Large Pension Pot

tony4147

Am I rite that if a person has a large pension pot of say £500K and they have a guaranteed £20K/yr pension that most people would go the flexible drawdown route??
(drip feeding the money out to keep below the 40% tax bracket)

I see a lot of advantages, much more control, your money doesn't end up left with the pension Company if you and your partner die. Money becomes part of you estate for your children etc. I have a real problem with annuities in that they die with you and your partner.

In other words if a person can afford it should they be looking to put themselves into this position if they can, of been able to go flexible drawdown.

Linton

With your figures, the desire to keep out of HRT implies a maximum drawdown of about £20K. So going for uncapped drawdown doesnt make any difference - you could get £20K a year well within the capped limits.

So, ISTM that if you saw yourself having £20K of guaranteed income and not needing anything further beyond the HRT level you should have been putting your spare income into S&S ISAs, VCTs, trusts for the children, property, charity, expensive holidays, fast cars etc etc rather than allowing the pension pot to reach £500K.

tony4147

Linton wrote: »

With your figures, the desire to keep out of HRT implies a maximum drawdown of about £20K. So going for uncapped drawdown doesnt make any difference - you could get £20K a year well within the capped limits.

So, ISTM that if you saw yourself having £20K of guaranteed income and not needing anything further beyond the HRT level you should have been putting your spare income into S&S ISAs, VCTs, trusts for the children, property, charity, expensive holidays, fast cars etc etc rather than allowing the pension pot to reach £500K.

Ah, I was always told to try and get the biggest pot I can.

grey_gym_sock

the point of an annuity is to swap your capital for a higher income than you could achieve by keeping the capital and drawing off the investment returns. so it can be useful if your priority is maximizing your income (or avoiding investment risk). if you're happy to draw a lower percentage of your capital for expenditure, and care about leaving more over for your heirs, then staying invested makes more sense - which means drawdown, if your capital is inside a pension. (and even if you do want to maximize your income, drawdown may make sense at age 60 or 65, and buying an annuity only when you're a bit older.)

leaving anything that would be taxed at 40% inside the pension is not necessarily a good idea, however. note you have the options of (a) leaving it in (b) taking it out and investing it elsewhere (c) taking it out and spending it (d) taking it out and giving it away - and regular gifts out of income are exempt from inheritance tax (even if you die within 7 years).

anything left in the drawdown pot when you (i.e. the survivor of a married couple) die: taxed at a flat rate of 55%.

anything taken out, paying higher rate tax, and given away as part of regular gifts out of income: taxed at 40%.

anything taken out, paying higher rat tax, and still held at death: taxed at 40% (as income), and then (if you're over the IHT limit) again taxed at 40% (IHT): so the overall tax rate is 64% (because what's left over is 60% of 60% = 36%).

grey_gym_sock

tony4147 wrote: »

Ah, I was always told to try and get the biggest pot I can.

a bigger pension pot is better than a smaller pot. but significant amounts in different kinds of pot (pension, and S&S ISA) is usually better than all in 1 kind.

Linton

tony4147 wrote: »

Ah, I was always told to try and get the biggest pot I can.

Pensions are efficient for saving for retirement - yours and your dependents. They are less effective for meeting other objectives.

Triumph13

The one thing I'd add to Mr Sock's excellent calculations above, is that you need to take into account the tax relief you got on the way in when comparing these taxes on the way out to what would happen with other investment vehicles. If you have a pot this big then you almost certainly got 40% relief on the way in (or better if you had a salary sacrifice scheme) so the apparent double whammy in the last example is only the same as if you had held the investment outside a pension from the beginning.

I'm lucky enough to have a salary sacrifice scheme that effectively gives me 45% relief. Because of this, even if my pot ends up going over the LTA and suffering a 25% charge, then the kids get slighly more on death than if I'd invested in an ISA instead:

ISA: £55 after 40% IHT becomes £33

Pension £55 contribution becomes £100 after tax relief, £75 after LTA charge and £33.75 after 55% charge.

On the other hand, if anyone can recommend a decent VCT...

Linton

Triumph13 wrote: »

The one thing I'd add to Mr Sock's excellent calculations above, is that you need to take into account the tax relief you got on the way in when comparing these taxes on the way out to what would happen with other investment vehicles. If you have a pot this big then you almost certainly got 40% relief on the way in (or better if you had a salary sacrifice scheme) so the apparent double whammy in the last example is only the same as if you had held the investment outside a pension from the beginning.

I'm lucky enough to have a salary sacrifice scheme that effectively gives me 45% relief. Because of this, even if my pot ends up going over the LTA and suffering a 25% charge, then the kids get slighly more on death than if I'd invested in an ISA instead:

ISA: £55 after 40% IHT becomes £33

Pension £55 contribution becomes £100 after tax relief, £75 after LTA charge and £33.75 after 55% charge.

On the other hand, if anyone can recommend a decent VCT...

But the 55% charge is on the total amount after decades of investment return. Whereas with the ISA option only the 40% IHT (if applicable) is paid on the final amount.

tony4147

I work through an Umbrella Company, to get my tax down I pay more into a pension, I pay salary sacrifice, so for every £100 paid in it is only costing me something like £56.

Triumph13

Linton wrote: »

But the 55% charge is on the total amount after decades of investment return. Whereas with the ISA option only the 40% IHT (if applicable) is paid on the final amount.

Makes no difference. The ISA would have grown by the same amount. If we assumed everything had doubled due to investment growth then the kids get £66 via the ISA route and £67.50 via the pension route in my example.

Yes you pay tax on the investment growth, but you got investment growth on the tax relief.

jem16

tony4147 wrote: »

Am I rite that if a person has a large pension pot of say £500K and they have a guaranteed £20K/yr pension that most people would go the flexible drawdown route??

Does your £20k/yr guaranteed pension income come from somewhere other than the £500k pension pot or is it coming from that?