MSE News: Over-55s get green light to use their pension like a bank account

Former_MSE_Helen

People will be able to take a series of series of lump sums from their pension fund instead of just one from April 2015...

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Over-55s get green light to use their pension like a bank account




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digannio

Here's my position and how I intend to go about the new rules. Perhaps someone could advise on whether this is still on track with the changes.

I'm a non-taxpayer and receiving a company pension and due to get a full state pension (already checked) in about seven years time. I've also got a personal pension with Scottish Widows worth about £31,000 and an old company DC one invested through Fidelity worth about £13,000.

Neither will offer drawdown so I plan to move them into a self invested personal pension through someone like Iweb or Halifax Sharedealing ready for April. Then I plan to go into phased drawdown and take £4,000 a year (plus another £1,000 a year tax free). This will take my annual income up to my personal allowance when added to my pension income... I understand the tax-free element of the pension doesn't count towards my personal tax allowance. I plan to do this each year and thereby accessing much of the pot tax free until when the state pension kicks in and I become a tax payer.

I gather that the above is still on track and can start when the new rules come in next April and the minimum income requirement for drawdown is ditched.

I've even got my eye on the fund I want. I've been looking at the L & G Multi Index 4 fund... lower risk, low cost, multi asset fund and rebalanced for you.

Well, that's the masterplan... what could possibly go wrong;)?

PS I hereby acknowledge the very valuable tips from people like kidmugsy and others in devising this cunning plan... and they didn't even ask for so much as a pint of Owld Gutrot in return
:beer:

PPS More research needed, I fear, over this "not having to go into drawdown" move. I think I'll take a bit of timeout while everything is fully drawn up and all the options are spelled out clearly and on the statute books. Still, the new freedoms do look ideal for someone in my position.

bmm78

digannio wrote: »

Here's my position and how I intend to go about the new rules. Perhaps someone could advise on whether this is still on track with the changes.

I'm a non-taxpayer and receiving a company pension and due to get a full state pension (already checked) in about seven years time. I've also got a personal pension with Scottish Widows worth about £31,000 and an old company DC one invested through Fidelity worth about £13,000.

Neither will offer drawdown so I plan to move them into a self invested personal pension through someone like Iweb or Halifax Sharedealing ready for April. Then I plan to go into phased drawdown and take £4,000 a year (plus another £1,000 a year tax free). This will take my annual income up to my personal allowance when added to my pension income... I understand the tax-free element of the pension doesn't count towards my personal tax allowance. I plan to do this each year and thereby accessing much of the pot tax free until when the state pension kicks in and I become a tax payer.

I gather that the above is still on track and can start when the new rules come in next April and the minimum income requirement for drawdown is ditched.

I've even got my eye on the fund I want. I've been looking at the L & G Multi Index 4 fund... lower risk, low cost, multi asset fund and rebalanced for you.

Well, that's the masterplan... what could possibly go wrong;)?

PS I hereby acknowledge the very valuable tips from people like kidmugsy and others in devising this cunning plan... and they didn't even ask for so much as a pint of Owld Gutrot in return
:beer:

PPS More research needed, I fear, over this "not having to go into drawdown" move. I think I'll take a bit of timeout while everything is fully drawn up and all the options are spelled out clearly and on the statute books. Still, the new freedoms do look ideal for someone in my position.

What impact will it have on your standard of living if your fund drops by 20% in the first year? Key question for anyone to consider before going into drawdown.

Without knowing full details of what other provisions you have and how much income you need, I would question the wisdom of placing £44k in drawdown. A lot depends though on whether your likely outgoings are covered by your company and state pension.

Pincher

£44k? I would use up any personal allowance left to draw down tax free, and then just leave the rest invested, and pray that it

1. Grows, and

2. we hit high inflation, pushing up annuity rate to 12%, convert to annuity, then

3. Pray some more, so inflation comes back down, so your retirement is not a bust.


You can always draw down more if you need it.

digannio

I also have other substantial savings and investments that mean I wouldn't be looking at the workhouse should there be a market dip. I believe in my position the chance to boost my income in this extremely tax efficient way over the next few years is a good opportunity. I will have less need of this pot once the state pension kicks in when I will become a taxpayer when combined with the state pension. I think I am in an ideal position to benefit from these changes.

kidmugsy

digannio wrote: »

I'm a non-taxpayer and receiving a company pension and due to get a full state pension (already checked) in about seven years time. I've also got a personal pension with Scottish Widows worth about £31,000 and an old company DC one invested through Fidelity worth about £13,000.

Neither will offer drawdown so I plan to move them into a self invested personal pension through someone like Iweb or Halifax Sharedealing ready for April.

If you want to, you could put your combined pension into "capped drawdown" in this tax year. That would give you access to this year's NISAs for your Pension Commencement Lump Sum, and the chance of using those wonderful interest-bearing current accounts at TSB, Nationwide, Lloyds, etc., until it's NISA-time at (say) the end of the tax year. And you'd get a bit of tax-exposed, but presumably tax-free, drawdown money too. Yippee! You could even (I'm not making this up) recycle £2880 p.a. of your drawdown income into another pension contribution, in preparation for playing the game again in future.

As for providers, if I were you I'd include BestInvest and Hargreaves Lansdown in your comparison.


UPDATE: see the sixth bullet point.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/363574/pension_flexibility.pdf

SECOND UPDATE: any use?
https://www.hl.co.uk/pensions/income-drawdown/income-drawdown-calculator

redux

Hmmmm, I read this bit of the MSE article:

Under the changes individuals will be able to take a series of lump sums from their pension fund, with 25% of each payment tax free and 75% taxed at their marginal rate of income tax in that year. They will not have to enter into a drawdown policy.

So that means that someone who still wants to take a substantial lump sum at the start, for example to pay off something, maybe a mortgage on a house or loan on a business asset, would be likely to pay more tax that year than if the whole 25% lump sum was tax free.

I haven't read about the scheme yet in any detail at all, so maybe some people will correct this assumption and point out there are ways around that.

But it strikes me that the big fanfare about making things better is adding flexibility but not necessarily any overall reduction in tax, except where some people as above are able to plan their income to just below a threshold.

Shackfan

redux wrote: »

Hmmmm, I read this bit of the MSE article:



So that means that someone who still wants to take a substantial lump sum at the start, for example to pay off something, maybe a mortgage on a house or loan on a business asset, would be likely to pay more tax that year than if the whole 25% lump sum was tax free.

I haven't read about the scheme yet in any detail at all, so maybe some people will correct this assumption and point out there are ways around that.

But it strikes me that the big fanfare about making things better is adding flexibility but not necessarily any overall reduction in tax, except where some people as above are able to plan their income to just below a threshold.

That's how I read it. Example... You have 100k and take the whole 25% in one go. No tax to pay. Or you decide to take it gradually and take 10k out in first year. So 2.5k is tax free but you pay tax (if you are above the no tax threshold) on the 7.5k!!!

jem16

redux wrote: »

But it strikes me that the big fanfare about making things better is adding flexibility but not necessarily any overall reduction in tax, except where some people as above are able to plan their income to just below a threshold.

It can lead to an overall reduction in tax if you don't take the whole pot in one large lump sum but in several smaller lump sums.

For example if you had £100k in your pension pot and assuming no other income that year;

Take it all in one year you would have £25k tax free. The remaining £75k would be taxable so the first £10k tax free, the next £32k at 20% and the remainder at 40%. (tax bands are rough, not exact)

Take it over 2 years, assuming no other income so £50k each year;

£12.5k tax free and £37.5k taxable. First £10k tax free and the next £27.5k taxed at 20%. Second year would be slightly better as personal allowance would be higher so more is tax free.

Biggest point is the removal of any of it to be taxed at 40%.

kidmugsy

redux wrote: »

So that means that someone who still wants to take a substantial lump sum at the start, for example to pay off something, maybe a mortgage on a house or loan on a business asset, would be likely to pay more tax that year than if the whole 25% lump sum was tax free.

I suspect you've got your knickers in a twist over nothing; "will be able to" does not mean "will be compelled to".

System

Of course it can't be like a bank account. You can take money out and pay money in at will with a bank account - you can only pay money into a pension through contributions.
The analogy is it would be just like an ISA - you can draw money out but only pay in up to your allowance.