Spread the tax free cash from sipp

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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  • jamesdjamesd Forumite
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    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?
    The time of the crystalisation event for each portion. Age 75 for the person in whose name the money is in is effectively a crystalisation event. Husband's death isn't but part of it was already crystalised. As a spouse she never pays the 55% if it goes into a pension pot in her name. For others, the already crystalised part has a 55% from the time he crystalised it. The part he didn't crystalise is now in her name and her reaching age 75 is one of the crystalisation triggers. The age he would have been doesn't matter because the money is no longer in his name.

    I don't know whether the lifetime allowance percentage that he used to crystalise part of it is counted against her. I assume not but if it matters, it should be checked.
  • jamesdjamesd Forumite
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    As kidmugsy wrote, best to get that tax free lump sum now. And best to take at least enough income from the pension to fully use your basic rate tax band, to minimise the amount you have to take out of the ISA and any other tax wrappers you're using.

    This assumes that you're not going to be liable for inheritance tax. If you are, the 55% tax on a pension to a non-spouse can beat the IHT rate. But you can beat that by taking the income at 40% and giving it away now.

    Even if you don't need the money, the optimal time to take the pension lump sum and drawdown income is likely to be at the earliest possible time. Assuming you can recycle the income into more pension contributions and other tax wrappers and leave the money invested somewhere. If you have non-spouse dependents you may need to buy additional life assurance to cover the 55% charge that crystalisation will cause to apply on inheritance to a non-spouse. This paragraph doesn't matter to you, it's just a general comment to anyone else reading along. You probably can't recycle 100% of the income but you get the IHT avoiding benefit and that's also worth having if IHT will apply to your estate.

    Another advantage of doing it early is that the percentage of the lifetime allowance which is used is calculated at the time of crystalisation. Do it early and there will have been less time to grow, so the percentage used will be lower. If you're fortunate you also end up doing it at a time when markets are down, further reducing the usage. Won't matter to most people but where the lifetime allowance could be a factor it's good to know.
  • SeniorSamSeniorSam Forumite
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    jamesd wrote: »
    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.

    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.

    Thanks James,
    I was aware that 100% can go to my wife if I die before crystallisation, but confused when you say that my wife and I can both take a TFC sum from the SIPP .... which is mine alone?

    Although we are not working now, I do receive some follow on commissions (£7500 pa) but this will stop in the next couple of years.

    My State pension is £15, 266 and I get a small occupational pension of £1,031. My wife has state of £7466 and we both have ISA and max premium bonds totaling £100k each. Although a modest IHT liability, we cannot afford to give much away at present, but are managing to balance outgoings including holidays.

    We want to have better holidays for the next few years and therefore may need to draw against investments, or take the TFC in parts or in full and use some of that. My thoughts were that it may be better to have more remaining in the pension to grow than to take it out?

    Perhaps I should think again about crystallising, but then more charges will follow once the HL SIPP has been crystallised.

    Sam
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
  • SystemSystem Forumite
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    jamesd wrote: »
    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.
    .

    Are you sure?
    Are you saying the remaining pot after a widow dies is tax free, even if she is over 75?
  • kidmugsykidmugsy Forumite
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    SeniorSam wrote: »
    My wife has state of £7466 ...
    Sam

    So if she had some private pension the first two-and-a-half thousand p.a. or so would be tax-free. That's worth exploiting. Also, until then you might be better off with some savings in her name generating tax-free interest - you'll get about twice the 1.5% p.a. that Premium Bonds pay on average. (If you enjoy the gambling aspect of Premium Bonds, you could instead punt on the Lottery on those occasions that there's a super-duper prize in the offing.)
    Free the dunston one next time too.
  • edited 29 October 2012 at 10:35AM
    jamesdjamesd Forumite
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    edited 29 October 2012 at 10:35AM
    Are you sure?
    Are you saying the remaining pot after a widow dies is tax free, even if she is over 75?
    No. The widower or widow gets to inherit the pension pot of the deceased wife or husband without the 55% tax charge. When the widower or widow dies without having remarried or formed a new civil union, then there will be 55% tax charge to pay on the remainder of the pot. So:

    Wife 1 is first death and has crystallised pot. Husband gets 100% into a pension pot
    Husband marries wife 2.
    Husband dies. Wife 2 gets 100% of pot.
    Wife 2 marries husband 2.
    Wife 2 dies, husband 2 gets 100% of the pot.
    Husband 2 dies unmarried, 55% tax charge.

    All of this unaffected by whether any of them are younger or older than 75. If any of them had wanted any of it outside the pension pot, that portion would have had the 55% tax charge.

    However, if the pot had remained uncrystallised and husband 2 was under 75, there would be no 55% tax charge on that uncrystallised portion. This would require all of those in the chain to be under 75 at the time of their death or the age 75 crystallisation would have happened.
  • jamesdjamesd Forumite
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    SeniorSam wrote: »
    but confused when you say that my wife and I can both take a TFC sum from the SIPP .... which is mine alone?
    I was assuming that she also had some pension.
    SeniorSam wrote: »
    My State pension is £15, 266 and I get a small occupational pension of £1,031.
    Hmm, that's 3703 short of the flexible drawdown limit. Two years of deferring your state pension plus inflation-linked increases and maybe a small annuity purchase would take you over £20,000.
    SeniorSam wrote: »
    My thoughts were that it may be better to have more remaining in the pension to grow than to take it out?
    It also grows tax free inside a S&S ISA. And that provides more flexible access, though smaller range of investments. So taking money out of the pension as fast as capped drawdown lets you is likely to be a better move than taking any money out of the ISA.
    SeniorSam wrote: »
    Perhaps I should think again about crystallising, but then more charges will follow once the HL SIPP has been crystallised.
    Just £75 to do the GAD calculation once every three years before age 75, then once a year.

    If your investments aren't changing much you could also consider switching some away from HL, where the saved commission - around 0.7-0.8% on many funds at HL - could save you money overall.
  • SeniorSamSeniorSam Forumite
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    Dates of replies seem to be out of order for some reason. I have replied this morning to James - please look back at dates.
    Sam
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
  • edited 29 October 2012 at 6:45PM
    SeniorSamSeniorSam Forumite
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    edited 29 October 2012 at 6:45PM
    So, according to the table mentioned by @Proxy, at my age of 71, the GAD rate would be £65 per £1000 based of 2% GAD rate. After taking TFC of 25|% (£75,000), I could therefore expect £65 x 225 return (£14,625 pa).

    Excluding charges, in drawing 2% per annum and assuming the remaining 'pot' (£225,000) grew at say 3%, or even 2% per annum, (it has been growing better than that so far) is there a way to calculate the remaining value after say 15 years?

    Just trying to get a handle on risk and reward?

    Sam
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
  • gadgetmindgadgetmind Forumite
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    SeniorSam wrote: »
    is there a way to calculate the remaining value after say 15 years?

    No, not really. The best you can do is look at the risk of totally depleting the pot over your chosen period.

    There are tables in books such as "Smarter Investing" by Tim Hale that show the risk of running out of pot given various asset allocations, but my copy is at work.

    Of course, while these models use the behaviour of equities and bonds over periods of a century in the past, the future is still an unknown.
    I am not a financial adviser and neither do I play one on television. I might occasionally give bad advice but at least it's free.

    Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.
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