SIPP Question

moneyfoolish

I'm currently receiving a final salary pension from a previous employer of which my wife will receive 50% if I die. I will also have a smaller final salary pension from my current employer when I retire of which my wife will also receive 50%. I've been paying around £1700 per month into the company AVC pension for the last 4 months and will continue that until I retire (anytime between 1 year and another 5 years). I will take as much of that money as I can as a tax-free lump sum. I have a few fixed term cash ISAs which are soon to finish and have thought about putting what I can into a SIPP as the rates are now so low. If I do this, will I be able to take this in the form of a drawdown as I will have final salary pensions of approximately £30,000 per year AND will my wife be able to get any money remaining if she outlives me?

jamesd

A person who has at least £20,000 in income from workplace defined benefit pensions, annuities and the state pensions can use Flexible Drawdown for personal pensions. Flexible Drawdown allows withdrawing an unlimited amount of money from a pension pot at any time. The amount taken above the 25% tax free lump sum amount is taxed as normal income in the year(s) in which it is taken. The Capped Drawdown alternative has limits on the amount that can be taken out each year after taking the 25% lump sum.

It seems likely that you would be able to use the AVC pot for Flexible Drawdown but it is worth checking. You'll probably find that you would have to transfer the AV part to do that.

It is not necessary to use a SIPP to do this. A standard personal pension is also fine. The SIPP form of personal pension adds the capability of using direct share holdings and a range of other things to the normal personal pension investment options of using unit trusts and other types of fund.

100% of the pension pot in a personal pension can be inherited tax free by a surviving spouse into a pension pot of their own. Or a 55% tax charge can be paid and it can be paid outside a pension pot to the spouse or anyone else. The spouse could choose to use drawdown (maybe flexible if they qualify) of buy an annuity or some combination of the two.

You could put the cash ISA money into pension contributions but why not do an ISA transfer into a S&S ISA instead? A S&S ISA can hold funds, shares and a large range of other investments, just like a pension. Given your retirement income level you're going to be a higher rate tax payer in retirement so the tax free income you'll be able to take from an ISA will be useful.

moneyfoolish

Thanks yet again for another informative reply, James. My problem with an S&S ISA is that
1) I'm past the stage of having any inclination to do the necessary research myself.
2) I know I'll panic if markets fall and I just cannot understand why they are going up with the fragility of most of the world's economies.
I, therefore, feel that I have missed the boat and that there will be an almighty correction in the not too distant future.
3) Were I to allow my money to be managed for me, I've seen so many alternative (Nutmeg, Vanguard Funds, Funds of Funds, Income Investment Trusts, etc.) that I wouldn't know which to choose!

jem16

jamesd wrote: »

It seems likely that you would be able to use the AVC pot for Flexible Drawdown but it is worth checking. You'll probably find that you would have to transfer the AV part to do that.

This may not be necessary as the AVC pot is with the LGPS which will allow him to possibly take the whole pot tax-free.

OP - which version of the LGPS are you in?

moneyfoolish

Yes, I can take the whole AVC pot tax-free (within limits which I am well within).

jem16

russell_anderson wrote: »

Yes, I can take the whole AVC pot tax-free (within limits which I am well within).

The reason I asked you about which version you are in is that the pre 2008 version comes with an automatic lump sum which I believe you must take and cannot inversely commute it back into the main pension.

This could then lower the amount you are able to take from the AVC pot.

moneyfoolish

Yes, I am in the Pre-2008 version which means I have to take a lump sum of around £11,000. However, I will only be contributing between £20,000 and £40,000 into an AVC and the pension people at work reckon I will be anble to take that as a tax-free lump sum as well.

jem16

russell_anderson wrote: »

Yes, I am in the Pre-2008 version which means I have to take a lump sum of around £11,000.

That assumes a pension of £3666.66pa then. Normal way to find out the value of the pot is to multiply this by 20 which is £73,333.33. Add on the lump sum of £11k and that gives £84,333.33.

However, I will only be contributing between £20,000 and £40,000 into an AVC and the pension people at work reckon I will be anble to take that as a tax-free lump sum as well.

I'm not so sure if you will be able to take it all.

If your main scheme is £84,333 plus £20,000 that would be a value of £104,333 altogether. 25% of that is £26083.25. You are already getting £11k so that would allow only another £15k approximately of that £20k.

I'm not 100% sure if this is the way it's worked out but I think it is.

moneyfoolish

I've got the figures from the pensions dept. at work and if I retire on 1/4/2014, my pension will be £7,957.29 per year with a tax-free lump sum of £11,299.12. whereas if I retire on 1/4/2015, my pension will be £8,656.10 per year with the same tax-free lump sum of £11,299.12. The lump sum is the same because it relates to service pre 2008 when the scheme changed. If I retire on 1/4/2014, I will have saved approx. £25,000 in my AVC whereas if I retire on 1/5/2015, it will be £45,000. The pensions dept. have already told me that there will be no problem taking all of that as a tax-free lump sum if I retire on 1/4/2014 but I haven't checked re leaving in 2015. I know my pension has been enhanced because if I leave on 1/4/2014, I will be 69 and if I leave on 1/4/2015, I will be 70. It is compulsory to take the pre 2008 lump sum.

bilbo51

jem16 wrote: »

That assumes a pension of £3666.66pa then. Normal way to find out the value of the pot is to multiply this by 20 which is £73,333.33. Add on the lump sum of £11k and that gives £84,333.33.




I'm not so sure if you will be able to take it all.

If your main scheme is £84,333 plus £20,000 that would be a value of £104,333 altogether. 25% of that is £26083.25. You are already getting £11k so that would allow only another £15k approximately of that £20k.

I'm not 100% sure if this is the way it's worked out but I think it is.

I think the calculation to determine the 'pot' size is (20*annual pension + AVC pot at retirement). 25% of this can be taken as PCLS. Bear in mind that you expect your AVC pot to grow over the investment period so this has an impact. Also that you annual pension is related to your final salary, which is also variable - although not very variable at the moment I know...

moneyfoolish

bilbo51 wrote: »

I think the calculation to determine the 'pot' size is (20*annual pension + AVC pot at retirement). 25% of this can be taken as PCLS. Bear in mind that you expect your AVC pot to grow over the investment period so this has an impact. Also that you annual pension is related to your final salary, which is also variable - although not very variable at the moment I know...

20*Annual Pension will be around £170,000 plus the AVC pot. I haven't had a salary increase for 3 years although we're probably going to get 1% this year. My AVC pot will be around £45,000 if I finish a year next April. It won't grow other than contributions as it's in the Sterling Fund for safety which has remained static over the last year. Therefore, I should be able to take 25% of around £215,000 as a tax-free lump sum or approx £55,000 i.e. all of my AVC pot. That, of course, might not be the case if I worked much beyond that time. If I was brave, I could move from the Sterling Fund to the Managed Fund as that grew 13% last year but unless my calculations are incorrect I reckon that I am saving 38.35% of my AVC contributions with lower tax and I'm more than happy with that!