questions re changes to pensions and annuities

theGrinch

I have a few decades to go before hitting pension age (although my parents are not at pension age), but I have several questions regarding the recent changes announced to pensions and annuities.

I know its still early days and we are awaiting further details, but I would be grateful for any answers.

1. Will this £20k qualifying figure be indexed?

2. Is this £20k a gross or net figure?

3. Can this £20k include the state pension, savings and dividend income and employment income?

4. Does this £20k exclude any potential income that may be received from the funds taken out of the pension?

5. Does one have to wait until 75 to demonstrate the £20k income to withdraw, or can 100% of the money in a SIPP be taken beforehand at say age 65 or 70?

6. Who or what needs to be satisfied that you have the £20k means and is it a one-off qualification?

7. If you qualify to withdraw 100% of your pension pot, can you withdraw in increments rather than a single lump sum.

8. Will the money withdrawn be taxable?

Thanks.

McKneff

You sound as if you are far too young to be worrying about all this.;)

The rules will have completely changed by the time you reach retirement age.:cool:

dunstonh

Pension rules seem to change on average every 7 years. They have been getting gradually more and more relaxed each time. The options available in 20 years wont be the same as those today. By then, drawdown will probably be the norm and there wont be a limited option and flexible option but just one rule that fits everyone (just like the existing drawdown rule).

So, as McKneff says, don't worry about it now because you cant fine tune to that sort of level for the very long term.

middlepuss

theGrinch wrote: »

7. If you qualify to withdraw 100% of your pension pot, can you withdraw in increments rather than a single lump sum.

8. Will the money withdrawn be taxable?

I'll give you what I think are the answers to these two as I'd like to see if my understanding is correct.

7. Yes, you can withdraw in increments.

8. You can take 25% out of a SIPP/AVC/Stakeholder pension pot tax free. When you draw out the remaining 75% it counts as income so is taxed at your income tax rate. Of course, if you draw out a lot in one year that could push you into the 40% tax bracket in which case some of the pension you draw out would be taxed at 40%.

sixtysomething

Even after wading through the (linked) Treasury document, I still can't find out what would happen to a pension fund, if it was never used.

For example, if I pop off after receiving my telegram from the Queen, having never drawn a penny, (wife preceeding me).
If the fund formed part of my estate and was distributed to the children, would it be taxed or not?

Does anyone speak governmentese?

theGrinch

thanks for the answers. my parents are close to 70 hence my very close interest.

Loughton_Monkey

I caught a bit of "Money Box Live" today, where they talked about it.

The £20K certainly applies only to pension income. It can be State and Personal, but it MUST be pension. Even a purchased annuity won't do. Not sure whether that's gross or net.

You can elect any time after pension age to "chrystalise" your 'pot' of pension, and not wait until age 75. But of course the rules for your drawdown will apply at the time of chrystalisation. So no £20K, then no 'flexible' drawdown. It was strongly suggested that people will 'segment' their pension pots and chrystalise at different times, in order to give more flexible drawdown of lump sums and income. Especially those who qualify for 'flexible'.

When you do qualify for flexible, then yes, you can withdraw 100% all at once! [Fully taxable of course in that tax year]. Or you can draw down zero in one year, or for 10 years. Totally and utterly flexible in the true sense of the word I think. When pot is empty, then that's it!

As to who needs to know of the £20K, I can only assume that it will be a question on the application forms, and you would have to supply the source/provider. E.g. State Pension £6,137, Final Salary Scheme from XYZ Ltd. £10,599, Money Purchase pension in payment, Split Pea and General, £4,357.

But given that all these providers have, by law, to deduct tax, they all need code numbers, and so HMRC will obviously know the income when dishing out the tax codes - which will have to include the drawdown provider.

theGrinch

thanks for that. I will listen to it on iplayer.

I might have it wrong, but sounds very much like they want you to spend decades savings and they give you 20% relief, but dare to touch your own funds it and they wack 40 or 50% tax. I guess staying invested and having the choice of an annuity is a step forward.

taking_stock

hi grinch, in answer to some of the questions...

1. the £20k does not have to be index-linked, which is why it was set so high - and in recognition of 80% of money-purchase types choosing level annuities

2. £20k is the gross figure

3. the 20k can include only pensions - so aggregate of state pension, employer pension and personal plans - basically so that it is guaranteed income for life, unlike savings interest, dividends, earned income etc

4. any potential income is excluded - it has to be pensions already in payment, so if your state pension is part of it, then you have to wait until then, for example

5. the £20k income can be demonstrated at any time after age 55 and hence flexible drawdown taken anytime after 55 too.

6. the £20k is a one-off qualification (because you could then withdraw your entire SIPP funds the next day if u really wanted!) and it seems likely that the SIPP provider will need only a simple confirmation from the existing annuity provider and/or your tax office.

7. yes, most will withdraw as and when they see fit while keeping the remainder invested to maximise investment return. for eg, someone may withdraw a larger lump for purchasing a new car or moving house, but would possibly want to limit the withdrawal to keep within the basic tax bracket for that year.

8. oh yes! for tax purposes it will count as income, so you will pay your marginal rate on any money 'withdrawn' in that tax year. Eg if you already £20k (gross) from annuity, then you could withdraw up to £23k paying only 20% tax, but anything thereafter would be 40% (or 50% if you took enough).

Loughton_Monkey

theGrinch wrote: »

thanks for that. I will listen to it on iplayer.

I might have it wrong, but sounds very much like they want you to spend decades savings and they give you 20% relief, but dare to touch your own funds it and they wack 40 or 50% tax. I guess staying invested and having the choice of an annuity is a step forward.

Well let's be fair. It's your choice if you take so much of your drawdown fund that it takes you into the 40% bracket (or more).

For standard rate tax payers, the tax relief and tax on pension more or less cancel each other out. It's the 25% tax free lump sum that gives the investor a small 'edge'*. The best off people are those who contribute at 40% relief (or more) and then draw down at 20% tax.

Someone who is daft enough to invest at 20% tax relief, and then draw down at 40% tax paid would be a bit of a 'loser'.

[*which is why the tax free lump sum is important. Otherwise, if you put £80 in pension, while, I put £80 in S&S ISA, your £80 becomes £100, and grows, say 200% to £300. When you draw all this down, (without lump sum) you get £300 less 20% tax = £240. My £80 will enjoy same growth and be worth £240, just the same, and I can draw that totally tax free. Only the tax free lump sum makes the pension 'better' - for basic rate taxpayers who are destined to pay tax on all pension received.]

middlepuss

Loughton_Monkey wrote: »

...which is why the tax free lump sum is important. Otherwise, if you put £80 in pension, while, I put £80 in S&S ISA, your £80 becomes £100, and grows, say 200% to £300. When you draw all this down, (without lump sum) you get £300 less 20% tax = £240. My £80 will enjoy same growth and be worth £240, just the same, and I can draw that totally tax free. Only the tax free lump sum makes the pension 'better' - for basic rate taxpayers who are destined to pay tax on all pension received...]

Nice example, and very true - at the moment.

But who knows what the rules will be ten years from now? Will pensions or ISAs be the better bet? For 40% earners who will be 20% pensioners pensions are certainly a no-brainer at the moment.

But for 20% taxpayers back both the pensions and ISA horse - split your savings between the two. Yes, when you'll retire you'll wish you'd put more into one or the other but with the benefit of hindsight we can all see how we could have become rich.