MSE News: Compulsory annuities scrapped for all in pension shake-up

JamesU

jamesd wrote: »

JamesU, you used the wrong life expectancy table. You should be using cohort life expectancy - the life expectancy that someone living through the following year's health effects will have - not period life expectancy - the life expectancy if everyone lived with today's health effects. That's around 87 for men and 89 for women.

Jamesd, good point. Will update the post and calcualtions properly, and actuarially, based on CLE when I have a time. Addtional 2-3 years compounded will not impact significantly on the lower MIR based on average life expectancy though, so the point still stands.

Update done.

JamesU

jamesd

To show more about the way the new rule increases the amount you need to put into your pension by 20% under the new rules, here's how the reduced income levels work out today, using a 3.75% gilt yield to maturity:

                Male              Male              Female        Female
Age           Old income      New income   Old income    New income
55             6.36%           5.30%           6.12%          5.10%
56             6.48%           5.40%           6.12%          5.10%
57             6.60%           5.50%           6.24%          5.20%
58             6.72%           5.60%           6.36%          5.30%
59             6.84%           5.70%           6.48%          5.40%
60             7.08%           5.90%           6.60%          5.50%
61             7.20%           6.00%           6.72%          5.60%
62             7.32%           6.10%           6.96%          5.80%
63             7.56%           6.30%           7.08%          5.90%
64             7.80%           6.50%           7.20%          6.00%
65             8.04%           6.70%           7.44%          6.20%
66             8.28%           6.90%           7.56%          6.30%
67             8.52%           7.10%           7.80%          6.50%
68             8.76%           7.30%           7.92%          6.60%

So under the old rules both men and women could draw on capital from age 55, assuming 6% is the income level that produces no change at all in capital value, while under the new rule it takes until age 62 before a man can draw on the capital and age 65 for a woman, cutting out the capital drawing at the time when it's most needed, before the state pensions start.

About the best that can be done from this mess is to remember that the annual income allowance is a use it or lose it allowance, so it'll be best to start drawing the income immediately once you reach 55, even if you don't need it yet. You'll need to invest that income, perhaps in a stocks and shares ISA, else you'll have less retirement income when you do need it, because you'll have lost the investment growth for the years between taking it and needing it.

Not using pension contributions is also part of the solution, diverting some of the money into non-pension investments so that you can draw on that capital to help you last until the state pensions start. This mostly applies if you may be forced to stop working or may choose to retire at or soon after age 55. If it's 60 before that's possible then saving five years of the pension income may be enough to keep you going until the state pensions arrive.

Gatser

jamesd wrote: »

So under the old rules both men and women could draw on capital from age 55, assuming 6% is the income level that produces no change at all in capital value, while under the new rule it takes until age 62 before a man can draw on the capital and age 65 for a woman, cutting out the capital drawing at the time when it's most needed, before the state pensions start..

...and this was a MAJOR advantage of Drawdown, now killed off!

jamesd wrote: »

About the best that can be done from this mess is to remember that the annual income allowance is a use it or lose it allowance, so it'll be best to start drawing the income immediately once you reach 55, even if you don't need it yet.

Not using pension contributions is also part of the solution, diverting some of the money into non-pension investments so that you can draw on that capital to help you last until the state pensions start. .

A REALLY GOOD POINT, Jamesd
The new rules have removed any uncertainty (for me) about the level of Drawdown to take from 55.
My revised strategy is now:
* to 55: maximise income on which basic rate tax is suffered
Put as much as possible into ISA's etc
any income exposed to HR tax, contribute to pension.
* From 55: Drawdown max possible!
limit other income to remain below HR tax, thereby work less hours = semi retire
* From 67: +State pension... just hope I'm fit enough to enjoy it! :T

As someone who has always promoted Pensions saving, these latest moves to reduce Drawdown Income for the 55-66's is beyond belief.
I can accept the principle but not the practicality of it.

If "Mr Smith" has £1m in pension funds, why can't he drawdown at the 1.2 rate from 55? I cannot see how that would result in him becoming a state benefit claimant.... can anyone?
(and the extra income will be taxed so HM Treasury gain)

Loughton_Monkey

Gatser wrote: »

If "Mr Smith" has £1m in pension funds, why can't he drawdown at the 1.2 rate from 55? I cannot see how that would result in him becoming a state benefit claimant.... can anyone?
(and the extra income will be taxed so HM Treasury gain)

I think you will find he can, with careful planning.

Can't be a*r*s*e*d to work out the exact figures myself, but 'Mr Smith' can easily drip feed his £1m into drawdown. Write down the income he wants (say the 'old' 6.3% figure). Now calculate what fund at 25% tax free plus 1st year drawdown at 5.3% gives him the equivalent of 6.3% income.

Alternatively, of course, he can use 40% (or so) of his £1m to buy his £20K annuity and then he can draw the rest 100% flexibly.

Gatser

Loughton_Monkey wrote: »

I think you will find he can, with careful planning.

... 'Mr Smith' can easily drip feed his £1m into drawdown. Write down the income he wants (say the 'old' 6.3% figure). Now calculate what fund at 25% tax free plus 1st year drawdown at 5.3% gives him the equivalent of 6.3% income.

Alternatively, of course, he can use 40% (or so) of his £1m to buy his £20K annuity and then he can draw the rest 100% flexibly.

But Mr Smith has suffered unfairly because of the changes.

BEFORE: He could enjoy £250k Tax Free
Then enjoy £750k x 6.36% = £47.7k pa

NOW: He still wants to enjoy his £250k
but then he will get £750k x 5.3% = £39.8k

My argument is, why should Mr Smith be forced to waste his pension funds (£400k out of his £750k) on an annuity.
He should be allowed to drawdown at:
£400k x 5.3% = £21.2k
plus
£350k x 5.3% x 1.2 (or more) = £22.3k
Total Drawdown = £43.5k

This seems a fairer compromise to protect drawdown funds.
I accept that Mr Smith may decide to put all his pension money into "The Icelandic Financial Tigers Fund" ... so that is a real risk....

At the end of the day, I am TOTALLY opposed to the concept that we should be made to hand over hard won pension funds to Insurance Companies and accept some meagre returns with possibly little return of capital.

jamesd

Loughton Monkwy, Gatser was positing the a million Pounds already in the pension pot. You're right that not putting the money into a pension is one of the options that can be used.

With a million Pounds spending some of the money to buy an annuity is wasteful (because of the low annuity returns) but affordable and it still leaves a lot of money to be invested while flexible drawing at 40% or 50% income tax rate can go on.

The limit is more of an issue for the more ordinary retirees who don't need as much as even the average £18,000 of pensioner income but do need some higher rate of income before the state pensions start to cover for the missing state pension money.

Moving up the target income band the flexible drawdown amount is too large, I think, even for those taking over £40,000 a year in income. Much of that can be expected to be outside a pension but even if it was all within a pension it's not efficient to have so much of the money used to buy a £20,000 annuity and just £13,000 left in drawdown (with £7,000 state pensions).

Sadly the net effect of these changes is a substantial reduction in flexibility at the time when it's most needed, coupled with higher taxes on ordinary retirees to pay for an inheritance tax gift for the richest retirees. Sad because it's not what I expect from any government including a Liberal Democrat component and it's more like the old style Conservative stereotype to tax average people to pay for benefits for the rich. A lost opportunity.

Loughton_Monkey

jamesd wrote: »

Sadly the net effect of these changes is a substantial reduction in flexibility at the time when it's most needed, coupled with higher taxes on ordinary retirees to pay for an inheritance tax gift for the richest retirees. Sad because it's not what I expect from any government including a Liberal Democrat component and it's more like the old style Conservative stereotype to tax average people to pay for benefits for the rich. A lost opportunity.

Well I suppose it is and it isn't. For those without £20K pension, and wanting to take 120%, then that's tough. I guess they are still nervous about people drawing down too much and then becoming a burden on the state.

I am lucky enough to have existing pensions well above the £20K limit. I have others (not yet in payment) and am still tucking my £3,600 into Stakeholders. So in about 10 years, when approaching 70, I have total flexibility. My only 'limitation' is I would have to take it out only up to the limit before 40% tax.

Although not a lot of money, everyone on flexible drawdown will presumably claim their 'free' £180 every year (almost as good as the heating allowance!). Simply bung in £2,880 on day 1. Take £900 on day 2, leaving £2700 to be tucked into the drawdown pot. Day 3, draw down the £2,700 less tax (£2,160).

hugheskevi

Although not a lot of money, everyone on flexible drawdown will presumably claim their 'free' £180 every year (almost as good as the heating allowance!). Simply bung in £2,880 on day 1. Take £900 on day 2, leaving £2700 to be tucked into the drawdown pot. Day 3, draw down the £2,700 less tax (£2,160).

Once you have done flexible drawdown you can no longer make any further contributions and receive tax relief.

jamesd

Yes, those with £20,000, perhaps from a work scheme, will be some of the winners from this, since they will be able to take unlimited capital from their other pensions, subject to income tax, once their £20,000 or more pension starts paying out.

Gatser

jamesd wrote: »

Yes, those with £20,000, perhaps from a work scheme, will be some of the winners from this, since they will be able to take unlimited capital from their other pensions, subject to income tax, once their £20,000 or more pension starts paying out.

So, thanks to the Governments latest changes, those people with FINAL SALARY SCHEMES are the WINNERS....again!

I thought I voted for better treatment than this!