Costs when moving to income drawdown

jamesd

The initial £30k would be 25% of £120,000. That would leave £90,000 in the pension pot which could produce perhaps 5% taxable, so say £4,500 taxable in both year one and year two. In year two you could take an additional 25% tax free lump sum of £5,500 to top that up if you still have £22,000 that you have taken no benefits from so far.

You'd have two different pots, one from which you've already taken 25% and from which you take an income in drawdown. The other you've taken nothing from and can still take 25% from all or part of it.

It's most likely to be simpler to take 25% from all of it in the first year and reinvest that within a S&S ISA or other investment. And take maximum income from the remaining 75%, saving any part that you don't need.

You'd use staged drawdown maybe if it would take a long time to get the tax free cash reinvested in an ISA to provide ongoing tax free income. Or maybe if you have lots of other taxable income.

What using the tax free cash for spending does is compromise the long term tax free income from an ISA in exchange for a short term reduced tax benefit. That can pay off if you already have so much extra income that you can fill the ISA each year anyway.

Besides the technicalities, the more important question is why you want to use the TFC for income. It can be appropriate but it can also be less good than some alternatives.

Daniel_Elkington

If you don't need the income then you could re-invest some into another pension. This is tax-neutral and will build up another PCLS (pension commencement lump sum). I'm not saying you should do this, but it is an option.

There are two things here, uncrystallised funds and crystallised fund.

Before you take an income from your pension (or hit age 75) your money is uncrystallised, which means that you can still take a pcls from it and if you die the benefits may be free from tax, lifetime allowance considerations notwithstanding.

when you take an income you crystallise part of the fund, which means if you die then you will pay 55% income tax on the benefits (very basically).

Be VERY careful when choosing a provider as some will crystallise the whole lot up front and !!!!!! the beneficiaries.

Some providers will crystallise on a monthly basis to ensure that any unused income does not affect the death benefits.

It seems like you don't want an adviser, but this is really complicated stuff and a few pages of feedback on an online forum are extremely unlikely to provide you with the answers you need.

I mentioned that at age 75 all your benefits are automatically crystallised. The intention is that you probably should annuitise at some point in the future.

You could always look at a third way product such as an investment linked annuity and simply take the minimum income allowed, which would allow that minimum to grow. You'd lose control of where it is invested but also lose the hassle of having to deal with fluctuations in the markets.

Additionally, in order to get drawdown to work you need to be investing in a high risk manner. You need the growth to be roughly 4% above your income level over a year to ensure a rising level of income that keeps up with inflation. For you this would be about 8% a year, which means a high level of equity content (60-70%) which would mean a high level of volatility which may affect your income in particularly bad years.

Sorry for the long winded answer but there are a tonne of issues with drawdown and unless you know what you are doing, I probably wouldn't.

You could annuitise enough money to produce enough income to access flexible (uncapped) drawdown, meaning you could access your funds whenever you like?

In terms of the original question - costs don't matter that much, cheap providers and incentives are generally offered over a short term. It's better to find a provider who is cost effective rather than just cheap.

SeniorSam

Many thanks James, that's made a little more sense.

Thanks also Daniel, that's very informative.

I had earlier considered using the TFC (all or part) to purchase a temnporary Annuity and not take drawdown from the Crystalised pot until later. Any thoughts on that strategy would be helpful?

Sam

Daniel_Elkington

Temporary annuities are alright, just be aware you are likely to end up with less than you started if you spend the income.

How much income do you need to live in the way you want to - or in a manner which you think is reasonable.

These technical questions are all very well and good, but without any personal information it's really difficult to pinpoint the exact strategy for you. I would say give me a call, but that is against the forum rules.:D

That's what I meant with my comment about advice on forums, a forum will give you a million different options, but cannot really tell you which one is best!:o

jamesd

I'd generally prefer taking income from the pension pot, not the TFC. The reasons are:

1. Better annuity rates for a lifetime annuity than a lifelong purchased life annuity purchased with the TFC. Better enough to probably more than compensate for the better tax treatment of the PLA. Not directly relevant because you're considering a short term annuity instead.
2. More capital freedom from spending no more than required of the money outside the pension. That money can stay invested, or more of it can, to provide ongoing tax free investment income.
3. Can't use a short term temporary annuity from the part in the pension pot, though, that has to be a lifetime annuity or be subject to the GAD limit.
4. I don't know how old you are but income drawdown is likely to be competitive or better paying than an annuity until you get close to or older than 75, particularly if you're in the 55-65 age range at the moment.

If you can't handle the risk of investments and have more than ample money to meet all of your needs for life, then buying annuities wold be the way to go, at least for your core income needs.

The TFC use with or without temporary annuity really makes sense mainly if you're already a higher rate tax payer on your retirement income. Then there's a chance that the tax saving can pay - but you have to trade that off against putting the money into ISA or VCT or other tax advantaged investments and consider whether over your expected lifetime they will deliver a greater tax benefit. They are likely to do that and beat use of TFC for income.

TFC use also wins to some extent if you take drawdown or annuity income from the part staying int eh pension but need to top it up to get a level income until say state pensions or work pensions start. Then you can use a mixture of income from TFC investments or drawing on TFC capital to top up your income until then. A temporary annuity is a low risk way of using the TFC to do this topping up.

So, my general priority tends to be to get money out of the pension pot as fast as possible to maximise capital flexibility. But sometimes adjusted based on tax or other considerations.

If you can say more about your general income situation and planning and needs that may help to see whether someone can come up with a more refined plan.

SeniorSam

Thank you again Daniel & James. Apologies for not giving enough information earlier. My wife will be 72 in September and I was 72 last month. The Sipp stands at £315k last month and has grown well in reasonably cautious funds that I am happy with and selected myself, principally Invesco Perpetual High Income, Distribution, Corporate Bond and another with good growth for some time.

We have combined State pensions together with a small income of just over £30k, but £7,800 ( the small income bit) of that will be reducing and stopping in the next year, so this is why the Sipp is being looked at more closely. Additional assets of National Savings and ISA's are about £200k.

We would like to maintain and income to cover outgoings and continue 3 holidays a year for the next few years, so I recon if we took income of £10,000 per anum, or possibly only £6-7k by using more TFC on holidays etc, that would do.

A little bit 'unknown' as I feel sure most people are when they start retirement. We have not drawn on our ISA's so far, but could do and could also add to the ISA's from TFC.

Hope this is enough to prompt more ideas.

Sam

jamesd

Do you, just you as an individual, not both of you, get £20,000 a year in work defined benefit, state pensions and any current annuities? How close do you get?

I'm wondering whether you can qualify for Flexible Drawdown. That would make all of the pension capital available and would eliminate one of the main disadvantages of pension money. If you're close it'd probably be worth deferring the state pension for a while (you can do it once even if you've started taking it) and/or buying a level lifetime annuity from money in the pension pot to get to £20,000.

Do you have sufficient income that is guaranteed that covers your core living expenses? Wondering how vulnerable you'd be if using income drawdown instead of annuity purchase.

SeniorSam

Hi James,

My state pension is £1315.04 pm another small Occ pension £85.98 pm, so (£16812) and below the £20,000 pension. Present income is supported by a renewal commission of about £7,800, as mentioned above, that will stop in a year or two. We spend a fair bit on holidays, about £18k from savings each year.

No drawings from ISA's which have been built up for our retirement, or capital taken as yet, but basic core living expenses are easily covered, we just like to have good holidays and use capital for that. Does that help?
Sam

I could always maximise another ISA and based on a 5% withdrawal from ISA's that would take me over the £20k per annum?

jamesd

I don't think your state pension can really be £1315.04 a month. so maybe that's a combination of the state pensions and some other work pension, perhaps from a government job?

I'd normally suggest deferring the state pension for a while to help get to £20,000 but given your age I'm less keen on that.

So what I suggest you consider first is taking at least part of your pension pot and splitting that portion into 25% tax free lump sum and using the other 75% to buy a single life level annuity that's just sufficient to take your guaranteed income over £20,000. Then you can commence Flexible Drawdown and draw as much capital as you like from your pension pot whenever you like.

Single life because it seems clear that you'll have more than ample provision for your wife from the rest of the pension pot and the fairly small amount from the annuity being lost on your death won't matter much to her financial position if you die first.

Then I suggest taking the 25% tax free lump sum from the remainder and reinvesting in S&S ISAs in each of your names as rapidly as the limit allows, to get you ongoing tax free income later. You could do this in stages, some each year.

Some thought needs to be given to inheritance tax planning. Will that matter to you? There's potential advantage in not crystallising some of the pension if you want it inherited by someone other than your wife without the 55% tax charge that comes from receiving pension money. Your wife can inherit it free of tax into a pension pot of her own, so no concern there, though she won't get it in flexible drawdown unless she qualifies in her own name, so it may be better to drain it as fast as you can without going into higher rate tax, prioritising the pension pot for all expenses.

SeniorSam

Thanks James.

Details sent to me recetly show that my state pension will b e as follows from the 8th April 2013 - a combination of Basic State 110.15 - Pre 97 additional state pension £97.90 - Post 97 additional state pension £20.91 - Extra basic state pension £35.05 and Extra Additional state pension £39.46. That's a weekly total of £303.47. My monthly payment will be £1,315.04 starting next month.

I did defer my pension for a few years before taking it when I was about 69.

I have made plans for IHT with Discretionary Will Trusts and setting up a loan trust so that the children can access sufficient funds to pay the tax without delay
I understand what you mean by taking part of the Sipp to buy the single life level annuity and get my pension total to just over £20k, but when you say I can take the remainder as required, do you actually mean that I can take the remaining balance if I wanted to?

Sam