Pensions and 25% tax free sum

marlot

I'm just coming up to 50, and have a mixture of deferred pensions. I also have a personal pension. I pay 40% tax.

I was thinking about the 25% tax free lump sum which I can get from my personal pension. What's to stop me funding my personal pension between now and age 54 to the maximum allowed, with the aim of taking the maximum tax free lump sum at 55, and then using the personal pension in income drawdown mode?

Obviously the chancellor could remove the tax free lump sum at any time, but is there anything else I have missed? Is this generally a good idea, or am I barking mad?

redbuzzard

Sounds like a plan to me.

One thing to consider is the limits on draw down, unless and until you have the required secure income from elsewhere to allow flexible drawdown, which will also change at some point - I have a vague recollection that the £20k minimum was set for 5 years.

dunstonh

Obviously the chancellor could remove the tax free lump sum at any time, but is there anything else I have missed?

Reduced death benefit, lower tax free cash payment than you could have got later. Typically increased charges as drawdown incurs costs.

Generally, it is a bad move to commence the pension early if you dont need to.

chucknorris

marlot wrote: »

I'm just coming up to 50, and have a mixture of deferred pensions. I also have a personal pension. I pay 40% tax.

I was thinking about the 25% tax free lump sum which I can get from my personal pension. What's to stop me funding my personal pension between now and age 54 to the maximum allowed, with the aim of taking the maximum tax free lump sum at 55, and then using the personal pension in income drawdown mode?

Obviously the chancellor could remove the tax free lump sum at any time, but is there anything else I have missed? Is this generally a good idea, or am I barking mad?

I'm 55 and not sure when I will retire, probably between 60 and 65. I will probably do the same about 5 years before I retire and put the max into a sipp. I might even start earlier, at the moment I am buying the max allowed additional pension in the teachers pension scheme, that will finish in 18 months, so I could be quite close to retirement then. If I retire earlier than 65 I will probably not draw a pension until I am 65 in any case.

EDIT: What I haven't resolved is what type of investment should I wrap in a sipp just a few years from retirement. Obviously I would rather go for something safe and boring rather than something volatile like an equity based investment, anyone got any ideas?

OffGridLiving

dunstonh wrote: »

Reduced death benefit, lower tax free cash payment than you could have got later. Typically increased charges as drawdown incurs costs.

Generally, it is a bad move to commence the pension early if you dont need to.

What if you recycle the tax free lump sum back into a new pension and leave the one in drawdown untouched until age 60 or 65?

dunstonh

OffGridLiving wrote: »

What if you recycle the tax free lump sum back into a new pension and leave the one in drawdown untouched until age 60 or 65?

If you dont fall foul of recycling rules designed to stop that then the amount paid in will be uncrystallised but the rest of the fund would be crystallised. So, death benefits would still be reduced.

PaulCooper

Worked and works for me, for about 6 years now (I'm 57) I have put as much as the government allows every year into my SIPP via slary sacrafice. I then take out the 25%, as I couldn't manage without doing so (well I guess I probably could!)
The way I look at it, if I were to take it as salary, either I'd be taxed at over 50% (40% + 13% NI) leaving me with 47% in my pocket, or due to strange tax gradients I'd be partially taxed at over 60% (between 100 & 120k). Either way the maximum amount I'd lose in my pocket now is 47%-25% = 22%, but I still have control of the other 75%ish as it's in my pension pot.
Then at least I can enjoy the money now, as who knows

---

Paul

OffGridLiving

dunstonh wrote: »

If you dont fall foul of recycling rules designed to stop that then the amount paid in will be uncrystallised but the rest of the fund would be crystallised. So, death benefits would still be reduced.

I guess the decision then is whether the new pension, enhanced by the 25% taxfree lump sum and 40% tax rebate (I'm a higher rate taxpayer) would outweigh the disadvantage of reduced death benefits. Though additional life cover could mitigate the loss of benefits somewhat.

In my case, I am more concerned about maximising the size of my pension pot during my working life than I am about death benefits, especially as I have life assurance to cover the mortgage and my company life assurance of 4x salary covers the rest.

jamesd

OffGridLiving wrote: »

What if you recycle the tax free lump sum back into a new pension and leave the one in drawdown untouched until age 60 or 65?

You can also just invest the lump sum elsewhere so it continues to grow just as it would have inside the pension pot. You may need a different tax wrapper though, or pay attention to CGT and income tax on the income, so it's not necessarily fully possible to match the gain.

There's no restriction on recycling pension income so that can be recycled instead of the lump sum. Or the pension could be taken in pieces with 1% of the lifetime allowance worth of lump sum taken each year. Or it could be noted that increase in contributions is calculated for the two years before taking the lump sum, the year of taking it and the two years after. So you can increase before that or after that and not break the rules.

The lump sum recycling rules catch rapid pay in, take out, recycle, repeat schemes that were around before the rule. Those who plan ahead are much less likely to break those rules. Increase contributions to the maximum annual allowance three years before taking the lump sum and the most you can do is stay the same, so you can't break the increase part of the rule.

After taking benefits a spouse can still get 100% of a drawdown pot into a pension pot of their own with no tax charge. But to take it outside a pension pot or to anyone else there's a 55% tax charge instead of nothing. If this matters, life assurance can be used to cover it.

ermine

PaulCooper wrote: »

either I'd be taxed at over 50% (40% + 13% NI) leaving me with 47% in my pocket,

I admire your ambition to reduce your tax liability and it's a no-brainer to SIPP any sort of HRT income but NI is charged at 2% above the UEL which is roughly when you exceed the HRT threshold, so you are taxed at 42%, not 53%.

wotsthat

jamesd wrote: »

The lump sum recycling rules catch rapid pay in, take out, recycle, repeat schemes that were around before the rule. Those who plan ahead are much less likely to break those rules. Increase contributions to the maximum annual allowance three years before taking the lump sum and the most you can do is stay the same, so you can't break the increase part of the rule.

Are those real rules or guidelines?

I could, say, from the age of 49 to 52 make zero pension savings and save in an ISA instead with the intention of then using these savings to max out pension contributions at age 52, 53 & 54.

With a drawdown lump sum & pension payments it would then be easier to maintain the contributions of the previous three years.

That's why I ask whether they are rules because the intent is obvious and that's to try and get the lump sum back into a pension with 40% tax relief.