Enter drawdown now or after April?

Mirador

Sorry another question.


What are the pros and cons of entering capped drawdown now, to use this years personal allowance against waiting until the new rules come in to effect in April, but losing this years allowance?

I recall a post by JamesD on the difference, but can't find it now.

atush

Can't help with the IFA stuiff, but the main drawback to waiting is losing this years PA, or if you still wanted to go back to work in future and put more than 10K a year into a pension.

I dont think your wife wants to go back to work and contribute more than 10K per annum (she can still contribute 2880/3600 per year with no earned income).

So your plan to start DD up to the GAD rate this year could be sound? And withdraw the rest next year?

gadgetmind

Mirador wrote: »

I recall a post by JamesD on the difference, but can't find it now.

If we're thinking of the same one, this is where James observes that there can be advantages of entering capped drawdown this year if you want to continue to contribute more than £10kpa to a pension in future tax years.

So,
Pros to entering now: Uses this year's personal allowance and provides future flexibility.
Cons: Fees may be higher as providers typically charge to enter drawdown and for a GAD calculation.

clivep

Is she 60? If so then another option would be to make use of this year's small pot rules.

6 months ago I made 2 partial transfers of £7,000 out of my pension into new arrangements... one into a Virgin Stakeholder scheme and one into a H&L Sipp. These will both be cashed in under the small pots rules later this month when I'm 60. As a non-taxpayer at present there will only be £100 tax to pay on this £14,000.

gadgetmind

clivep wrote: »

As a non-taxpayer at present there will only be £100 tax to pay on this £14,000.

Very nice and not even worth the hassle of splitting it over two tax years.

jamesd

Gadgetmind got it right: entering capped drawdown preserves the right to pay in more than £10,000 if you take no more than the 25% tax free lump sum then the GAD limit amount each year. Wait until 6 April and you only get the 25% tax free lump sum, with anything else triggering the drop in limit from £40,000.

One of the easiest and most effective forms of inheritance tax planning is giving the money away well before you die. Not always possible but it's useful. The changes to pension inheritance rules also make pensions very useful for inheritance tax planning because they are outside the estate and would in general be taxed at no more than the income tax rate of the person getting the money.

clivep

gadgetmind wrote: »

Very nice and not even worth the hassle of splitting it over two tax years.

two tax years?

This is all done in the current tax year to take advantage of this year's tax allowances before being able to do it easily after April's change.

Tax saving this year is 20% of £10,000 = £2,000 so worth the paperwork. Only extra cost is HL SIPP triviality & closure fees of £120. No extra cost for the Virgin Stakeholder.

jamesd

clivep, can you confirm that the Virgin stakeholder really has no charge for small pot taking and account closure? Costs are an issue for the pension loophole article and knowing a really cheap place to mention would be good.

clivep

jamesd wrote: »

clivep, can you confirm that the Virgin stakeholder really has no charge for small pot taking and account closure? Costs are an issue for the pension loophole article and knowing a really cheap place to mention would be good.

I can certainly confirm this as I took out one for my wife for £9,500 in May. She was already 60 in January and has a small annuity of about £1,800 per annum so I didn't think it worthwhile taking out 2 plans to use all her tax free allowance. The money was put in their income protector fund which has a 1% per annum fund charge but this was not of relevance for the short term. The only problem was the length of time it took to get the funds from Fidelity which meant that it was September before I could cash it in. Plan was closed with a value of £9,580.48 less tax of £1,437 which I subsequently reclaimed in full from HMRC using form P35. No charges other than about £20 management charges within the fund.

The stakeholder plans that I looked at did not have closure/triviality costs but I was unable to find a second one for myself that allowed a term of less than 1 year. That's why I decided a H&L Sipp seemed the cheapest way for my 2nd plan as the 0.45% annual management fee is OK for the short term required along with no dealing charges, low fund charges on clean funds and a triviality payment charge of £90 (£75 + VAT). I'm rather annoyed to find that they are also going to charge a £30 (£25 + VAT) account closure fee which I had though would be within the triviality charge particularly as their website says "This fee applies when transferring your account to another provider" which I am not doing!

jamesd

Thanks. Agreed about the account closure fee because triviality has mandatory pension account closure as part of its legal requirement.

clivep

Update:

I was 60 last Saturday and cashed in the two small pensions under the small pot rules

In July a partial transfer from Fidelity of £7,000 had been put in Virgin Stakeholder Growth Fund. Closing balance was £7,172.36 which was paid out net of tax with no other charges. Cheque received Wednesday 4th Feb.

In July a partial transfer from Fidelity of £7,000 had been put in Hargreaves Lansdown with £6,950 invested in L&G UK index (leaving £50 cash to cover HL charges). Closing balance was £7,265.32 less £90 commutation fee. HL agreed that the £30 account closure fee was not sufficiently clear and waived this charge. Cash net of tax received by bank transfer Thursday 5th Feb.

P45 received from HL. Virgin screwed up their documentation and the P45 was not included but after calling them it's just arrived in today's post. The P53 to reclaim the tax will be sent later today.

Once most of the tax is refunded I'll have paid £152.15 tax and received £14,195.53 from my partial transfers of £14,000.