Retirement planning endangered by taking any pension

FatherAbraham

It's just started to sink in, what this new pension-fund-drawdown liberalization means. In particular, the regulations just announced that taking any income from any pension will reduce one's annual allowance from £40,000 to £10,000.

Those who're planning to make huge pension contribs in their final work years need to ensure that they've deferred all their pensions until after they've stopped contributing.

One overlooked pension, which unexpectedly starts paying a few hundred pounds a year, could wreck one's chance to build up a large tax-free lump sum at the end of the working life.

I guess this is going to catch plenty of folks with older pensions, who don't realize the consequences of starting to take an income.

Warmest regards,
FA

hugheskevi

I think the rules about the reduced Annual Allowance only apply to those choosing to draw more as a lump sum than their 25% pension commencement lump sum.

Although folk will still need to be careful - the consequences of taking a small legacy pot of, say, £11,000 all as a lump sum could be very significant if they were planning large contributions.

Those in DB schemes also need to be careful if the reduced Annual Allowance relates to all pension saving, although the consultaton wording implies it was will only be DC. But if the reduced Allowance were to be across all pension saving, DB members with some DC will also need to be careful.

jamesd

Yes, it will catch people out.

It's also destined to become a standard caution for posts where I suggest taking anything out of a pension, though at least the PCLS alone can be taken without triggering it, so it won't hurt those with pension mortgages.

It's probably going to cause me to adjust my own plans once I know what the final rules are so I have some idea of what I have to try to avoid doing. Fortunately I don't have any stray pensions lying around to catch me out.

System

Is it 25% of any one pension, or 25% of one's total pension pots?

Does "taking more than 25%" mean drawing down any amount having already taken the 25%? If so that would apply to any normal retirement.
Or does it mean, as I have read, taking more than would be permitted by the current GAD rate allowance?
Is it cummulative? What happens if the GAD rate changes, or as has been suggested, is abolished?

FatherAbraham

hugheskevi wrote: »

I think the rules about the reduced Annual Allowance only apply to those choosing to draw more as a lump sum than their 25% pension commencement lump sum.

Are you sure?

From the Hargreaves Lansdown factsheet (July 2014):

Change 3: New restrictions on how much you can contribute
What is changing: If you take any income from your pension (in addition to any tax-free cash) after April 2015, you may still be able to make pension contributions, but only up to a reduced annual allowance of £10,000 a year. This includes employer contributions and pension benefits being built up in final salary schemes, which can be surprisingly large.

Income is the trigger, not lump sum, AFAICS. Taking more than the 25% lump sum is regarded as taking income, I suppose, but even if you take no lump sum, but a some income, then you've lost £30,000 of your annual allowance forever.

Warmest regards,
FA

hugheskevi

From HM Treasury consultation response:

new tax rules will be put in place to ensure that individuals do not use the new flexibilities, which are intended to provide people with greater access to their retirement savings, to avoid tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free. Those who choose to draw down more than their tax-free lump sum from a defined contribution pension will be able to benefit from further tax-relieved pension saving, and make further tax-free contributions to a defined contribution pension of up to £10,000 per year. This covers 98% of pension savers over the age of 55.

I don't think 'draw down' in that quote is being used as a technical term, just as meaning withdraw.

So I think taking 25% lump sum and nothing else is fine, clearly taking more than 25% as a lump sum triggers the £10,000 allowance. Taking 25% and buying an annuity probably triggers the £10,000 allowance.

wotsthat

Seems an entirely sensible move. If someone can afford to contribute £40k pa during their final years of work why do they need to draw a retirement income too?

It's easy to get around - live on earned income when working and pension income when retired.

kidmugsy

FatherAbraham wrote: »

From the Hargreaves Lansdown factsheet (July 2014): Change 3: New restrictions on how much you can contribute
What is changing: If you take any income from your pension (in addition to any tax-free cash) after April 2015 ...

I think that may be written in Young Person's English i.e. written badly. I suspect it means " If you take any income from your pension, additional to any tax-free cash, ....

jamesd

I read that as Father Abraham now appears to: PCLS is fine but any income results in the reduction. Naturally it would be foolish to take less than 25% as the lump sum then take income if there is a desire to pay in more than £10,000 because that would unnecessarily trigger the restriction.

wotsthat, for individuals who might be a target of this I assume that they will have ample other assets to live on so will not be restricted much. I think that rules could be made that might block systematic abuse by employers, though, and that appears to be the Treasury's main concern.

Clifford_Pope, any income from any pension pot would trigger the reduction. The PCLS could be taken from any number of pots without triggering the reduction.

All somewhat speculative because we don't know what the final rules are going to be.

Pincher

"to avoid tax on their current earnings by diverting their salary into their pension with tax relief, and then immediately withdrawing 25% tax-free."


In 1993, in America, my colleagues were able to "borrow" from their 401k pension account, only to make fresh "pension contribution" from their salary, which attracts income tax relief.
So, say US$500 goes in to the pension, consisting of $100 tax relief, and $400 salary. They can then "borrow" $400 from the pension account, paying a nominal interest rate like 2%, and spend it like normal money. So, if you wanted to, all the money in the pot was tax relief. The interest has to be paid, mind, so the pension account does make a return on the money lent, albeit only at 2%.


My initial reaction was of course: How can this be allowed!
And then: What a sweet tax dodge!
Obviously the HMRC is far too shrewd to let it happen here.

jamesd

It's already possible to do it here, effectively, under even the current rules, and I don't think that the Treasury or HMRC can come up with any half way reasonable rule that would block it except for deliberate schemes by employers or advisers.

The fundamental problems are that individuals that HMRC or the Treasury might want to target are too well off and the time to state pension age is too short for them to run out of other assets or borrowing capability and be forced to take pension benefits and trigger the rule. There's a chance of crafting rules that could block employers or other deliberate organised schemes, though.

It's an area where I'm reluctant to write much about different approaches to possible rules for individuals because I think it's a losing game for HMRC and Treasury and that at an individual level the much lower than in the past £40k annual limit combined with the lifetime allowance do a job that will probably suffice for the highest profile say £100k or £150k income individuals.