The Pension Loophole article discussion

saver861

Something I'm not clear about - perhaps someone wiser than me (pretty much everyone then!) me can explain re SIPP's.

The rules state ... "You may even be able to draw your entire pension as cash providing you meet certain criteria such as already having a secure pension income of at least £12,000 a year. "

So non tax payers and tax payers taking advantage of the £720 benefit, won't be able to draw down the total lump sum unless they have at least £12,000 pension? Am I reading this right?

Put another way, even if you are over 55 you cannot draw the full amount as a lump sum unless you show you have in place an existing pension paying, or will pay, £12,000 pa? Are they then 'forced' to buy an annuity with their SIPP?

I'm sure I've got this confuddled somehow but not sure exactly where.

jamesd

dunstonh wrote: »

In which case, wait until the new tax year when the triviality and small pots rules wont matter with money purchase schemes.

What will be the consequence for the £40,000 annual contribution allowance if 100% of the pot is withdrawn from 6 April 2015 onwards? How does that compare with the situation if it is done using the small pots rule no later than 5 April 2014?

The reason I'm asking is that the MSE article makes the explicit claim that doing it next year will cause the annual contribution allowance to be reduced to £10,000.

jamesd

saver861 wrote: »

I think the 'loophole' I'm referring to is the ability to start up the pension and withdraw it six weeks later when HMRC has added the tax benefit, i.e. as in the MSE document. I had thought that was something that had transpired recently due to changes in the budget etc?

That's been there since the time dunstonh wrote about. What happened in the budget is that the small pot limit was increased to £10,000 per pot from £2,000 and the number was increased from two to three. As you've seen for £2880 the gain isn't large. For three pots of £10,000 it's a lot more significant.

saver861 wrote: »

Something I'm not clear about ... The rules state ... "You may even be able to draw your entire pension as cash providing you meet certain criteria such as already having a secure pension income of at least £12,000 a year. "

There are four relevant types of drawdown for this, all from age 55 onwards:

1. Capped income drawdown. Can take up to 25% tax free lump sum then income up to the GAD limit each year.
2. Flexible drawdown. Can take 25% tax free lump sum then an unlimited amount out of the pot provided you have income currently in payment of at least £12,000 from state pensions, occupational pensions or annuities. The requirement before the last budget was £20,000.
3. Flexi-access drawdown, available from 6 April 2015. Up to 25% tax free lump sum and as much or little of the rest taken at any time desired.
4. Uncrystallised funds pension lump sum, available from 6 April 2015. Take any amount, 25% will be tax free, 75% taxed, the rest of a pot remains unaffected. Can't take 25% only from the whole pot and only some of the 75%, use flexi-access drawdown for that.

There are also two relevant types of other lump sums:

1. Small pots. Up to £10,000 for up to three pots as of 6 April 2014. Was two pots up to £2,000 before that. Have to be aged 60 -74 to use this.
2. Triviality. Based on total value of all pots being no higher than £30,000, was £18,000 before 6 April 2014. Have to be aged 60 -74 to use this. Can use small pots rule first to get combined £60,000 out. All pensions except state pension count towards the £30,000 limit.

Now you know about those types it is probably clear that the current rues are referring to the current flexible drawdown requirements, not the new flexi-access drawdown ones. The rules will probably be changed.

saver861

jamesd wrote: »

That's been there since the time dunstonh wrote about. What happened in the budget is that the small pot limit was increased to £10,000 per pot from £2,000 and the number was increased from two to three. As you've seen for £2880 the gain isn't large. For three pots of £10,000 it's a lot more significant.

Cheers bro ... gotcha.

jamesd wrote: »

2. Flexible drawdown. Can take 25% tax free lump sum then an unlimited amount out of the pot provided you have income currently in payment of at least £12,000 from state pensions, occupational pensions or annuities. The requirement before the last budget was £20,000.
3. Flexi-access drawdown, available from 6 April 2015. Up to 25% tax free lump sum and as much or little of the rest taken at any time desired.

Ok got this too. The Flexible is existing but the Flexi-access is from 2015. Thus removing the £12,000 rule.

My occupational pension is over £12k, so it don't matter none anyway.

However, her who must obeyed, is packing in her freelancing this year and will only have a £7k occupational pension. If I'm right, she can open an SIPP up to £3,600 per year and draw the full amount down whenever she wants from April 2015. As she will be a non tax payer she can take it all tax free? (she is 60). The £12,000 rule don't come into it from April 2015? - unless they fiddle with the rules again, which they probably will.

jamesd

Yes, she can do that, no £12k rule from April 2015. She won't have unlimited personal allowance, just about £3k a year unused once the £7k occupational pension starts. No unused personal allowance once her state pension also starts. If she won't be paying her full earned income into a pension this year it'll pay to borrow to do that unless really costly borrowing is used. Watch out for the lump sum recycling limit but she probably can't exceed even the 1% of lifetime allowance limit on lump sum recycling.

saver861

jamesd wrote: »

She won't have unlimited personal allowance, just about £3k a year
unused once the £7k occupational pension starts.
If she won't be paying her full earned income into a pension this year it'll pay to borrow to do that unless really costly borrowing is used.

The £7k occupational pension has been in place for a few years. She bailed the workplace about four years ago. The freelancing was the top up to that, which she has wound down this year.

We have missed the boat on this one as, from what I'm seeing now, it would have been beneficial for her to have been using a SIPP or Stakeholder for the last few years.

Ah well .. some you win...... never thought I'd see the day when I'd be reading up so much on Pensions!! ..... jeeze. Mind you, the good news I still have all my own hair and teeth ... mostly :cool:

OldBeanz

There was no point in contributing to a small SIPP for many people until the latest changes in policy. If your wife had the money in a SIPP then she would have been forced to take an annuity or highly charged restricted drawdown. One of the main beneficiaries of the latest changes is women who had small pensions can use them to fill the gap that the raising of the state pension age created. There was no pensionable way to do this efficiently. My wife is now building up her SIPP to plug the gap between 60 and 67. Previously she was going to have an annuity of less than £1kpa (funds were going into my pension because I could take it flexibly). She is now paying in as much as she can.

saver861

OldBeanz wrote: »

There was no point in contributing to a small SIPP for many people until the latest changes in policy.

Yes thats true and thinking about it, there is no way we would have taken it out to buy an annuity - rates have been garbage for the last 10+ years.

johnfthetraveller

OldBeanz wrote: »

There was no point in contributing to a small SIPP for many people until the latest changes in policy.

There is little point in contributing to the small SIPP for many people AFTER the latest change in policy, unless you want to enrich the brokers.

Come on Martin, the article STILL has not been corrected. Surely you have a duty of care to correct the article promptly, before others fall foul of disproportionate charges, as I have.

gadgetmind

johnfrith wrote: »

There is little point in contributing to the small SIPP for many people AFTER the latest change in policy, unless you want to enrich the brokers.

The latest changes are a game changer for many people.

Before these changes, my wife was gaining 20% tax relief on her contributions but not paying any tax as she's within her personal allowance. However, at retirement she'd only have been able to access the 25% PCLS and would then have a trickle of money (around £2.5k pa) both before and after state pension.

Now she'll be able to empty her SIPP tax free in around 10 years so it (and associated fees) will be long gone by the time SP arrives.

I do however agree that this "loophole" is very difficult to exploit, and it's really those using pensions as they were intended to be used (slowly building a nest egg for retirement income) who will benefit from the forthcoming changes.