Drawdown and State pension

STILTON

Hi all,
I have a question to you pension wizards out there.

I am currently receiving a company pension which is high enough for me to gain Flex drawdown on a SIPP of 90K.

I am 63 and thinking of deferring my State Pension until I can drawdown all of my SIPP into ISA's. Then draw SP as lump sum or increased payout.
I can draw 10k per year to 65 (before hitting 40%). if then take SP only 5k out.
Is getting as much out of SIPP below 40% beneficial and deferring sensible.

Am I missing any points on my plan.

Thanks in advance.

mania112

I'm trying to think of the reason for putting pension income into an ISA. I mean if you don't need the money, why not just leave it?

- It's late and i'm tired, so there's probably something very obvious i'm missing.

Also, don't forget you can take 25% of the SIPP tax free and there are annual limits for ISA's (so your calculations need to consider that).

SeniorSam

Hi Stilton,
Do take advantage of deferring the State pension for a few years as you get roughly 10.2% increase and you are unlikely to get that elsewhere. Also, if you died before taking the State pension, any deferred amount can be refunded to your spouse, so it's really a 'no brainer'.

As the value of your SIPP is not very high, consider continued investment of your Sipp for as long as possible, rather than drawing off it if you can afford to do so, but do choose your funds carefully to get the best results and with a provider that does not take too much in charges.

With your company pension at £20,000 pa or above, the flexible drawdown of your SIPP sounds very sensible, but if you take it all in cash, then the tax may not be so good.

Sam

gadgetmind

I think the plan sounds sensible. Pensions are a tax play, so do whatever you get to get as much as possible out at a low tax rate. I think you should even be prepared to build up investments outside of ISAs temporarily. Also remember to use ISA/income of spouse if applicable.

Note that rules on deferring SP are changing but I'm not sure when. Taking lump sum will no longer be allowed and deferring won't increase the pension as fast.

Of course, I assume you'll be sensible with the ISAs and treat this capital as a source of income just as if it was still in the pension!

kidmugsy

A very intelligent scheme, if I may say so. I'd be keen to get my money out while basic rate tax is only 20%, and safely tax-sheltered in an ISA while they are still available. (I'd also be interested in using some of the cash I couldn't fit into a tax shelter to buy and store gold bullion in Zurich or Perth, Western Australia, though the question of diversification of assets takes us away from your enquiry). And the 10.4% extra pension p.a. for deferring is ridiculously good, though the lump sum deal is a bit lame.

gadgetmind

kidmugsy wrote: »

I'd also be interested in using some of the cash I couldn't fit into a tax shelter ...

My plan is to stash this into dividend earning assets in my wife's name. The dividends attract no more tax and we can use keep selling these assets to fund ISAs. By the time SP kicks in, we'll have most in ISAs, which makes paperwork *much* easier.

jamesd

Your plan is sensible. It allows you to take the maximum possible out of the SIPP as early in the process as you can without entering the higher rate tax bracket and paying avoidable income tax.

Assuming you're in normal good health, optimal state pension deferring time for men is 1-3 year and for women 2-5 years, the longer end for better health cases or for more provision for a long life. Then taking the higher income option, which is more financially beneficial.

The main catch is that you can't make more pension contributions from the year in which you commence flexible drawdown. This means that you have a potentially more rewarding option, though it'll take longer to extract money from the pension.

There's a table of the capped drawdown GAD limits here. Figures are for 100% of GAD limit but it's back up to 120% now. Assuming a 2.5% gilt yield and age 65 the 10% limit is 5.6% of capital, 4.9% at 60, in the middle at 63. Multiplying by 1.2 raises the 5.6% to 6.72% of capital. Assuming the £90k is after taking the lump sum, 6.72% is £6,048 a year.

When not in employment you can pay up to £3,600 gross a year into a pension.

Pretending you only drew 5k out a year that'd take you until age 81 to get it all out and you could do that much with capped drawdown.

So, I wonder if it might be a good idea to make more pension contributions for a few years to get some more tax relief.

The gain on just 3.6k per year isn't very big, though, so on the whole I prefer your plan to use flexible drawdown. Some small tax gain lost but it neatly synchronises taking out the pot at a higher rate while you can and doing the state pension deferral. So my view is that it's a good plan and you should proceed.

mania112

Again, unless i'm missing something there seems to be some bad advice here.

The plan being suggested (and complimented by most) is to drawdown a SIPP and move that money into an ISA ASAP (and someone suggesting to put any excess into gold bullions.... really?!)

You clearly don't need the money.

You're mainly doing this to avoid paying 40% tax in the future. Currently your buffer is £10k pa.

Therefore, more or less 9 years until you can take your state pension.

It seems to me that this pot of money is mainly going to be kept as a nest egg for family, for when the inevitable happens?

If that's the case, leaving the funds uncrystallised in a pension is the best place for them.

Don't get caught up on the potential of losing out on income tax in your lifetime, when your dependants can take your pension without penalty if you were to die before age 75 with an uncrystallised pension.

Personally, I would leave the SIPP if i didn't need the income.

I would also defer the State pension if i could and take a lump sum in a few years and have a big holiday (assuming mortgage paid)

kidmugsy

gadgetmind wrote: »

The dividends attract no more tax ...

The dividends on gold attract no tax either.:)

Nor CGT if you buy gold sovereigns, which I might have done had I had somewhere safe to store them. I find that the banks' closure of their safety deposits is a ruddy nuisance. But I digress.

jamesd

mania112, you seem to be missing a range of things and offering some poor advice.

1. Age is 63 now and what that implies about gender if it's possible to defer the state pension now.
2. Stilton didn't mention family, you seem to be presuming that.
3. Once removed from the pension all of the money is available having had only 20% tax paid on it.
4. If left in the pension, most of it will be taxed at 40% if needed in larger than 5k quantity, such as, say for big holiday or care.
5. Your presumption about family seems to be causing you to overlook the significant value of having all of the money available for use during Stilton's own lifetime without that 40% tax issue. Care is expensive and a fair proportion of people will need it, and need it in greater quantities than just 5k a year given current costs for such care.
6. You seem to be presuming that inheritance tax is going to be an issue. And that there is going to be some survivor who will care about that.
7. The ISA route offers comparable investments for most of us so there's no loss in having the money for most of us, since it can just be invested in the same way.
8. Your thought about taking a state pension lump sum is very poor planning guidance because it's more efficient to use the pension pot to do that and use the higher state pension to provide income and perhaps accumulate the pot again if desired.

Best to stop presuming inheritance and optimising for that and think of Stilton and what Stilton will need during Stilton's own lifetime and how to optimise for that.

STILTON

gadgetmind wrote: »

Note that rules on deferring SP are changing but I'm not sure when. Taking lump sum will no longer be allowed and deferring won't increase the pension as fast.

Thanks for your opinions,
I have been in touch with the gov.pension office, who tell me there are no plans to change the deferral criteria only a white paper on the increase in the SP uplift around 2016, I have also searched the net but cannot find any comment on this.

My plan A, as I said is to drawdown into ISA cash and S&S until exhausted and then close the flex draw acct, then draw SP. Therefore I can have full freedom and flexibility of my cash etc.
If lifestyle allows I can then feed into another pension etc for more tax relief.
Even think about an annuity, heaven forbid !