SIPP, Hargreaves Lansdown and Funds 2006 (dunstonh)

jamesd

First a bit of clarification. Two main ways to take income from a pension pot: buying an annuity or using income drawdown. Or you can do some of each. Income drawdown generally does better at younger ages and annuity purchase starts to become better sometime after 75 or so, or at younger ages if someone isn't inclined to take stock market/ corporate bond investment risks.

The GAD limit applies regardless of the size of the pension pot, it's a percentage of the pot value that can be taken in annual income. Here's a calculator for the GAD limit. You can take up to that percentage as income, or any lower amount. It's an annual use it or lose it allowance and has to be recalculated every three years, for which there's a small charge by most pension providers - not an excessive one from Skandia or HL.

£100k definitely isn't too small, though some annuity vendors and the MSE guide says it is. It's particularly wrong about it in the case when there's a workplace pension or other income that's providing most of the income, as in your case. It really depends on the rest of the income picture, risk tolerance and the other available income.

You can continue to pay into the pension if you like. What you should really do is calculate what your steady income level can be and see whether you can meet your income needs until the work and state pensions start. If you can't do that after making more pension contributions then you can try again with ISA contributions that let you draw on the capital at a higher rate.

Ideally you want to be able from day one to get the same income as you will get with the work and state pensions in payment. If you can manage that and are happy with it then you could retire as soon as you get to that point. If you need more than that then you also need to have some of the non-pension capital left to top it up with extra income.

The anti-recycling rules only apply to the lump sum and it's a common technique to take income from one pension and put it into another if the capital isn't required. The rules don't bar all lump sum recycling. You can recycle 30% of the lump sum without breaking the recycling rule.

An AMC of 0.1% would be for an institutional tracker fund. Something like the Blackrock institutional FTSE All Share Index tracker. £68.50 is the Skandia annual admin charge.

I'll leave it to dunstonh to comment on the deal you're offered.

There would be a small charge from Skandia to transfer out, I think under £100. Nothing from the adviser unless you used them for some of the work. For comparison, Hargreaves Lansdown charges £75 for a transfer out in cash.

I think you're better off with no fee over the longer term, so not the Clubfinance deal. Just a case of working out how many years it takes for the extra 25% of the renewal commission to become greater than £500 to work out how long it takes to break even and get ahead.

dunstonh

£100k definitely isn't too small, though some annuity vendors and the MSE guide says it is.

It's a historical figure going back to when charges were higher and most providers had a £100k minimum. It needed a higher value to be cost effective. Nowadays the drawdown charge can be just £50 a year. So, the value you can do it with can be lower.

Anything that still says £100k is obsolete. Nowadays, the greater focus is on how much other income there is in addition to the unsecured income and whether there are the risk is appropriate.

£500 Execution only with nil set up commission
Investor Charge of £68.50 - is this the same as the platform charge?
No initial charge on funds (including swwitches)
All fund based trail commission rebated
Net AMC of 0.5%

Investor charge is the platform charge. Cheapest funds on Skandia at this moment are the Blackrock class D index trackers at 0.2-0.3% TER.

When you say Net AMC of 0.5% is that the fund charge is an explicit charge from the IFA firm?

I think £500 to get you on platform with natural trail rebated is a good deal.

optimist_2

Thanks very much for your contributions, Jamesd and dunstonh. I will come back and continue the thread tomorrow.

optimist_2

OK, I have just had a look at the GAD tables, and they are telling me that for a 100k pension, taking 25k as a lump sum, the maximum drawdown pension per annum is £55 per £1000 or £5,500 per annum. Does that sound about right? However, you can't seem to use a date in the future to match with the age you might want to take benefits, so I have had to used yesterdays date. Does that matter, or is it just your age that is important? If I reduce the lump sum to 10k, the maximum drawdown pension increases slightly, but the maximum drawdown pension per £1000 (per annum) stays the same. What should the Gilt Index Yield be set to (the default is 4.00%)? These results are very similar to the income you would get from an annuity, I think, but obviously the fund is still invested. Do you have to take an income once the fund is in drawdown or can you just take out the lump sum, keep the fund invested, and take the income at a later date? Aren't there plans to make PPPs/SIPPs even more flexible in the future, by allowing you to take the other 75% of the fund as a taxable lump sum? So, for 100k, you could take 25k as tax free cash and also the other 75k (after tax). As this has been taxed, there would be no restriction on reinvesting in ISAs. Isn't that another way of doing it? At what rate would the tax be calculated? Thanks.

jamesd

That's about right.

You can't go into the future because the GAD calculation has as one of it's key pieces the interest rate on a 15 year gilt in the previous month. That's constantly changing. 4% is about right at the moment. It'll probably increase over time as the effect of quantitative easing fades away and hence so will the limit.

You can see the effect of age by changing the age now. The income increase with age. So over time it becomes higher than the annuity income.

You don't have to take an income if you don't want to. It's fine to take the lump sum and leave the money invested, then take an income later. Though it often won't be the best thing to do if you're restricted by the GAD limit, because that's a use it or lose it annual allowance. So it'll often be better to take the income and invest it outside the pension, then you can draw on that to top up the income from the GAD-limited pot that's still in the pension.

The GAD limit only applies to what is now called capped drawdown, what was called just drawdown before (or more technically, was called unsecured pension before age 75 and alternatively secured pension after).

If you have at least £20,000 of pension income from annuities, workplace defined benefit schemes or the state pensions that are currently being paid you will be able to use flexible drawdown instead of capped drawdown. Flexible drawdown lets you take as much of your pot as you like, subject to normal income tax. So take out enough to go over £150,000 income and you'd be paying 50% tax on the money.

The effect of the £20,000 limit means that for most people it will be more practical to start taking a pension income at age 55 and invest the money outside the pension if they will need more income than the GAD limit allows. This is particularly true before state retirement age.

The big winners from flexible drawdown are likely to be government employees and the relatively few people in the future who will have private sector defined benefit pension schemes. Also big winners are those with unusually large pension pots, such that buying a £20,000 level annuity to quality for capped drawdown won't use much of their pot.

The big losers with flexible drawdown are those who want to retire before state pension age and who have ordinary pension pot values. They won't be able to use flexible drawdown because they won't be able to get over the £20,00 income requirement but will still be affected by the 18% reduction of capped drawdown income levels that was introduced at the same time as flexible drawdown. Starting to take income at 55 and investing it outside the pension is the best workaround.

optimist_2

Thanks.

What is the difference between unsecured and secured pension?

I read somewhere that you should only take out a lump sum and go into drawdown before retirement, if absolutely necessary. The remaining 75k will grow more slowly. Are there the same investment options pre and post drawdown? If you needed a second lump sum from a second pension, it would take a long time to build anything meaningful at 5k a year, so don't you really need something bigger than 100k? You will also be taxed on the income, before reinvesting in the second pension. Is all pension income taxed at the appropriate rateher it be from drawdown, annuities, or defined benefit schemes? Is there any situation when you are not restricted by GAD limits (apart from flexible drawdown)?

My immediate reaction is that I might be better investing more in ISAs over the next few years. I currently have less than half my pension fund in isas, so this would balance things out, and give me more options later on. You avoid any tax issues, is totally flexible, but miss out on the tax break on pension contributions. If you invest in a stocks and shares ISA and PPP on the same platform, can you transfer funds from the ISA into the PPP at a later date?

jamesd

An annuity is a secured pension.

It's not accurate that the remaining 75k will grow more slowly. You have identical investment options after taking the lump sum to those you had before. For the lump sum you have very similar investment options in a S&S ISA tax wrapper or with more potential to be taxed, outside any wrapper.

Arguments about it being wrong to take a lump sum and go into drawdown before retirement generally assume that the money is being spent, not reinvested for retirement. If it's being reinvested most of those arguments vanish because the money is still there. The lump sum part becomes available to eliminate entitlement to means tested benefits or to bankruptcy so it's not quite as protected as it was in a pension. There's also a difference in what happens if you die before or after taking the money, if it's not paid into another pension by the beneficiaries of your estate.

Reinvesting to get past the GAD limit and meet income needs for retirement before state pension age is fine as a reason to do it - you're not actually spending it yet. Same for taking it to put it into another pension pot to get another tax free lump sum, it's standard planning.

It takes a while to accumulate a large pot at £5k a year but that's still more per year than most people put into pensions. £5,500 before tax relief becomes £6875 after basic rate tax relief, enough for another £1719 of tax free lump sum with £5156 to add to the pension pot that's in drawdown. Or for higher rate it's £2291 and £6875.

All pension income is subject to income tax, none from a pension is subject to NI. The tax free lump sum is the only part that's not subject to the GAD limits in the UK. If you were to move abroad you could transfer to a QROPS and those may have different limits, some better, some worse. For example, in France you'd be barred from taking any lump sum, while in some other places it might be 30% or more.

Yes, you can transfer money from an ISA into a PPP. The investments have to be sold, cash transferred, then the investments rebought. All of the providers will have some way to do this reasonably conveniently because it's a fairly common approach.

ISA first means you don't get the pension tax relief but for the flexibility it can definitely be worth taking the ISA tax breaks instead. Moving it into a pension as you get older and have less need for capital outside a pension can also be useful, since the GAD limit increases and becomes less of a factor as you have fewer years before getting other pension income and as you get older.

optimist_2

James, thanks.

A unsecured pension being one that is in drawdown, and therefore still dependent on stock market performance.

If you transferred money from an ISA (cash or S&S) into a PPP, would you get tax relief at this point? I also hadn't realised that you could invest a tax free lump sum in an ISA.

If you take income from a pension fund in drawdown, you will get taxed at your top rate of tax ie 20%, 40% etc, but you will only get that back if you reinvest in a PPP rather than an ISA.

Can you elaborate when you said that taking income from a drawdown fund under the GAD rules is a 'use it' or 'lose it' scenario.

Lastly, can you transfer a pension fund that is in drawdown?

optimist_2

I have just heard back from the IFA I have been put in touch with, and he says that FSA regulations now effectively prohibit execution-only transactions, for reasons of professional indemnity insurance and stringent compliance legislation. The FSA have recently tightened up on this. Is this correct?

dunstonh

optimist wrote: »

I have just heard back from the IFA I have been put in touch with, and he says that FSA regulations now effectively prohibit execution-only transactions, for reasons of professional indemnity insurance and stringent compliance legislation. The FSA have recently tightened up on this. Is this correct?

You cannot do execution only defined benefit transfers.

Many compliance companies, PI providers have also insisted that some money purchase transfers not be made on execution only basis either.

Some firms just refuse to do execution only outright.