New Pension Rules

BazzerPontefract

"From April 2015, from age 55, whatever the size of a person’s defined contribution pension pot, we propose that they’ll be able to take it how they want, subject to their marginal rate of income tax in that year. 25% of their pot will remain tax-free."

I have a stakeholder pension plan with a provider that only, currently, provides annuities. Does the above mean the provider will have to offer flexible drawdown against the stakeholder plan.

Your_Hero

BazzerPontefract wrote: »

"From April 2015, from age 55, whatever the size of a person’s defined contribution pension pot, we propose that they’ll be able to take it how they want, subject to their marginal rate of income tax in that year. 25% of their pot will remain tax-free."

I have a stakeholder pension plan with a provider that only, currently, provides annuities. Does the above mean the provider will have to offer flexible drawdown against the stakeholder plan.

The quote is right. But a stakeholder plan would unlikely offer flexible drawdown due to costs. You may not need to enter drawdown at all to withdraw your pot. You can draw ad-hoc lump sums (or the whole amount). This is known as Uncrystallised Fund Pension Lump Sum (UFPLS).


The only time you will need to enter drawdown is when you want to take the tax free cash now and defer the 75% until a later date.

EdGasket

I don't know but you don't have to stick with your current provider when you decide to take benefits; you can transfer to another provider or a SIPP

So what is the difference between taking ad-hoc lump sums and drawdown? It would seem to me that drawdown is redundant now because you can just take out what you want anytime.

Thrugelmir

BazzerPontefract wrote: »

Does the above mean the provider will have to offer flexible drawdown against the stakeholder plan.

There'll be no obligation to have to offer anything new. For no other reason that some companies will not have the systems etc to support such products. Ideas always look good on paper. The reality isn't quite so easy or straightforward. There'll be a cost to administering flexible drawdown. Which may make it uneconomical as well. Unless there's considerable capital outlay at the outset.

EdGasket

What is uneconomic about returning money to people who have invested it? Share dealing companies do this every day for minimal charge. I ask again, isn't drawdown redundant now that you can simply take out what you like? There are no difficult rules to follow anymore; they have to give you what you ask for so why should the charge be any more than say £20 tops per withdrawal?

Your_Hero

What is uneconomic about returning money to people who have invested it? Share dealing companies do this every day for minimal charge.

You've got to remember that pensions were taken out long before drawdown was even introduced. They cannot suddenly allow this without investing millions of pounds into new technology which they have no incentive to do. This is partly why the new drawdown rule (subject to approval) will be introduced (see below) but may not necessarily be offered by all providers.

EdGasket wrote: »

I ask again, isn't drawdown redundant now that you can simply take out what you like? There are no difficult rules to follow anymore; they have to give you what you ask for so why should the charge be any more than say £20 tops per withdrawal?

No it will not be redundant as I explained in the first post.

The main difference between drawdown and UFPLS is that drawdown allows you to take your full tax-free cash but will also crystallise your pension pot.

Whereas, UFPLS allows you to take ad-hoc lump sums, and 25% of whatever you take is tax-free. The remainder pot is not crystallised. This also allows pension providers, who cannot facilitate traditional drawdown due to costs, to offer this option as a half-way house although they can choose not to offer it.

dunstonh

Does the above mean the provider will have to offer flexible drawdown against the stakeholder plan.

I cannot imagine that a stakeholder pension will offer any flexible income options given its low profitability. It is also a product that is largely out of date now and caters for a niche market that is typically your annuity buyer.

What is uneconomic about returning money to people who have invested it?

The platforms that these products are built on are coded to do certain things. Stakeholder is not a modern product and was built to be cheap and simple. (although doesnt really fit with cheap with a lot of people nowadays).

Why spend millions on systems to offer a facility on a product that is largely obsolete when all the person needs to do is transfer it to a pension that does allow it?

Thrugelmir

EdGasket wrote: »

What is uneconomic about returning money to people who have invested it? Share dealing companies do this every day for minimal charge.

How do share dealing companies make their money?

I'll give you a clue to start with it's not the dealing fees.

EdGasket

Thrugelmir wrote: »

How do share dealing companies make their money?

I'll give you a clue to start with it's not the dealing fees.

Well thats all I ever pay so you'll need to enlighten me further on that one. I know there is bid-offer spread but the marketmaker gets that not the sharedealing company. I don't pay any annual charges so I don't see how else they are making money out of me??

EdGasket

So if I understand 'Your Hero' correctly, he is saying that if I want to take 25% cash tax free, as has always been possible, I have to take 'drawdown' and then can't take out further amounts of capital ad-hoc? I do not think that is correct anymore.

Your_Hero

EdGasket wrote: »

So if I understand 'Your Hero' correctly, he is saying that if I want to take 25% cash tax free, as has always been possible, I have to take 'drawdown' and then can't take out further amounts of capital ad-hoc? I do not think that is correct anymore.

No you've not understood me correctly at all.

Drawdown will effectively allow you to freely draw what you like, i.e. the capped limits are removed. Since you've take the tax-free cash out already, the remainder is fully taxed as income under PAYE. So you can still withdrawal your ad-hoc capital anytime, it just gets taxed. Your whole pot is crystallised now and a different set of rules apply upon death.

The other withdrawal method allows you to draw out any amount and take your tax-free cash with it in stages, i.e. 25% of whatever you take it tax-free. The rest of the pot is not crystallised.