefits, then they should require married men to purchase an annuity with a spouse's pension included, as you say.
    Trying to keep it simple...;)
  • sabelusabelu Forumite
    1.1K Posts
    Part of the Furniture 500 Posts Combo Breaker
    ✭✭✭
    How does this work could i invest my 50k and get 40% back, can i still withdraw 25% @ 50. why is there a need for an administrator, are there fees involved, can i transfer existing share holdings and OEIC's?
    It pays to challenge
This discussion has been closed.
Latest MSE News and Guides

Energy price cap could be extended beyond 2023

New plans have just been announced by the Government

MSE News

Cheap contents insurance for tenants

DON'T assume your landlord covers you

MSE Guides

Summer sizzlers round-up

Incl £2ish sun cream & £1.50 disposable BBQs

MSE Deals