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

Linton

N1AK wrote: »

I might be missing something but wouldn't the exclusion from interest/capital gains within the ISA be better than having to pay tax when removing the earned interest from the pension?

So for example, if you could take an extra £20k a year out of the pension at the standard tax rate after 5 years you'd have £100k in the ISA. The interest on the ISA is now yours with no tax. However if the money was still in the pension you would have to pay tax on the capital and tax on the interest when you took them out of the pension?

Err no it works out the same....

Say you have £10K in a pension and after 5 years it has risen by 50% to £15K. If you take that out as a standard rate taxpayer you pay £3K tax leaving you with £12K.

If you took the £10K now and out it in an ISA you pay £2K tax which is less, to leave you with £8K in the ISA. After 5 years it has risen by 50% to £12K. Which is the same as if you had left it in the pension.

Where taking it out now may help is if you are close to the HRT tax band. Clearly only using £10K of the lower band is better than using £15K.

zagfles

Linton wrote: »

Err no it works out the same....

Say you have £10K in a pension and after 5 years it has risen by 50% to £15K. If you take that out as a standard rate taxpayer you pay £3K tax leaving you with £12K.

If you took the £10K now and out it in an ISA you pay £2K tax which is less, to leave you with £8K in the ISA. After 5 years it has risen by 50% to £12K. Which is the same as if you had left it in the pension.

Where taking it out now may help is if you are close to the HRT tax band. Clearly only using £10K of the lower band is better than using £15K.

Yes, and even accounting for the TFLS it makes no difference.

£10k left in the pension: grows 50% to £15k, £3750 tax free, £11250 taxed at 20%, total out £12750.

£10k taken out and put in an ISA: £2500 tax free, £7500 taxed at 20% = £8500, grows 50% to £12750.

£10k crystallised, TFLS £2500 taken out an put in an ISA, £7500 left in pension: £2500 ISA grows to £3750, £7500 pension grows to £11250 = £9000 after tax, total £12750.

jamesd

Yes, though the PCLS does make a difference when paying in, since £8k into the pension delivers more than 8K initially into an ISA due to the PCLS among other things.

Thrugelmir

zagfles wrote: »

Yes, and even accounting for the TFLS it makes no difference.

£10k left in the pension: grows 50% to £15k, £3750 tax free, £11250 taxed at 20%, total out £12750.

£10k taken out and put in an ISA: £2500 tax free, £7500 taxed at 20% = £8500, grows 50% to £12750.

£10k crystallised, TFLS £2500 taken out an put in an ISA, £7500 left in pension: £2500 ISA grows to £3750, £7500 pension grows to £11250 = £9000 after tax, total £12750.

If the increase in personal tax allowance isn't utilised by other income. Then the pension will generate a higher net income.

Unlikely either that growth alone will generate the 50% growth you state. As it's a proven fact that reinvestment of income provides the majority of compounding return. Lastly the pension can diversify further than the ISA. Thereby reducing the risk of outright capital loss.

Far too simplistic to assume a positive return over any 5 year period.

zagfles

Thrugelmir wrote: »

If the increase in personal tax allowance isn't utilised by other income. Then the pension will generate a higher net income.

As already mentioned: "..assuming that the personal allowance is fully utilised..."

Unlikely either that growth alone will generate the 50% growth you state.

It was an example, the same applies whether it's 50%, 20%, 1%, or -20%

As it's a proven fact that reinvestment of income provides the majority of compounding return.

So what? Same applies whether returns are growth or reinvested income compounding or a combination.

zagfles

jamesd wrote: »

Yes, though the PCLS does make a difference when paying in, since £8k into the pension delivers more than 8K initially into an ISA due to the PCLS among other things.

Yes of course - the discussion was just about what you do once the money is in.

Daddiebear

I am over 55, low paid and on short hours, I have over £20k in my works pension.
It struck me that as our family has to claim housing benefit the rules state that if we have over £6k in savings then we cannot claim Any benefits at all, as the new pension laws come into effect next April all those with pension pots over the £6k threshold could be in a very precarious position as these could be interpreted as Savings as one can withdraw the monies at any time. Unless there is a clause which states that the pension will not be classed as savings then I will be forced to draw most if not all the money out and spend it quickly on a legitimate item.
Any thoughts ??

kidmugsy

Daddiebear wrote: »

I am over 55, low paid and on short hours, I have over £20k in my works pension.
It struck me that as our family has to claim housing benefit the rules state that if we have over £6k in savings then we cannot claim Any benefits at all, as the new pension laws come into effect next April all those with pension pots over the £6k threshold could be in a very precarious position as these could be interpreted as Savings as one can withdraw the monies at any time. Unless there is a clause which states that the pension will not be classed as savings then I will be forced to draw most if not all the money out and spend it quickly on a legitimate item.
Any thoughts ??

No risk in April, I'd have thought. Mr Osborne didn't introduce all this flexibility with the intention of blighting his name by changing the law that currently protects your pension. He probably wants to be remembered as the great pension reformer, reasonably enough, and also to win the May election.

Longer term there might be a worry. It may depend on when and how severe the next great financial crisis is, and which party (or parties) is in government. Late 2015? 2016? Who knows? From the public interest point of view it wouldn't be unreasonable on the face of it, but many Chancellors wouldn't want to introduce a disincentive to saving in a pension. But Osborne probably won't be Chancellor after the election. You may have to trust to the tender mercies of Ed Balls. Or even a UKIP/SNP coalition.

Dunnit

Wonder if someone can check the maths on this.

The wife has a pension of £5k from 60 when she wants to retire. She will then get her other pensions at 67 which will take to approximately £13k.

To ensure she uses her annual tax allowance within those 7 years she was going to build up a SIPP of £50k. That would allow her to take £12k as her tfls and then £5.5k thereafter for the 7 years. This would roughly use all her tax allowance and any surplus/short fall can be dealt with by delaying taking her state pension for a few months or extra contributions.

What I am wondering is whether there are any benefits in not taking the initial 25% tfls but taking 25% tax free each time as this just appears to complicate matters for little or no gain? Is there anything else we are missing?

mgdavid

seems reasonable to a layman's eye based on what we know today, but beware of the implicit assumptions:
- how many years til she is 60?
- what will the personal allowance be by then?
- will the 25% PCLS still exist by then?
- there will (should) be investment gains within the SIPP, increasing its value
- etc