What to do?

XTony

Some context, I am 56 and a member of the Classic Civil Service Pension Scheme. As I have bought some added years, when I reach 60 I could retire on a pension of about £25K and a lump sum of three times this. But I have no particular wish to retire at 60 so might work till I am 63, go part time or do some consultancy outside of the civil service. Also I have no dependents to consider.I already pay in the maximum allowed to ISAs and have a six figure sum in cash savings.

Like many in the public sector I have only recently appreciated the benefits of the pension. My questions is what can I do now to augment my retirement income in a tax efficient way?

I have heard people speak about drawdown but had assumed that this was for those with large personal pension pots. But I wondered if it would be cost effective to open a personal pension this late in my career? Is it even allowed when you have an occupational pension?

So could I open a personal pension? Could I put say £15000 a year into it for a few years and get 40% tax relief on it? If I can, am I allowed to draw all of it down when I retire over several years and just pay 25% on it? Is it that simple?

If so what type of pension lets me do this? What are the rules? What happens to the money if I die? Does this avoid an annuity? What impact does the occupational pension have on what I am allowed to do?

Or should I consider other options at this stage? I believe I can commute my lump sum on retirement to extra pension, but how efficient is this? Or should I just buy and let a house?

Any advice on what to do or consider appreciated?

Tancred

Not sure what you are asking for here. Is your pension not enough for you? Is that what you are saying? I believe you can commute the lump sum to have an extra 8.33% of your salary, thereby making your pension 58.33% of your final salary, assuming you are a member of the Principal Civil Service Pension Scheme. I don't understand why you are talking about opening a personal pension - why would you want to do that? You already have a very good pension lined up for you. If you still want more then just work for longer.

XTony

Tancred wrote: »

Not sure what you are asking for here. Is your pension not enough for you? Is that what you are saying? I believe you can commute the lump sum to have an extra 8.33% of your salary, thereby making your pension 58.33% of your final salary, assuming you are a member of the Principal Civil Service Pension Scheme. I don't understand why you are talking about opening a personal pension - why would you want to do that? You already have a very good pension lined up for you. If you still want more then just work for longer.

What I am thinking is that when I retire I will have an adequate pension as you say. I will also have significant cash savings and I have used the ISA options to reduce tax liabilities. When I retire, I will get another £75K of lump sum that I have no immediate plans to use, also I will probably downsize my home at that stage. I may work longer than 60 or I may not, but that has nothing to do with wanting more, the job is interesting in itself.

So one option is commute the lumpsum (thanks for the figure above) to more pension but I do not know if that is a good deal or not. It may be better to take the cash? So what I am asking is whether I should explore other options that are more tax efficient?

I am not sure if opening another pension makes sense in my situation, or even whether its allowed, but it seems like a way of moving some cash that is earning relatively little interest into a form that I could use after I retire to fund holidays etc over a number of years. Just seeking some opinions on the matter.

xylophone

http://www.hl.co.uk/pensions/sipp/what-is-a-sipp

http://www.hl.co.uk/pensions/income-drawdown/what-is-flexible-
drawdown
http://www.civilservice.gov.uk/pensions/pensions-and-tax
The above might be worth a look.

jamesd

You can have an unlimited number of pensions. There used to be rules limiting holding personal and workplace schemes but they were abolished a decade or so ago.

The requirement to buy an annuity with personal pension money was abolished more than five years ago when Alternatively Secured Pensions were introduced and since then additional changes to remove other relics have happened.

You can pay into a personal pension and receive tax relief at your tax rate, so if some of your income is taxed at 40% you'd get 40% income tax relief on that part of the pension contribution. Normally 25% would be added to what you pay in by the pension provider to give you 20% basic rate tax relief then HMRC would adjust your tax code to get you the remaining 20% of higher rate relief.

From a personal pension you can get a 25% tax free lump sum and then take an income from the rest. The income can be from leaving the money invested, called income drawdown, or from buying one or more annuities or any combination. Within income drawdown, a person who has at least £20,000 a year of income from workplace defined benecfit pensions, the state pensions and any annuities is allowed to use "flexible drawdown". Flexible drawdown lets you take out an unlimited amount of money at any time; it also bars ever making any more pension contributions to any pension. You can start out with normal capped drawdown and switch to flexible later. The drawdown income is added to your normal taxable income for the year in which it is taken, including the potential 75% capital drawing from flexible drawdown. Those with public sector pensions are particularly likely to be able to meet the qualifying requirements for flexible drawdown.

Income drawdown does not require large pension pots. It can be cost-effective for pot sizes of £10,000 and even smaller at lower cost providers. And those like you who will qualify for flexible drawdown can easily benefit.

For income drawdown there is a concern about variability of investment income but that is mostly likely to be irrelevant for a person in your situation who is likely to have at least £30,000 a year of guaranteed and inflation-linked income from the work and state pensions. It's more of an issue for those with large parts of their income from drawdown and high fixed living costs. Those with relatively small proportions of their income involved are less likely to have issues, just because less of their income could be affected.

You could use reverse commutation to reduce the workplace lump sum to buy more pension. It is unlikely that your employer will offer you a fair deal for this but no harm to ask what the rate would be. Commuting income to lump sum typically seems to get lousy 12:1 commutation rate in many public sector schemes, making taking a lump sum normally a horrible idea for those not expecting to die within a few years. Reverse commutation might instead require giving up £30 of lump sum for every £1 a year of extra income. Neutral - fair - is about 28:1 in either direction.

When you die the money in a personal pension can be inherited by whoever you nominate to the pension scheme provider. It is not part of your estate and not controlled by your will. If you have a spouse at the time they could get 100% paid into a pension pot for them. Otherwise they or anyone else can take it outside a pension after a 55% tax charge is taken. Charities can get it with no tax charge.

Given your circumstances it appears that you would benefit from:

1. Using the full annual limit for pension contributions. Remember to find out how much of the limit your workplace pension is going to use.
2. investigating whether Venture Capital Trust (VCT) use is appropriate. These invest in smaller companies and you get 30% initial tax relief which has to be repaid if you sell within five years. Income is tax free and there is no capital gains tax. You can sell and rebuy every five years to get another chunk of 30% tax relief. The tax relief is limited to the income tax actually paid in the year in which you buy.

atush

Is all your savings in cash Isas? Have you not been using your S&S isa allowance? You could combine this with a PP.

XTony

atush wrote: »

Is all your savings in cash Isas? Have you not been using your S&S isa allowance? You could combine this with a PP.

No about £150K is in general savings accounts, £75K in cash ISAs and £150K in S&S ISAs Not very IHT efficient I know.

James many thanks for the above comprehensive reply. Two supplementary questions.

Can I do drawdown in any personal pension, or do I need to pick one that allows it?

On the face of it putting cash into a pension as a HRT payer and getting 40% added for free and they being able to withdraw it later at 25% tax seems quite generous even if you do this and take little risk in its investment. Is there a real likelihood that a future Government might stop people doing flexible drawdown? Or increase the £20K income required or just tax it more heavily?

atush

So, let me see. You have 225K in cash, and 150K in equities?

Don't know about your IHT situation in total (as dont know the value of what your property is worth and why you'd worry abt that with no dependents) but I think you need to diversify.

you have enough to live on, you have too much cash, maybe not enough property or equities if you want your non pension income/capital to keep pace with or grow above inflation.

jamesd

Some places may not allow income drawdown and some may not allow flexible income drawdown. Most modern plans do, it's more of an issue for those with old ones. The solution is easy, the money can be transferred to any other personal pension, so one that does it can be picked. But in your case you might as well just start out with one of those that allows it.

The £20k is fixed for a few years but will be increased to allow for inflation at some point. Your income level is so far above it that it's unlikely you could be affected. The £20k level is already very high. Flexible drawdown was only introduced a few years ago so it seems unlikely to go away.

Capped drawdown limits could also be changed.

These things are just the fundamental nature of legislative risk. Governments can and do change the rules. Most of the trend in recent years has been to make pensions more flexible, not less so. The biggest hiccup in that was this government temporarily reducing the capped drawdown GAD limit multiplier from 120% to 100%.

From the look of things you should be planning to put £15-20k or so into VCTs a year to eliminate most of your basic rate tax liability, in addition to the pension use. £20k of VCT use gets a tax rebate equivalent to the basic rate tax on £30,000 of income. HMRC would send you a cheque for £6,000 or pay it into a bank account you tell them about. Add the personal allowance and that gets you to around the higher rate threshold. Assuming that some smaller companies investing is appropriate for you. The five year period of these would be starting to expire around the time of your contemplated retirement so you could either keep the ongoing tax free income or sell. Or sell and rebuy some to use whatever basic rate tax liability you end up having after retiring.

XTony

atush wrote: »

So, let me see. You have 225K in cash, and 150K in equities?

Don't know about your IHT situation in total (as dont know the value of what your property is worth and why you'd worry abt that with no dependents) but I think you need to diversify.

you have enough to live on, you have too much cash, maybe not enough property or equities if you want your non pension income/capital to keep pace with or grow above inflation.

Yes its true, I have more cash than I need, and know I must give more thought to this sort of thing. I paid off the mortgage years ago and have one BTL but have been fairly relaxed about the situation knowing I had a good pension. The past ten years have been complicated by various issues with relatives who are no longer with me. It rather shocked me how much I had when I added it all up! Maybe I just need to spend more!

XTony

James, Thanks again for this further explanation. I now have more time to explore these issues so I will look into your suggestions.