Pension Tax relief

JOHNGT

No, you don't need to commit to this every year. If you wanted to do this for 3 or 4 years then fine.

One word of caution - this is a good idea for those in good health - in fact, the longer you live the better. If you are in poor health, you might be better keeping your money in an ISA.

You should also be careful not to turn all your capital into income just because it is tax efficient. If you have enough income then there is no great need to create more, although you could start saving excess income (and the tax free lump sums) in ISAs thus rebuilding your capital.

zagfles

Loughton_Monkey wrote: »

No. I am simply paying into them and watching them grow.

Since I have well over £20K in 'secured' pensions, I can use 'Flexible Drawdown'. So in my case, the strategy is very clear. It is (a) an extension of S&S ISA, where I can invest in funds without fearing CGT, with (b) a 'bonus' of the tax free cash lump sum which is effectively 6.25% 'free' money.

For my wife, it is (b) only.

Given that I am early retired, my 'game' is to manage my available cash in an optimum way. For the last 5 years, at least, the combination of equities growth, fixed term cash interest, and 'instant' cash interest has given me enough income not only to supplement my pension income, but actually to grow my asset base. It should be shrinking gradually.

But as I get older, I need to wind down the %age equities - but the pension will be the last to go - because of the tax relief.

I thought that if you use 'flexible drawdown' you can't then contribute the annual £3600?

kidmugsy

I echo JOHNGT: once you've stopped working it's a good deal easier to turn capital into income than income into capital. So capital stored in ISAs may be a wiser choice than capital converted into income by means of a pension.

In my case, we've made a few years of pension contributions for my wife because (i) she's short of pension and we need to think of the years after my death, and (ii) she has some personal allowance against income tax unused, so we may as well exploit that while I'm still on the go. We tell ourselves that we have enough capital left over to be able to afford this strategy.

jem16

JOHNGT wrote: »

You should also be careful not to turn all your capital into income just because it is tax efficient. If you have enough income then there is no great need to create more, although you could start saving excess income (and the tax free lump sums) in ISAs thus rebuilding your capital.

I think you should also be careful not to turn capital into so much income that you end up in danger of paying more tax when your higher personal allowance at age 65 and above is reduced.

robbieroy

Thanks JOHNGT, kidmugsy and jem16 for your prompt responses and food for thought.

I did a projection of my income from my annual main pension income for when I hit the big 65 and it will be approximately £19,733 (gross and assuming a 3.5% annual increase).
Add to this my projected state pension income of what might be £140 per week gross then this would give a total gross income of £19,733 + £7,280 (gross state pension) = £27,013
This would appear to be over the income limit which is presently £22,900 for those 65 - 74 years old.
I don't know whether or not to subtract the personal allowance from the gross total but if I did that then this would give me a taxable income of [£27,013 - £9,490 (personal allowance)] = £17,524
So if my taxable income is based on gross income minus personal allowance then I am under the income limit of £22,900.
Any feedback on the above is more than welcome.

FYI - I got an quote from a company and the figures were:
Payment - £2,880
Basic tax relief - £720

---

Total Purchase price £3,600

Immediate tax free lump sum - £900
Annual gross pension payment - £104.80

Fees are an advisor's commission of £130,50, but if I don't go through and advisor then the fee will only be £30.50

Any comments welcome
RR

jem16

robbieroy wrote: »

I did a projection of my income from my annual main pension income for when I hit the big 65 and it will be approximately £19,733 (gross and assuming a 3.5% annual increase).
Add to this my projected state pension income of what might be £140 per week gross then this would give a total gross income of £19,733 + £7,280 (gross state pension) = £27,013
This would appear to be over the income limit which is presently £22,900 for those 65 - 74 years old.

You would also need to assume the age allowance limit would also increase.

Perhaps better to look at today's figures as a guide - i.e. basic state pension of £97.65 times 52 plus your current main pension. You also need to add on savings income and dividend income from investments.

I don't know whether or not to subtract the personal allowance from the gross total but if I did that then this would give me a taxable income of [£27,013 - £9,490 (personal allowance)] = £17,524

No you don't subtract the personal allowance. It has to be the gross figures of all income.

Loughton_Monkey

zagfles wrote: »

I thought that if you use 'flexible drawdown' you can't then contribute the annual £3600?

Not once it's in flexible drawdown. I plan to do this a few years down the road. Certainly not yet.

Loughton_Monkey

robbieroy wrote: »

FYI - I got an quote from a company and the figures were:
Payment - £2,880
Basic tax relief - £720

---

Total Purchase price £3,600

Immediate tax free lump sum - £900
Annual gross pension payment - £104.80

Yes, this is broadly how it works. You can do this every year and build up a bigger pension. This method means you are not carrying the investment risk.

Alternatively, like me, you could accumulate you annual contributions - wait for your secured pensions to be above £20K, and then put the non-lump sum part into flexible drawdown and take as much out as you can without getting into 40% tax. [Then draw out the remainder the following tax year].

As mentioned above, you can't 'flexibly withdraw' every year's contribution because once you have invoked a flexcible drawdown, you are 'banned' from contributing again.

So to summarise, if you wish to use small pension allowances to 'leverage' the tax relief, you follow one of two strategies:

1. Put your £2,880 in every year. The 'day after', you withdraw the £900 and put £2,700 into an annuity. Keep doing this and build up your annuity. In this scheme, you are getting good tax advantages, but irreversably converting capital to income.

2. Build up your £2,880 every year. Carry the investment risk. In a few years down the road, choose a time when equity prices are 'high'. Then crystalise it by taking the full 25% lump sum, and put the remainder into flexible drawdown. Now draw out the pot as fast as you can - subject only to no breaching the 40% tax limit in any one tax year. This scheme carries an investment risk.

saintalan

Loughton_Monkey wrote: »

...
As mentioned above, you can't 'flexibly withdraw' every year's contribution because once you have invoked a flexcible drawdown, you are 'banned' from contributing again.
...

Hi, good thread.

Does the above mean per plan?

For example, if you have taken an Income Drawdown instead of an Annuity at retirement then this will apply.

Thanks

Alan