AVC Flexible drawdown

Hotglove

I will soon start to draw a second final salary pension. I will have an AVC fund of about £75,000. I intend to take all my second pension as annual pension and take the max lump sum of £30k from my AVC fund, transferring the £45k balance to a Flexible Drawdown Fund. As I understand it, one can invest this fund in commercial property (without paying tax)
My wife and I are partners and co-owners of a freehold shop, which is worth over £100k.
I wonder whether I could use the £45k to purchase some of my wife's share of the shop?
I have looked at HMRC website for guidance, and, apparently, such transactions (non arm's length) are permitted provided that the values are "real world"
Any thoughts?

jamesd

What will be the total income from all of the final salary pensions when they are being paid?

There's something specific called "flexible drawdown". Flexible drawdown requires an income from final salary pensions, annuities and the state pensions of at least £20,000 at the time you start it. At that point you can take out the whole pot in one go or spread over as long as you like. The money is normal taxable income for the year(s) in which it is taken.

If income isn't sufficient to qualify for flexible drawdown then standard "capped drawdown" can be used instead. It can also be used while waiting for the state pensions to make flexible drawdown available.

With either capped or flexible drawdown the purchase of commercial properties within a self-invested personal pension (SIPP) is possible. A mortgage of up to half of the value of the pension pot is permitted. Rent on the property can be used to provide income for the pension. Most SIPPs do not allow this type of transaction but there are plenty around that do.

The transaction you're considering is quite common for business owners.

Hotglove

My total pension income will be about £26k, including State Pension. I'd like to have some cash to use on renovation work on residential properties that we own. If I can use the £45k from Flexible Drawdown Fund without paying tax, that would be ideal. I plan to continue working after drawing the second pension, so any tax would be 40%.
I believe that the £45k paid to my wife for her share of the shop would not be enough for her to incur a significant tax liability, but, obviously, I would save 40% on the drawdown.
I'm not sure who to approach for advice as financial advisors appear to be sales people who specialise in particular products.

mania112

I hope to clarify:

What you want to do is not best suited to 'Flexible' Drawdown, as mentioned, because you don't want to withdraw the funds. You want to invest them in commercial property.

The product type for your situation will (likely) be Standard/Capped Drawdown.

A SIPP (Self-Invested Personal Pension) is the pension type which allows commercial property.

Tax is a non-issue in the way you're asking. You aren't withdrawing the cash.

EDIT: Sorry! I think what you're saying is that you DO want to withdraw the cash to carry out renovations? Flexible Drawdown is now the RIGHT product.

It will not be tax free, however, and in fact you will pay a high amount of tax as it is added to your income for the year and effectively you'll pay the top rate of tax on the whole sum.

EDIT2: Actually.... you are buying your wife's share of the property so that SHE has cash to carry out the renovations. We're back to option 1. I won't be back(!)

jamesd

Remember that it's £20k of specific types of income. Work income, drawdown income don't count, only final salary or other defined benefit work pensions, annuities and the state pensions.

The first 25% of the pension pot can be taken as the normal tax free lump sum. With both capped and flexible drawdown other income is normal taxable income in the year that you take it, so 40% unless it pushes your taxable income into the 45% range.

What do you prefer, having the money to use to refurbish other properties or buying the interest in the business property? You can do either, just pick one. You could do some of each but the costs of drawdown and holding commercial property start to get really marginally to bad when the amounts are much below the whole amount you have.

Holding a commercial property inside a SIPP has costs and the SIPPs that allow it are more costly than normal ones so overall if you're content to use the money to refurbish - and get higher rents as a result, I assume - then I think it's likely to be better for you to pay the one shot 40% income tax and do the refurbishing.

One thing to be aware of with flexible drawdown is that once you do it, you can never again make pension contributions in your own name. Well, you can, but the penalties make it not worthwhile. This applies also to contributions from an employer.

Of course if your wife plays along you can buy an interest off her with the pension money then she can do the refurbishing with the proceeds of that purchase.

kidmugsy

Hotglove wrote: »

I will have an AVC fund of about £75,000. I intend to … take the max lump sum of £30k from my AVC fund, transferring the £45k balance to a Flexible Drawdown Fund.

Have you checked that the use of Flexible Drawdown is permitted by your provider?

Hotglove

Yes, I belong to ESPS, the Electricity Supply Pension Scheme, and they tell me that FD is an option. Also, my final salary pension income will be just over £20k, so adding the State Pension will lift that we'll over the £20k threshold.

kidmugsy

Remember that you can make no pension contributions after you've started flexible drawdown, nor in the tax year in which you started it.