How can I unlock my pension?

Linton

JRRHartley wrote: »

Thanks for all your answers. I guess what I am really asking is; is there a way to get hold of my money and take it out of the restrictive pension scheme, and put it somewhere where I can invest more freely and pass down to my children without the 55% tax.

Sadly my wife of 59 years passed away last year, so there is no need for her provision. I just don't see why my children should lose out down the line.

I would really like to invest in residential property, where I believe there is good potential for growth, but I have been given the impression that this is not possible within a pension?

The 55% sounds horrendous, but actually isnt if your estate is liable to inheritance tax as otherwise you would still need to pay income tax and then there would be 40% inheritance tax.

So for example if you were eligible for unrestricted drawdown you could take the whole pot in one year as income, invest the money as you saw fit and pass the proceeds onto the kids when you died. But then the total tax paid would be higher than if you had simply left the money in the original pension.

As to investing a pension in residential property - you cant directly. But you can invest in companies that make money from residential property eg property trusts, or in some "residential" property that is not used for owner occupation - eg care homes and guest houses. So to some extent you can get the benefits of your belief in the residential property market.

Final point - the purpose of a pension is to provide income for yourself until your death, which could be say 30-40 years away. Do you want to compromise on your welfare during that long period for the benefit of the children who perhaps could be retired themselves by then?

dunstonh

I would really like to invest in residential property, where I believe there is good potential for growth, but I have been given the impression that this is not possible within a pension?

Its not possible. Thankfully, they backed down on allowing that.

I guess what I am really asking is; is there a way to get hold of my money and take it out of the restrictive pension scheme, and put it somewhere where I can invest more freely and pass down to my children without the 55% tax.

No.

You seem focused on this 55% but why? It only equates to taking back the tax relief. So, if you hadnt used the pension, the amount would be lower. So, they are no worse off by paying the 55%. Plus, they avoid 40% inheritance tax.

atush

Take the pension, and invest that money elsewhere to give to yoru children/ But they will pay 40% tax on it when you die, and ou would have paid tax on it too. So more than 55%.

As said, the only way around this is to give toi the children from income. If you don't want it to be spent right away, leave it in an acct in your children's names to build up until you die.

When your wife died, did she gift them some of her estate from her nil rate band?

Linton

okydoky wrote: »

No wish to hijack this thread but can someone elaborate on the above paragraph? My confusion is around the wisdom of taking drawdown early enabling the transfer of funds to a more flexible non-pension environment. If you are retiring early, say 56 and your savings equal the value of your pension pot, are you actually best to go into drawdown right away, rather than live off savings for a few years before touching the pension pot?

Or not??

In general I dont see any real point in moving money from one tax sheltered investment environment to another, such as an ISA. The investment options are much the same, if anything a pension is more flexible.

In retirement I believe you need both a good reliable income and a pot for emergencies and expensive luxuries. So its not a good idea to run your savings very low to avoid drawing down on a pension. Conversely its not a good idea to run your drawdown too low too early so that you are paying income tax now when you dont need the income.

Then there is the matter of the 25% tax free allowance. If you start drawing down now you have got to take the allowance now and so lose the potential extra tax free money you could have got in the next say 10 years as your pension pot increases in value.

So the answer I believe isnt a simple one thing or another. You need to work out a retirement financial plan which takes into account all the factors - a spreadsheet model would let you understand the implications of the various options.

JRRHartley

DunstonH - Would you suggest I purchase an annuity? I can't see the benefit. Also, why are you against making residential property possible as part of a pension portfolio. Thanks.

Linton

JRRHartley wrote: »

DunstonH - Would you suggest I purchase an annuity? I can't see the benefit. Also, why are you against making residential property possible as part of a pension portfolio. Thanks.

The main benefit of an annuity is that the income is guaranteed. The real risk of old age is that you live too long and run out of money. An annuity puts this risk onto the insurance company

The risk is a particular problem in periods of high inflation. An annuity provides the only way of guaranteeing an income that matches inflation. No other investment product or strategy can do this.

But annuities cost money - so it all depends on your attitude to risk. My attitude is that my minimal acceptable standard of living must be provided by annuities. Anything beyond that I am prepared to risk and so will use drawdown.

dunstonh

DunstonH - Would you suggest I purchase an annuity?

I dont know what you are trying to achieve to make any guess at what you should do. Maybe not commencing the pension at all could be an option.

Also, why are you against making residential property possible as part of a pension portfolio.

House prices are inflated enough as it is without giving another method to inflate them further.

jamesd

okydoky wrote: »

My confusion is around the wisdom of taking drawdown early enabling the transfer of funds to a more flexible non-pension environment. If you are retiring early, say 56 and your savings equal the value of your pension pot, are you actually best to go into drawdown right away, rather than live off savings for a few years before touching the pension pot?

The money inside the pension pot has more restrictions than money outside the pot. So the normal case is that it's best to take money from the pension as fast as possible and preserve or increase the money outside the pension.

There are some wrinkles to consider:

1. The pension tax wrapper allows investments that the ISA wrapper doesn't allow. The non-ISA, non-pension wrappers like spread betting allow some that neither allows. VCTs can't be held within a pension or ISA but provide tax free income for life and 30% tax relief on the way in, capped at the tax you actually paid in the tax year of the purchase.

2. The age allowance reduction region, since pension income is taxable while ISA income isn't. Other tax wrappers or none may or may not have extra tax to pay depending on what it is.

3. Income tax rate, it might not pay to become a higher rate tax payer with pension income if you're on the edge.

4. When you first take benefits from a pension you use a percentage of the lifetime allowance. That percentage is fixed for life, regardless of how much the pension and non-pension money grows. So taking the pension early reduces your chance of exceeding the lifetime allowance.

You don't lose out on the larger tax free lump sum from more years of pension growth by taking the lump sum early if you continue to invest it outside the pension instead of inside it. It just grows outside the pension instead of inside it.

My own current intent is to enter income drawdown as soon as I reach 55, regardless of whether I intend to retire at that age. If not retired I expect to continue making pension contributions to get a second tax free lump sum.

jamesd

JRRHartley wrote: »

I guess what I am really asking is; is there a way to get hold of my money and take it out of the restrictive pension scheme, and put it somewhere where I can invest more freely and pass down to my children without the 55% tax.

No. The 55% charge only applies if you have taken any benefits from the pension, so you could arrange to die before you reach age 75 and never take benefits from it.

You can split the pot and take benefits from some and not from the rest.

You can buy a life assurance policy with the pension income and have that pay out tax free.

JRRHartley wrote: »

I would really like to invest in residential property, where I believe there is good potential for growth, but I have been given the impression that this is not possible within a pension?

Residential property is a prohibited investment within a pension. Commercial property is fine. Group schemes like student accommodation can be OK.

jamesd

srcandas wrote: »

James that sounds fun but be blowed if I can see how it might work. ... Let's ignore burdening yourself with increased external, and for that matter internal, (to the pension pot) expenses.

Best not to ignore them but they should be less than a pension unauthorised payments charge.

srcandas wrote: »

We need to put at risk external money in order to gain external money. If we fail the only compensation is that internally we have increased the pot!

Right. That makes it cash neutral other than costs, so it cuts the risk. You can reduce the risk of money outside moving inside with an option or covered warrant in case things go the wrong way.

srcandas wrote: »

If the investment (gamble) outside works it would work whether it was balanced within the pot or not. Or am I missing something (probably ).

You're right. But quite a lot of people might not be particularly happy to say use triply leveraged ETFs inside a pension pot and say the same within an ISA or financial spread betting outside it without some serious balancing of risks. You can do it without leverage and protection but the target is to extract all of the money before the next three year review. No need to use the tools I mentioned, there's no shortage of choices. ETFs can be handy because they can be held inside an ISA.

And that's about the limit of sensible discussion of this. People who can't work out how to do it are probably also those who don't know enough to get it right and who shouldn't try it.