New Pension Drawdown Rules today.

Loughton_Monkey

jamesd wrote: »

"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."

Bustards!

Nothing wrong with a bit of tax avoidance.

Is it possible, do you know, to 'elect' for capped drawdown, continue to contribute for a while, and then at an appropriate moment, transfer the whole shooting match into flexible drawdown? [Subject of course to having the £20K underlying].

jamesd

Yes, no problem at all to do that, for the small minority of retirees who will be in a position to do it. The rules only count pensions currently being paid so for a pension wealthy pensioner retiring before state pension age it'll be normal to wait at least until work pensions start, then perhaps also until the state pensions start, before there will be enough money in payment to allow flexible drawdown.

I write "pension wealthy pensioner" because pensions are being reduced in importance for the ordinary well off population, accelerated by these changes, and aren't where I expect a large chunk of the wealth of most well off pensioners to be. Property, ISA and non-tax-advantaged investments are things that I expect to be ever more important.

Loughton_Monkey

jamesd wrote: »

Yes, no problem at all to do that, for the small minority of retirees who will be in a position to do it. The rules only count pensions currently being paid so for a pension wealthy pensioner retiring before state pension age it'll be normal to wait at least until work pensions start, then perhaps also until the state pensions start, before there will be enough money in payment to allow flexible drawdown.

I write "pension wealthy pensioner" because pensions are being reduced in importance for the ordinary well off population, accelerated by these changes, and aren't where I expect a large chunk of the wealth of most well off pensioners to be. Property, ISA and non-tax-advantaged investments are things that I expect to be ever more important.

Agreed it's a small minority. Luckily I am in that position where I have a core FS pension being paid at over £20K a year, (although this only covers a proportion of my spending). I have a couple of other pension pots available and am also electing to pump my £3,600 minimum into pension (and for Mrs Loughton Monkey of course).

I guess everyone else in that situation will recognise that - in a sense - all of those non-pension assets you allude to - cash. ISA's. Other investments - are indeed 'in flexible drawdown'! Fully self administered. That's the nature of the beast when you're trying to live the rest of your life on a bag of assets. So it's no 'skin off the nose' to (a) delay the pension pot parts, and (b) build them up to leverage the 6.25% 'boost' on £2,880 per year. At some stage - probably quite late - the pension can go to flexible drawdown at quite a high level.

There seems to me an irony in your (correct) assertion that pensions will lose favour for the well-off middle aged, who will drift towards ISA's etc. And yet when we actually reach pension age, there's something to be said for building up funds for flexible pension drawdown.

jamesd

Yes, there's irony there alright. Good to read that you're able to benefit.

BeatTheSystem

Regading these new rules. Does anybody know whta would happen if say someone has at age 55 built a pot of £2M. This is 500K over the 1.5M limit. I understand that this 500K would be taxed at 25% if put into income such as an annunity or 55% if taken as a lump sum.

The remaining 1.5M, say 25% is taken as tax free lump sum and the rest put into drawdown but at a rate much lower than fund growth and the fund soon grows above 1.5M again, would there be further tax to pay becuase the fund has breached the 1.5M limit?

Not saying this is the best strategy, just a question.

Thanks

BTS

Boondocks

LOST reply to Boondocks - 100% of GAD at your review date, only if the review is after 5th April 2011, else you could get away with 120% post review.

Alas my review is 24th April so all my careful financial planning is wasted by a 16.7% drop in income to say nothing of the GAD rates falling too.
The draft Finance Act does mention something about "Transitional Provisions" but the wording is too complex for me to decode if that applies to people like me

Boondocks

Careful_ly wrote: »

I think bringing forward the 5 year review to sometime between now and April will have to happen, that will take him closer to 65 when his other pensions become due.

I believe that an individual's 5 year review dates are set in stone when you first crystallize your benefits, so you can't bring your review date forward.

jamesd

Boondocks, they aren't set in stone. If your pension provider refuses to do an additional one you should ask them to explain why and consider moving to another provider.

BeatTheSystem, if you will have pension pots exceeding the new limit in April then you should contact HMRC by 5 April 2012 to inform them of this and ask for "fixed protection" so that you won't be subject to the reduced lifetime allowance. The form you'll need to use isn't available yet. If you already have enhanced protection or primary protection this won't apply to you. You can apply for fixed protection even if your pension pots aren't yet over the new limit but you lose the protection if more money is paid into a pension scheme, so you should only do that if you think you'll go over the limit even without paying more money into a pension.

The charge for going over the lifetime allowance is only made at the time of a benefit crystallisation event, normally taking a lump sum, buying an annuity or going into income drawdown. Since you already had a BCE when you took the lump sum initially there's no additional test if you invest well and go over the limit later. If you have several pensions, each time you have a BCE you'll be told what percentage of the lifetime allowance has been used. You'll need to track this and file a tax return if you exceed the limit.

If you take benefits/have a BCE before 6 April 2012 you'll use up a percentage of the current £1.8 million limit. That percentage used is the one that is tracked so there's possible benefit in doing this before the new limit arrives.

You can only take up to 25% of the lifetime allowance as a tax free lump sum. Looks as though you knew this but worth mentioning.

If you think you might go over the lifetime allowance there's a good chance that it's to your advantage to take benefits as soon as possible, so that you've less chance of your future investment growth taking you over the limit. Since the GAD limit is a use it or lose it allowance you'll also probably gain by being able to start taking this amount of income as soon as possible, so you don't lose any of the possible income. You should invest it, perhaps in a S&S ISA, if you don't really need it as pension income to live on yet.

BeatTheSystem

Jamesd,

Thank you for your reply.

At age 55 without further contributions at 7% growth the fund value should be 1,710K

It seems sensible to apply for fixed protection before April 2012.

Do you know if I can I contribute between now and then or should contributions cease now?

I am not sure what to do regarding contributions, it is not guaranteed that the fund will grow at 7% each year every year for the next 13 years (until age 55). Makeing large employer contributions is incredibly tax efficient still.

Once again thanks, you seem to know your stuff...

Loughton_Monkey

Boondocks wrote: »

Careful_ly wrote: »

I think bringing forward the 5 year review to sometime between now and April will have to happen, that will take him closer to 65 when his other pensions become due.

I believe that an individual's 5 year review dates are set in stone when you first crystallize your benefits, so you can't bring your review date forward.

You can have a valuation at any time you are prepared to pay for it.

As has been said many times: Those already in drawdown and wish to protect their 120% for a further 5 years must get a valuation before April next year.