Opt out of SERPS/S2P?

dunstonh

If your pension projection is close to the age allowance reduction (or just over), contracting out may help by being able to take 25% of the contracted out funds as a lump sum, therefore reducing your income and not exceed the age allowance reduction point.

DazednConfused_5

Age allowance reduction ?? wot dat ??

dunstonh

When you get to age 65 and 75 you get an increased personal allowance. Currently the standard persoanl allowance is £5035 but the 65 age allowance is £7280. Meaning you can earn £7280 tax free instead of the £5035.

If you earn over £20,100 though this increase in age allowance gets reduced by £1 for every £2 over. This can increase your tax by over £500 a year.

The £20,100 figure includes personal/work pensions, state pension, interest and dividend income.

So, by contracting out and taking the 25% out (and therefore reducing your income) could save you over £500 a year.

DazednConfused_5

Thanks for the explanation but it's given me yet another shock. I kind of assumed that once you retired, unless you continued to receive earned income (eg part time job etc), state & a modest work pension income would be largely tax free. Does your answer really mean that any income over 7280 pa (earned or not) is taxed?? I think I need to find a 'Dummies guide to retirement' or think about heading for a tax haven...

Paul_Herring

DazednConfused wrote:

I kind of assumed that once you retired, unless you continued to receive earned income (eg part time job etc), state & a modest work pension income would be largely tax free. Does your answer really mean that any income over 7280 pa (earned or not) is taxed??

http://www.hmrc.gov.uk/pbr2006/pn2.htm - Income Tax Personal and Age-related Allowances 2007-08 section

All 'retirement age' gives you is an increased personal allowance (around £2,200 extra) - not an exemption from paying income tax.

This brings up a question of my own - probably for DH or James - the current limits have age limits of 65-75 and 75+ - I've heard that the 65 will be increasing to 68 or so for the state pension; I'm assuming that these age related income tax age limits will also be changing - to what? 68-78/78+? I've not heard anything specifically about them...

dunstonh

I'm assuming that these age related income tax age limits will also be changing - to what? 68-78/78+? I've not heard anything specifically about them...

I have seen nothing as yet to say the age allowance ages are changing. Logic would suggest that the 65 age increases to 68 in line with the changes in state pension commencement age. However, the two things dont need to be linked.

Cook_County

There are two additional points here:
1. A small contracted out pension could be hit by charges and the impact of increasing mortality so that the fund can only buy an annuity far less than the S2P given up. (Of course spectacular investment growth is also possible on the converse.)

2. Tax is a factor but none of us can predict tax rates in the future, so it is safer to use today's rules and rates in calculating post-retirement income. If you projecting 30 or 40 years worth of retirement you could add say 2 or 3% a year increases in tax allowances if your maths is that sophisticated...

DazednConfused_5

One more novice question - as life assurance premiums are higher for smokers is the converse true for annuities ie higher income as life expectancy will allegedly be shorter? If actuarial tables reflect the dangers of smoking surely this should be the case. (You may have guessed I'm an ex-smoker)

dunstonh

Some providers do take into account smoker status and give smokers better annuity rates. Same also applies to those with medical conditions, including high blood pressure or high cholesterol as well as those retiring from certain manual jobs.

Typically, to get access to those sort of annuity providers you would need to see an IFA as the two main companies that offer increased annuities on those terms only deal with IFAs.

If you commence your retirement benefits with the pension provider you will usually find none of the above things are taken into account and you get their bog standard rate.

jamesd

I'm about to approach an IFA to make an execution-only purchase of a personal pension where holding protected rights money is a significant part of the purpose.

Recent writings from the FSA suggest that execution-only deals are not free from regulatory risk and there's some need to assess suitability for them. This of course conflicts with execution-only dealing and more so where a transaction is regarded as high risk.

What would you prefer to know about such a sale to minimise your regulatory risk?