Spread the tax free cash from sipp

SeniorSam

I retired a couple of years ago and have a pension pot growing reasonably well using my own selection of life funds and now it's almost £300k. I do not immediately need additional income, but may need to draw capital from other investments such as ISA's to prop up the state pensions and other bits we both get of around £30k pa. We are both age 71.

I would appreciate clarification on the following points:-


(1) Can someone please clarify this 'age 75' rule. I was under the impression that the rule had been set aside, but will a crystalised drawdown pot be taxed? When I started my SIPP, the rule was not limited to any age.

(2) I would also appreciate clarification on the 'equalisation' rule that will be coming into effect soon. Is this likely to affect the amount I can draw from my SIPP (GAD rate) ?

(3) If my SIPP TFC is not all needed, can take a few TFC amounts over a couple of years, up to the limit of 25%, and not actually start the drawdown of the remaining pension at all ?

Would appreciate advice on this . Thanks

Sam.

mania112

1) it's no longer necessary to convert to an annuity at age 75. There are one or two changes at 75, however. You can no longer contribute to a pension, your income (based on gad rate for any crystallised funds) is reviewed every year, rather than every 3 years.

I think the death benefits alter at age 75 too, but I'm not sure on that.

2) GAD rate shouldn't be affected by gender equalisation because draw down income is not different for men and women already. However, Annuity rates are based on Gilt Yields and so are GAD rates, so you can't rule out a knock on affect, although I wouldn't be concerned about it.

November will see GAD rates drop again to 2% which is as low as it can possibly be, so there's only one way it can go in the future.

3) assuming your SIPP allows you to convert to drawdown, then a partial drawdown will also be possible and commonly utilised.

Edit: yes, with death benefits - from age 75 you will be taxed on all pension funds (currently 55%) whereas under age 75 only the crystallised amount will be taxed on death.

kidmugsy

mania112 wrote: »

Edit: yes, with death benefits - from age 75 you will be taxed on all pension funds (currently 55%) whereas under age 75 only the crystallised amount will be taxed on death.

Hold on: presumably a widow wouldn't pay 55% tax, would she? Not if intending to carry on with withdrawal or to buy an annuity?

kidmugsy

SeniorSam wrote: »

I do not immediately need additional income, but may need to draw capital from other investments such as ISA's to prop up the state pensions and other bits we both get of around £30k pa. We are both age 71.

In your shoes I might be keen to keep as much as possible in my ISA tax shelters and instead take some of my Tax Free Lump Sum. As you say, there is no need to draw out taxable income too if you don't want to. I might aim to have all my TFLS out by my 75th birthday. If that gave me more capital than I needed for spending, I'd stick as much as possible into new ISAs and (should they be issued again) Index-Linked Savings Certificates. I might also buy some shares in a tax-exposed way e.g. in Investment Trust Savings Schemes. [If you remain a standard rate taxpayer and don't realise large capital gains in any one tax year, you don't lose anything by holding equity tax-exposed.] Or I might even buy gold sovereigns if I had somewhere safe to keep them. Does your bank still offer a safety deposit?

kidmugsy

Another tax shelter you could use for TFLS money is contributions to a personal pension for your wife - up to £3600 (gross) per tax year. That might, depending on your circumstances, spread future income across the pair of you in a tax advantageous way, long term.

SeniorSam

Thank you for your answers mania112 and kidmugsy, much appreciated.

Sam

mania112

kidmugsy wrote: »

Hold on: presumably a widow wouldn't pay 55% tax, would she? Not if intending to carry on with withdrawal or to buy an annuity?

If the crystallised portion is used to pay an Annuity, and it has a joint life feature it will continue to be paid to a spouse at the given portion - subject to their income tax rate.

I was referring to unsecured funds. Uncrystallised monies will be subject to a 55% tax charge on the lump sum. This is where it is different than for those under age 75.

If there is a crystallised fund after age 75, it's treated the same way as under 75.

System

Suppose a pension is partly crystalised, partly in drawdown, and after the husband's death at say 74 the widow continues drawdown without crystalising any more. Supposing she was younger than her husband, eg 64 - would the 55% rate cut in when she reached 75, or after one year when he would have reached 75?

jamesd

mania112 wrote: »

I was referring to unsecured funds. Uncrystallised monies will be subject to a 55% tax charge on the lump sum. This is where it is different than for those under age 75.

For a spouse it isn't different. She gets to inherit 100% of an unsecured pension pot into a pension pot in her own name. No 55% tax charge before or after age 75. A limited range of other financial dependents also get this treatment.

For a non-spouse there again is no change before or after age 75. The difference is whether it's crystallised or not. If it is then there's a 55% tax charge, otherwise there isn't.

The rules changed a bit in April 2011, so that's perhaps where you're getting a little bit misled.

As for income, take it from the pension, not the ISA. Nothing to gain by taking money out of the great ISA tax wrapper.

Since you're still both under 75 you can both take a lump sum and go into capped drawdown now. Assuming you're not working you can pay in £3600 gross to another pension fund and get another 25% tax free lump sum on that later.

mania112 wrote: »

to prop up the state pensions and other bits we both get of around £30k pa

Just to be clear I'm reading that as the combined pension income of both of you is £30k, not each of you getting £30k for a total of £60k.

Is either of you anywhere near to £20,000 of secure pension income from the state pensions, work defined benefit schemes and annuities that you already have? Just checking whether Flexible Drawdown might be an available option.

Proxy

mania112 wrote: »

2) GAD rate shouldn't be affected by gender equalisation because draw down income is not different for men and women already. However, Annuity rates are based on Gilt Yields and so are GAD rates, so you can't rule out a knock on affect, although I wouldn't be concerned about

This is incorrect - the tables for men and women are currently different. See link below.

http://www.hmrc.gov.uk/pensionschemes/drawdown-tables-2011.xls

They've announced that all GAD rates will move to male table after 21/12

kidmugsy

@SeniorSam: if you click through to jamesd's link you'll read "Any pension commencement lump sum must, however, be paid before age 75": note that "pension commencement lump sum" is the new name for the dearly beloved "tax-free lump sum". So you would be well advised to get it out before you are 75. (You might also want to get it out before the rogues start taxing it, as seems to me implicit in its new name!)