Phased Retirement Plan

santamed

Could anyone please explain what this is and what my options are. Unfortunately I trusted the IFA when he said it was just the thing for me and sign here please. Incidently I am 62 and hope to retire next year.

The policy which is with Scottish equitable is invested in various funds including US, Technology, Small companies, equity and Baille managed,

The date of retirement is age 75 and the current fund value is about £150,000 although I notice that the transer value or annuity fund is about 10% less than the value?

Does this mean that I would have to wait until I was 75 to get the full value. The IFA led me to believe that he was not taking all his commission and putting some back into the fund. Does this mean he is taking it back (plus any value increase) if I transfer to a sipps for example. He told me he was doing me a favour as there was very little work involved from transferring the funds to the Phased Retirement Plan from other existing plans which he had previously set up.

It would be a big help in my planning if I knew exactly what my options were with this plan. I will certainly need to take some of the money every year to top up my other policies.

Help much appreciated.

dunstonh

Unfortunately I trusted the IFA when he said it was just the thing for me and sign here please.

Why did the IFA say it was right for you? It can be right, it can be wrong but it really depends on the circumstances.

The IFA led me to believe that he was not taking all his commission and putting some back into the fund. Does this mean he is taking it back (plus any value increase) if I transfer to a sipps for example. He told me he was doing me a favour as there was very little work involved from transferring the funds to the Phased Retirement Plan from other existing plans which he had previously set up.

What does the illustration show that would have disclosed the charges?

It would be a big help in my planning if I knew exactly what my options were with this plan. I will certainly need to take some of the money every year to top up my other policies.

The policy which is with Scottish equitable is invested in various funds including US, Technology, Small companies, equity and Baille managed,

When did you arrange it?

Have you actually asked these questions to your IFA? I assume you have as its always a good idea to keep in communication with your adviser. What did he say?

EdInvestor

santamed wrote: »

It would be a big help in my planning if I knew exactly what my options were with this plan.

I'm sure it would;) Do you have any documenattion from the IFA who set up the plan?This should explain how it works. Normally phased retirement plans allow you to leave the gfund invested but turn small chunks of it into annuities (guaranteed income for life) regularly, usually to take advantage of the 25% tax free sume to cut your tax bill.

I will certainly need to take some of the money every year to top up my other policies.

The plan may well allow you to do this.

However often these plans are rather expensive as far as charges, penalties etc are concerned and you may well be better to transfer to a straight income drawdown plan in a SIPP and then take an income froim the fund, rather than all these small annuities.

I would personally think it is a bit of worry that you appear to have no idea how the plan works.Also the investment profile looks rather high risk.

Does this mean that I would have to wait until I was 75 to get the full value.

How do you mean "get the full value?" This is a pension fund, so if you have already taken the 25% tax free cash, you can only now take an annual taxable income- you csannot get the capital out.

The income could be in the form of an annuity (but you would then lose the whole fund - which can be paid in case to your heirs minus a tax charge ) or a pension from the income drawdown fund.Are you taking an income from the fund now?

jamesd

The plans vary in what they can do, your IFA and the plan documents should be able to tell you.

Here's one example. Say you wanted to take 7000 a year in after tax income so you could invest the money into ISA investments that produce ongoing tax free income. Or just that you want 7000 after tax income. Each year part of the total pension pot is taken, 25% as tax free cash and the rest put into income drawdown (could buy an annuity instead).

year	pension taken	lump sum	drawdown fund	drawdown inc	total inc
1	24,476		6119		18357		1101		7000
2	21,395		5349		34403		2064		7000
3	18,702		4676		48430		2906		7000
4	16,348		4087		60691		3641		7000
5	14,290		3573		71408		4284		7000
6	12,491		3123		80777		4847		7000
7	10,919		2730		88966		5338		7000
8	9,545		2386		96125		5767		7000
9	8,343		2086		102382		6143		7000
10	7,293		1823		107852		6471		7000
11	6,198		1550		112500		6750		6950

pension taken: how much of your total pension pot you take
lump sum: how much of that is the 25% lump sum
drawdown fund: the total value of the pension moved into the drawdown fund
drawdown inc: income from the drawdown fund at 6%, after tax of 20%
total inc: total after tax income including both lump sum and drawdown income

At the end of this you'd have an ongoing income from the drawdown fund of 6750 a year and an ISA pot of 118,000 that you could take extra income from. Nothing left in the original pension fund, it's all taken as tax free cash or moved into the drawdown fund which is worth 112500.

Or replace drawdown with annuities instead, for similar results, though less growth potential. The plan probably assumes annuity purchase each year and at the end.

Assuming all of the pension income is taxed (personal allowances used) you'd have ongoing pension income of 6750 before tax, 5400 after and ongoing ISA income of 7080 for a total after tax income of 12480 a year, 1040 a month. State pension and other pension is assumed to use the 9500 of personal allowances you'd have. End result is that you'd stay below the age allowance reduction threshold and you'd have moved more than half of this pension completely outside the tax system for the rest of your life, saving you 1416 in tax each year that you get to take as extra income, even ignoring the effect of age allowance reduction which would apply and would further reduce your income if you didn't do something like this or investment bonds to avoid it.

If you didn't have other taxable income and could use your personal allowances you'd vary the amounts to get whatever income level you needed and your taxable income might well be below the personal allowance limit, making all of your income in retirement tax free.

You say you have other policies so this looks like it's a reasonable choice to minimise the tax you'll pay in retirement. Total income of 13830 this way before tax plus state pensions would take you close to or into age allowance reduction at around 21000 and higher taxable income, so it seems likely to be reasonable for what I can see of your income so far.

Depending on the value of those other policies and the state pensions you might or might not benefit from use of funds held inside investment bonds. But the IFA should have analysed that for you if you were getting full advice and should have chosen this because it was the most suitable option given your preferences.

Also, since you haven't taken all of the pension pot at the beginning, the part not taken is fully inheritable and that can be a significant benefit as well, compared to just buying an annuity at the start, if you're unfortunate and die early. The ISA pot is also fully inheritable. Both after tax considerations, but unlike an annuity they don't just vanish.

Assumptions: 7% growth for untaken pension, 6% drawdown income. 7% growth on ISA pot which is left to accumulate, 20% tax rate, all tax allowance already used, so all drawdown income taxable. 150k initial pension pot.

Phased retirement can be extremely useful, flexible and tax efficient.

Do note that I'm not an IFA, do not have the G60 pension planning qualification and don't know enough about your other income and circumstances to have given comments that fully consider your circumstances. Which applies to all posters here so far except possibly dunstonh on the G60... don't know if dunstonh has that.

santamed

Firstly let me say that the reason I have lost touch with my IFA was that I completed a form (not requested) re miselling. Eventually I was given just over £40,000. Other than a phone call to say that he was surprised and upset that I had completed the form he has not spoken to me since.

Jamesd your option looks as though it could be very interesting for me as £7000 in income added to my other bits and pieces (whilst retaining some inheritance capital) would be great.

Couple of things that I cannot get my head around and would appreciate some clarification:

1. Where would I get 6% after 20% tax in drawdown. Is the drawdown invested in a SIPPS?
2. How do I get the income from drawdown, is it allocated at the end of the year? in which case the income from drawdown would be one year in arrears?
3. Do I need an IFA to organise this for me and what would the likely charges be? does your forecast take any account of charges?
4. You mention that I will be left with an ISA pot of £118,000, but I cannot see where this comes from. Could you please clarify.


Sorry for the ignorance in these matters but I obviously relied too heavilly on the ISA in the past, without understanding the practicalities.

jamesd

The drawdown can be via a SIPP. Doesn't have to be.

The income is from the investments, so some might be funds paying income one to twelve times a year while some might come from sale of some of the capital. Your choice of investments so you choose how it comes about. There's a limit on drawdown income that's a percentage above the maximum available from an annuity purchase. The idea is to ensure that you don't withdraw so much that you run out of money before you die.

I completely ignored all charges. It was complicated enough already and I didn't want to make it more confusing. First you should find out what options your current plan allows. You'll also need to decide on annuities, drawdown or perhaps a mixture of the two. There will probably be a fee for calculating how much you're allowed to take in drawdown income and that may make it more economic to recalculate the drawdown income every few years instead of every year, taking more in lump sum income instead of drawdown at the start. An IFA with pension or investment qualification to organise it would probably be a good idea but it's possible to do it yourself. IFA costs vary, with those like dunstonh with the NMA charging model using low up-front charges then annual commission from the investments of around 0.5% seem quite reasonable if they do a good job of managing the investments for you.

I was assuming that you were taking 7000 income a year for the purchase of investments in an ISA and not spending any of the money. The 118,000 is the value of those investments after growth at 7% a year. You can mix and match as you see fit, of course. I just needed some basis for calculation so I chose that one.

Here's a different calculation, assuming 7000 into ISA each year, 5000 spendable for two years until the state pensions start then 1000 a year. Income is the total of these amounts, so 13000 income is 7000 for ISA and 5000 for spending.

year 1: 45560 taken, 13000 income
year 2: 39740 taken, 13000 income
year 3: 17350 taken, 8000 income
year 4: 15080 taken, 8000 income
year 5: 13180 taken, 8000 income
year 6: 11520 taken, 8000 income
year 7: 8314 taken, 498 income, all pension converted

At this point there's 112,910 in the drawdown pot and 64,818 in the ISA pot to produce ongoing income.

Or another, 7000 into ISA each year, plus 9000 for two years then 4000 for one year and 3750 for one more year. After that, ongoing 6800 from the 113540 drawdown fund, plus whatever the 33255 in the ISA produces.

year 1: 56000 taken, 16000 income
year 2: 48900 taken, 16000 income
year 3: 25300 taken, 11000 income
year 4: 21180 taken, 10750 income, all pension converted

There's a trade-off here between income now and income later and also how much ends up in the ISA portion of the investments.

jamesd

I should explain that the reason I include the ISA in there each time is the tax gain if you avoid getting over 21,000 or over 9,500 in taxable income, with the income from ISA investments not being taxable, unlike pension income. Personal and age allowance will cover up to 9500 of income from next year while at 21,000 age allowance reduction starts and produces a 33% marginal rate of tax.

If income is between those levels the ISA option isn't as useful for tax reasons but remains very useful to produce a very flexible pot of money that can be taken in any quantity desired at any time, unlike drawdown or annuity money. Inheritance is also a factor for some.

From the look of the Scottish Equitable phased retirement documentation I could find online it appears that you may have a very flexible plan with a fair range of investments and lots of flexibility in how you split between annuity and income drawdown. Don't know exactly what yours is, of course, so this could be completely wrong.

The reason for phased retirement plans: splitting the pension pot into 1000 individual chunks that can be taken individually with their own choices made for drawdown, annuity and investments, so it's potentially more efficient and flexible than trying to do it with several individually managed pots of pension. May well be cheaper for things like calculating the income drawdown limits for each piece.

santamed

Thanks for your help James.

It occurred to me today that if I could go back in time I would not have entertained pension funds. When you consider mis selling, commissions, charges and restrictions on retirement, it would seem to make much more sense to have had all your savings for retirement in ISAs.

Unless I am being stupid it would seem to me that if (for example) I had 500K in ISA.s I could just put that money into a BSociety and get in excess of 25K in interest (albeit taxable) plus the approx £10K per annum from gov pension.
which would give us a taxeable income of £35K a year. This would do me fine with no mortgage etc. To cover inflation I could still continue to invest say a spare £5000 between us in ISAs and make do on £30k.

I would retain all my savings to pass on, no ifa charges, no insurance companies making money out of me with dismal annuities and no charges. With the right bank/BS the money would also be 99.9% safe.

Why are pensions so complicated, does the Govt not trust us to be sensible with our funds and make our own simple decisions or am I over simplying the whole thing.

jamesd

You're over-simplifying, in part because most people don't have anything close to 500,000 in investments when they retire. For most people the tax benefit is worth the restrictions, up to a certain level of retirement investing. The first fifty to hundred thousand or so is probably useful in a pension, since you do benefit from the tax breaks then.

Above that it's more interesting. Those at higher rate while working who retire at basic rate still gain from the pension tax treatment, perhaps enough to compensate for the restrictions, at least for some of the money. Even for basic rate payers one fifth of the 25% tax free cash lump sum is from the tax relief.

If you just need modest secured income, not flexibility or inheritance efficiency, it's hard to beat pension contributions for the tax relief going in, reduced tax when you take the income and the tax free lump sum.

The sticky topic on pension vs ISA covers this in far more depth. Better to discuss there if more discussion is useful.

Judwin

santamed wrote: »

It occurred to me today that if I could go back in time I would not have entertained pension funds. When you consider mis selling, commissions, charges and restrictions on retirement, it would seem to make much more sense to have had all your savings for retirement in ISAs.

Unless I am being stupid it would seem to me that if (for example) I had 500K in ISA.s

Isa's have only been running about 8 years, and so the maximum anyone will have in a Cash isa is approx £30K if they fully subscribed at £3K a year.

If instead you had used a Maxi S&S Isa, then you could have put £7K per year in. Growth would have depended on the assets chosen, but it's extremely unlikely it would have grown to £500K by now, unless you got very lucky with some of the assets.

Before ISA's/TESSA's, a pension was the only realistic option.

Cheers,
Judwin

EdInvestor

Before ISAs we had PEPs.There do exist million pound PEP/ISAs pots and there are people who do exactly as santamed says, though as the money is already in the PEP/ISA there is no need to pay tax on the income.Normally you would invest the money in a mix of assets including gilts, property funds and equities, rather than cash, as your money loses value quite rapidly because of inflation if it's in cash.

But it's certainly possible to arrange your retirement so that your income is tax free, and for basic rate taxpayers with no company pension there's little attraction in the pension system as currently arranged compared with using ISAs.