Start capped drawdown now if 55 and paying £10k into pension

jamesd

The rules for pensions from 6 April 2015 will impose a cap of £10,000 on pension contributions each year for anyone who takes any more than the 25% tax free lump sum from a pension pot. There is one main exception: a person who is in capped drawdown before that date. Such a person can also take out the amount allowed under capped drawdown rules without triggering the £10k cap. This doesn't just apply to the money in capped drawdown on 6 April 2015, it applies also to money moved into drawdown later, even money paid into a pension after that date.

It is likely to be good planning to put £1,000 or so into capped drawdown this tax year even if you have no need for the money. This will preserve your ability to take out more money than the 25% lump sum.

The extra amount that can be taken out varies as normal for today's capped drawdown. At the moment the income limits are these percentages of the pension pot size, different numbers for each age, not just at the steps I give. These numbers are with the 3% gilt yield of August 2014.

Age 55: 7.20%
Age 60: 7.95%
Age 65: 8.85%
Age 70: 10.355
Age 85 and older: 22.05%

So a 55 year could could continue to take £7,200 a year out of a £100,000 pension pot without triggering the £10,000 cap. If they don't want to do that immediately they could just put £1,000 of it into capped drawdown and preserve their ability to take that £7,500 for whenever they want to do it.

Nobody new will be able to enter capped drawdown after 6 April 2015. Act now or lose this capability forever.

For the amount that you put into capped drawdown you have the usual reduction in death benefits:
1. No 100% tax free serious ill health lump sum if diagnosed as having a life expectancy of less than a year. Just the new usual 25% tax free and 75% added to taxable income.
2. On death 100% paid tax free into the pension pot of a spouse or very limited set of financial dependants. If paid to anyone else or to those outside a pension pot a 55% tax charge, a plan to reduce this, new level not yet known. Term life insurance is a cheap way for those in good health to manage this if desired.

PaulCooper

Hi James
It's an extremely good point that you make and one that I had gradually realised was available. I was wondering how to put it into words and make public on this board, you've done it excellently.
From my perspective it might make a considerable difference to how much I can keep away from HMRC.
I'm 58, with around £550k already in drawdown. I was anticipating taking circa £41k pa from next year (keeping out of the 40% tax bracket), thinking that I would probably not contribute to the fund again (as I would have finished employment). What I will probably do from next year is take out the amount that still allows me to contribute the £40k. 'Recycle' the £40k, claiming the 25% tax free allowance

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I'm assuming that this 25% amount will not be added to the £41k and prevent me doing this on a yearly basis??
Thanks for pointing this very subtle and important point out
Paul

kidmugsy

Paul, are you familiar with the rules to obstruct you from recycling your TFLS?

PaulCooper

Hi Kidmugsy
Yes I am, I used the wrong word, but it got the point across.
I thought that these new restrictions were designed to prevent recycling, which of course it will, for most as the limit of £10k will apply.
I was making an assumption that by a 'quirk' of my age and the fact I'm already in drawdown, that I'd escape the £10k limit!
A couple of days ago, I asked the question of my SIPP provider, let's see what they have to say. I'll put the results of the questions on this board when I've got something definitive
Thanks for pointing it out anyway
Paul

jamesd

PaulCooper wrote: »

I would have finished employment

What I described won't be relevant to you because you will not be affected by the £10,000 cap anyway. You will presumably have no earned income so your cap will be £3,600 gross a year.

You appear likely to have sufficient funds to make sufficient VCT contributions each year to eliminate your basic rate tax liability. You probably have sufficient non-pension money or borrowing capacity to do that and still maintain your required income level.

PaulCooper

Good one, never thought of that angle!
Income from a pension fund doesn't count as earned income??
Back to the drawing board if that is the case.
Paul

jamesd

Right, pension income isn't earned income. Your next possible tool on the drawing board is VCTs.

okydoky

So James..................

My pension pot is now in drawdown, do I avoid 55% tax on my demise by nominating my wife's SIPP as sole beneficiary?

I must have missed this, when was it announced?

Thanks

greenglide

You nominate your wife as the beneficiary (already done?) not her SIPP. She would then have the choice as whether to inherit the pot or take as a taxed lump sum.

Has it not always been the case?

okydoky

Yes thanks, but it is the tax treatment of the fund I am querying.

If I die first,will it be subject to 55% tax if she takes the fund, but tax free if it is transferred into her pension?

Ta

greenglide

That is correct, see https://www.rowanmoor.co.uk/sipp/death-benefits/ for details of the rules