Annuity or Drawdown

westy22

2. Assuming the OP is a tax payer his doesn't achieve anything, you are simply taking money from pot A and moving it to pot B with tax paid when money is taken from pot A and then tax relief claimed with it is paid into pot B.

Yes, that transaction is, in itself, tax neutral but Pot B is now eligible for a further 25% TFC at some stage in the future. This provides a potential ~ 6% uplift.

CannySaver_2

westy22 wrote: »

This provides a potential ~ 6% uplift.

I'm afraid not, assuming income tax and tax relief are at the same rate, there is no more cash.

You are simply able to take it as a tax free lump sum and not income.

No uplift on the amount of money just a different way of taking it out of the pension.

jem16

CannySaver wrote: »

3. Re RDR (Retail Distribution Review) and waiting until November, I'm not sure of the merit in this, really can't see what product development is going to happen in four short months.

It's not product development that will happen. It's how platforms will charge depending on whether bundling of product charges will be banned or not. Some platforms are already unbundled like Transact and Elevate but others such as HL, Fidelity and Cofunds would have to change their charging structure if bundling was banned. Skandia are reported to have 2 sets of charging organised and are just waiting to see how the FSA report goes. It would probably seem daft to jump onto one platform just now which may have to change.

CannySaver wrote: »

No uplift on the amount of money just a different way of taking it out of the pension.

If you take the tax free lump sum out of one pension and immediately put it into a new pension it gets an uplift of at least 20% tax relief. Later on you take the 25% tax free lump sum from that new pension so your gain is approximately 6%.

jamesd

CannySaver wrote: »

1. Re taking income drawodwn early to make ISA contributions. Unless I am misunderstanding you this makes no sense, why incur an income tax charge of 20%. 40% or even 50% just to make an ISA contribution?

The amount of income that you can take each year from a pension pot is capped by the GAD limit calculation. There is no accumulation of the allowances from past years to use later. So you take the maximum income each year and invest it outside the pension. That amount outside the pension can then be used to increase your income in later years or just as a greater lump sum. It's a way around the GAD limit. At 40% tax it's probably better to use new pension contributions if tax will be 20% at final retirement time.

Taking the money earlier and using it in this way has at least four other possible benefits:

1. The amount of the pension lifetime allowance used is calculated as a percentage at the time benefits are first taken. Taking them earlier shifts some of the growth outside the lifetime allowance test because subsequent growth isn't in the pension. And the part inside the pension is also no longer subject to the test, however much it grows by.

2. In the ISA the ongoing investment income is free of additional tax and not counted as taxable income for age allowance reduction calculations.

3. The money in the pension pot is subject to periodic GAD recalculations that can reduce the permitted income if they happen to be done at a time when markets are down. This doesn't apply to money in the ISA pot so the result of a combination can be a smoother income.

4. The family member may also be in a job where salary sacrifice pension contributions are available. Using the pension money for income and sacrificing the same amount of after tax salary can produce an additional gain due to the saved NI from the sacrifice.

Three of those depend on whether specific factors apply, the income smoothing potential is always there. So is the benefit for dodging the GAD test.

CannySaver wrote: »

2. Assuming the OP is a tax payer his doesn't achieve anything, you are simply taking money from pot A and moving it to pot B with tax paid when money is taken from pot A and then tax relief claimed with it is paid into pot B. If the OP is a non taxpayer (including the pension income), which is unlikely but I guess possible then this coud have some benefit up to the maximum contribution level of £3,600 gross pa

Take £100 from a pension pot. Pay 20% tax. Pay into a pension and get 25% added to bing it back up to £100. Now take 25% tax free cash from the pension. That has changed from 100% taxed to 75% taxed. The price paid is reduced capital outside the pension because 75% remains in it.

The tax paid has been reduced from £20 (on £100) to £15 (on £75) at basic rate. At higher rate from £40 to £30.

CannySaver wrote: »

3. Re RDR (Retail Distribution Review) and waiting until November, I'm not sure of the merit in this, really can't see what product development is going to happen in four short months.

Other than the major platforms having been developing new versions and the chance that paying by commission will be banned? Those are pretty significant changes and all that they are waiting for in some cases is for the FSA to announce what it's decided.

It's potentially a very big deal, with the pricing models of some major players possibly being banned and some significant increase in competition as they all fight for market share with new offerings.

CannySaver wrote: »

the lump sum death benefits are taxable at 55%, compared to zero tax on no protected rights prior to retirement.

There is no 55% tax if the money is paid into another pension. If there's a desire to have a 100% payout outside a pension, life assurance can make up the difference. The cost of the life assurance is likely to be less than the benefit gained.