Draw down one pension then start another

TH1878

Tom2023 wrote: »

I either buy the flat now or in 3 years time in which case unless the property market has turned on its head it will cost me at least 15-20% more.

Is this flat to live in, or rent out? If it's to rent out, then the rental income should at least cover the amount of pension you're giving up.

If it's to live in, that's a different matter and one that can't be answered by anyone on this forum.

However, it is stupid to make long term decisions based on a short-term expectation that property prices will rise, especially in London at this point in time. You only need to look back 7 or 8 years to see just how stupid that is.

http://www.cebr.com/reports/house-prices-to-fall-in-2015/

I have just come across this on a .gov site...

If I can draw my entire pension and get an annual allowance that doesn't seem very fair.

Or am I misunderstanding something?

That's not relevant to you at the moment.

kidmugsy

Tom2023 wrote: »

Thanks to every one who said I should exercise caution.

Not so much "exercise caution", more "Have you lost your senses?".

Tom2023

I understood I can pay in 40k a year into a pension and the tax allowance means the pension company claims 20% relief and I claim the other 20% on my Self-Assessment Tax Return.

The gov website suggests I wouldn't get any tax relief if I did a flexible draw down.

TH1878

Tom2023 wrote: »

I understood I can pay in 40k a year into a pension and the tax allowance means the pension company claims 20% relief and I claim the other 20% on my Self-Assessment Tax Return.

The gov website suggests I wouldn't get any tax relief if I did a flexible draw down.

You're not doing a flexible drawdown.

Tom2023

kidmugsy wrote: »

Not so much "exercise caution", more "Have you lost your senses?".

I am looking at the figures and they will tell me if it is a sensible decision.

You're not doing a flexible drawdown.

It's an option I can take but if I subsequently get no allowance it doesn't look that attractive an option.

TH1878

Tom2023 wrote: »

It's an option I can take but if I subsequently get no allowance it doesn't look that attractive an option.

Tom, you're speaking in riddles. If you're talking about taking benefits from your final salary pension as in the original post, you are not taking flexible drawdown. You are taking scheme pension.

If you're talking about taking flexible drawdown from another pension elsewhere, the rules change in April anyway so you will be able to contribute £10,000pa into a pension scheme.

jamesd

Tom2023 wrote: »

The gov website suggests I wouldn't get any tax relief if I did a flexible draw down.

That'd have been right if you were using flexible drawdown but you aren't. There are a range of types of drawdown:

1. Capped income drawdown. 25% lump sum then up to the GAD limit income allowed each year, currently 6-8% at common retirement ages. No new capped drawdown plans can be started from 6 April 2015. This is what most drawdown is using today. After 6 April 2015 the GAD limit amount can still be taken without triggering a reduction from 40k to10k in the annual allowance for pension contributions.

2. Flexible drawdown. A mandatory requirement of at least £12k of guaranteed income from workplace defined benefit pensions, annuities and the state pensions must be in payment before this can be started. Used to be £20k. No new pension contributions are permitted once starting this until 6 April 2015. No new ones can be started after 6 April 2015.

3. Flexi-access drawdown. The as much as you like whenever you like option but your annual allowance for pension contributions is cut from 40k to 10k if you take even a penny more than the tax free lump sum. Capped drawdown can be converted to this if desired after 6 April 2015.

Your work pension is none of these things and you can take that income without triggering a reduction in your annual contribution allowance.

Tom2023

jamesd wrote: »

2. Flexible drawdown. A mandatory requirement of at least £12k of guaranteed income from workplace defined benefit pensions, annuities and the state pensions must be in payment before this can be started. Used to be £20k. No new pension contributions are permitted once starting this until 6 April 2015. No new ones can be started after 6 April 2015.

My employer's Final Salary Scheme have told me I'm in allowed Flexible draw down. I can draw down a % of my pension.

I can't just take a TFLS and any TFLS would be pro rata to the % I draw down.

Slightly confused by;

No new pension contributions are permitted once starting this until 6 April 2015. No new ones can be started after 6 April 2015.

I'm obviously in need of some one to one professional advice.

Triumph13

There is something very wrong in what you believe your employer has told you. Flexible drawdown (and any other type of drawdown) specifically applies to defined contribution schemes, not to final salary schemes. The only times that drawdown could come into play would be (1) for any defined contribution AVCs you have within the scheme; or (2) if you transferred the scheme to a personal pension / SIPP (generally a very unwise thing to do). I would suggest your first step should be to talk to your employer again to clarify exactly what they mean.


Regarding your wider plans, even if we accept your contention that the flat will increase by 20% if you wait, that would be covered by the 20% higher lump sum you would get by not having had the actuarial reduction and so you would come out level on the lump sum / purchase side.


That then leaves you with the question of whether 3 years worth of reduced pension and 3 years worth of net rent on the flat, invested into a new pension, would give an income greater than 20% of the pension which seems very unlikely.


As an example if the unreduced pension was 25k, the lump sum now £100k and you managed to get a 5% return on the flat after expenses then you'd be looking at giving up £5k pa of guaranteed, indexed income and hoping to replace it with a pot of £75k (3 years pension at the reduced £20k and 3 years of £5k rental profit on the flat). That's nearly 7% after-inflation return which you'd have to take one hell of a lot of risk to have any hope of achieving.


To make your route make sense you either need to be getting WAY higher than a 5% net profit on the flat over the next three years or the price of the flat has to increase significantly faster than the 20% actuarial reduction.

jamesd

There are two things:

1. flexible drawdown, the real legally defined thing. you cannot be and are not using this because it does not apply to defined benefit pensions.

2. whatever your workplace scheme is calling flexible drawdown. A different thing that seems to have useful properties but it's not the legally defined thing with its consequences.

Not a big deal but you might want to suggest that your workplace stops calling its flexible pension access flexible drawdown so it doesn't confuse people.