Flexible Drawdown

P-H-I-L

Hi,
This is my first post so please be gentle !

My question is this - lets say you have a final salary pension from a previous employer that provides a retirement income of £20k and an occupational pension with your current employer that you are paying into. Let's also assume you are a higher rate tax payer.

My understanding is that you could choose to pay more of your income into your occupational pension (subject to the current limit of 50k) and this would be tax free but you would pay NI. This would increase the size of your pension fund and reduce the amount of tax you pay on your salary.

When you retire you would be able to immediately get up to 25% of your fund tax free. You could then use the remaining balance to enhance other pensions. Obviously the point here is to drawdown just enough to keep you below the 40% higher tax rate over several years.

Please can you confirm if my assumptions are correct or if I have missed something significant. I appreciate that funds in any kind of drawdown are subject to the usual investment risks not to mention that flexible drawdown plans are few and far between right now.

Anything else I should consider ?

Thanks
P

Linton

Your understanding is correct. You dont actually need a £20K FS pension as the £20K requirement for Flexible Drawdown includes State Pension.

The well known on-line SIPP providers (H-L, Bestinvest, SIPPdeal, Alliance Trust) all provide Flexible Drawdown. There are (of course) additional charges beyond those for a basic SIPP.

zagfles

Linton wrote: »

Your understanding is correct. You dont actually need a £20K FS pension as the £20K requirement for Flexible Drawdown includes State Pension.

Yes but only from state pension age. If you want to go into Flexible Drawdown before you get to state pension age then you will need a £20k in other pensions.

P-H-I-L

Thanks for very quick reply :T

That's a good point especially especially as many db schemes start at 60.

I guess if you were desperate to retire early it would be possible to start the higher contributions earlier and save the tax....buy an annuity from second fund for the period between age 55 and when your 20k db pension kicks in .??

P

Linton

What you could do is to put the SIPP (or whatever the second pension is) into capped (non-flexible) drawdown to get the 25% tax free lump sum. You then live off this but dont actually drawdown any of your pension. Once you have you £20K guaranteed income from your DB pension, and State Pension if necessary, you can switch your SIPP into flexible drawdown.

jamesd

P-H-I-L wrote: »

You could then use the remaining balance to enhance other pensions.

To be clear, that should be "the pensions of other people". You are prohibited from making or having made any new contributions to any pension in your name (except state) from the year in which you commence Flexible Drawdown.

This limitation does not apply to Capped Drawdown, the income from which is restricted by the GAD limit, unlike Flexible drawdown.

Taking income from Capped Drawdown and using it for other pension payments in your own name is likely to be a good deal unless you need to accumulate that income to build up a lump sum, perhaps in the ISA tax wrapper, and if that happens to be more appropriate in the specific situation.

Linton is correct that you don't have to take an income after taking the lump sum but it'll be more efficient unless the annual limit or other circumstances make it impractical or impossible.

If the new contributions are by salary sacrifice this is even more efficient and the recycling gain isn't just the tax avoided on the second lump sum but the additional benefit of the NI saving on the whole amount.