New Pension Drawdown Rules today.

lvader

johnaka wrote: »

all this talk of big pension's.
I don't know any body who has that kind of a pension pot.
if I had £300,000 I wouldn't put that to any kind of pension pot.
I like it where I can get my hands on it and if poped it I'd like my family to get their hands on it to.
any way how would all this affect a small pension??
all in all I only have a small pension pot of around £50,000 of which £36,000 is made up of contracting out serps.
so where does this leave me then?
I'm hoping to get around £155 aweek pension ,this inc state pension.

For anyone paying high rate tax and expecially those receiving an employer contribution it really makes sense to use a pension for retirement income.

Not being able to get your hands on it is also a big advantage for high eaners. Otherwise you could find yourself unemployed at 50 and loose everything before the normal retirement age. The state doesn't help people with lots of savings.

Gatser

johnaka wrote: »

all in all I only have a small pension pot of around £50,000 of which £36,000 is made up of contracting out serps.
so where does this leave me then?
I'm hoping to get around £155 aweek pension ,this inc state pension.

If State pension is around £100 pw, Your pension of £50k needs to pay you £2500 pa = 5%. that seems reasonable, presumably as an annuity.

jamesd

lvader wrote: »

For anyone paying high rate tax ... it really makes sense to use a pension for retirement income.

Only if you can take the money at the rate you need.

My current plan has me taking over 70% of my non-pension pot during drawdown until I can take pension income.

lvader wrote: »

Not being able to get your hands on it is also a big advantage for high eaners. Otherwise you could find yourself unemployed at 50 and loose everything before the normal retirement age. The state doesn't help people with lots of savings.

My target isn't so modest as 50. It's as soon as possible and I've just about achieved it, before reaching 50.

The younger you are, the greater the need to avoid using pension investing and use other means. This is because you'll have more years before age 55 at which you'll need to draw down on capital if you're to survive until you reach 55.

Hence my changed suggestions for many on middle incomes to prioritise non-pension investing after taking employer contributions, until you can live without needing benefits. Once you can do that the pension tax relief can get back to offering a better deal and you can switch money into the pension without risking becoming dependent on benefits, assuming normal investment performance long term.

It's unfortunate that lowering the income limit makes not using a pension more attractive for those who are determined to look after themselves and avoid benefits, but that's the effect and how those with that interest have to act.

penguinman

A question;

Assuming someone has the necessary £20,000 annual pension income, and a small amount , say £10,000, in a separate Money purchase pension pot. Under the proposed new rules, from April 2011, would that person be able to cash in the entire £10,000 pot, with first 25% at zero tax, and the rest taxed? Does anyone know?
Thanks

Loughton_Monkey

penguinman wrote: »

A question;

Assuming someone has the necessary £20,000 annual pension income, and a small amount , say £10,000, in a separate Money purchase pension pot. Under the proposed new rules, from April 2011, would that person be able to cash in the entire £10,000 pot, with first 25% at zero tax, and the rest taxed? Does anyone know?
Thanks

Yes, this is exactly what you can do. Indeed it is what every £20K+ pensioner really must do - providing he is 'happy' to put money away in funds [pensions being typically very poor for 'cash' savings].

In such cases, I view the new drawdown as a sort of "S&S ISA PLUS" investment. You see if you put £2,880 a year into an ISA, it will grow over X years to a certain amount. Let's assume we use 5 years, and lets assume the £14,400 total 'investment' is now worth £17,000.

In an ISA, that's exactly what you would have. £17K. But if you put it into pension, the fund would have received 5X£3,600 = £18,000 and could have grown at exactly the same rate to £21,250. So you throw it directly into drawdown, less the £5,312.50 Lump Sum, and proceed to draw the remaining £15,937,50 less tax = £12,750.

Hence your bank account now contains £18,062.50 instead of £17,000. That's the 'standard' 6.25% enhancement as a quirk of the tax relief.

The only complications are (a) a small charge for the drawdown, and (b) the danger that taking 100% drawdown might take you into 40% tax territory.

Loughton_Monkey

My last post gives rise to a new 'product' for banks. If they are prepared to go into this small market - of pensioners on £20K+ incomes. Any such pensioner may well be continuing to salt away cash into a Cash ISA wrapper. Now if banks would put the exact same ISA savings product into a Pension wrapper, then we would all be able to put £2,880 in per year, wait a year, and then take out our £900 tax free lump sum, and our £2,160 (£2,700 less 20% tax) PLUS the interest (less tax) on £3,600 [Say, another £80 at Halifax rates].

So £2,880 into £3,140 is 9%. Not bad!

penguinman

Thanks LM, I thought that may be the case from reading the proposed finance bill, but found it a little ambiguous. This all assumes the bill is passed in March by the House of Commons.

Thanks again, seasons greetings to all.

jamesd

Every pensioner with an income over £20,000 doesn't have to treat more as cash. They can leave it invested, buy an annuity, take some lump sum taxed as income or do are range of other things with it. Except that they can't get pension tax relief on it after using flexible drawdown, though they can under capped drawdown.

Your great product idea is scuppered by the lack of pension tax relief in flexible drawdown.

Loughton_Monkey

jamesd wrote: »

Every pensioner with an income over £20,000 doesn't have to treat more as cash. They can leave it invested, buy an annuity, take some lump sum taxed as income or do are range of other things with it. Except that they can't get pension tax relief on it after using flexible drawdown, though they can under capped drawdown.

Your great product idea is scuppered by the lack of pension tax relief in flexible drawdown.

I don't think my product idea is scuppered. It works. We can all throw in our £2,880 a year, get £720 from HMRC, earn £80 interest for one year on £3,600, then take £900 tax free and the remaining £2,780 less 20% as immediate flexible drawdown cash.

Just because you have put one pension pot into drawdown, doesn't mean you cant build up others and put them into drawdown later.

jamesd

"Capped drawdown" and "flexible drawdown" are to be two different things. The individual goes into flexible drawdown, not the pension. The consultation responses and replies:

"3.30 The draft legislation includes a number of measures which are intended to prevent tax avoidance. In particular, the Government proposes that:
... individuals in flexible drawdown should not be permitted to accrue further tax-relieved pension savings, in order to prevent “recycling” of tax relief."

Scuppered. Nice try, though.

For capped drawdown it will still be possible to make contributions to other pensions and continue to get tax relief.

While posting links, here's a link to the budget proposals page and directly to the pension income reduction proposal itself.