Maximising moribund pension fund

jamesd

Your plan isn't crazy, it just doesn't make sense since it makes you worse off.

If pension 3 is performing badly that's your fault. You are the person responsible for selecting and changing the investments inside it. If that pension doesn't allow changes, transfer the money to a pension that does. A 12k penalty is unusual and usually means that the money is in a with profits fund and you've been lied to about the real value until you asked for a transfer value. But today markets have been doing so well that the with profits penalties should be low. Maybe £12k was from the 2008 to 2011 range of years?

Sometimes with profits type pensions or sometimes others have guaranteed annuity rates that are substantially above current rates. One way this is afforded sometimes is to reduce the growth rate so that the amount of money on which the high annuity rate has to be paid is lower. These can be good deals to keep, it depends on how good the annuity rate is.

Knowing just what investments you have in pension 3 and what the name of the pension product itself is would be helpful.

Unless you are paying an unusually high mortgage rate - over 7% - it doesn't make much sense to use pension money to pay off a mortgage because investments can be expected to beat that.

You're right that unused annual contribution allowance can be carried over from the last three years provided you were in a pension scheme during those years, as you clearly were.

Minimum wage saves you from a mistake. If your employer cut your pay to below the income tax personal allowance you would receive no tax relief when the employer paid the money direct. salary sacrifice arrangements like this only make sense for money that is at least taxed at 20%. You could pay the other £10k into a personal pension yourself and get tax relief on it even though yo didn't pay tax on the money, though. What is happening to the employer NI that your employer is saving by not paying you the money? It's pretty common for employers to spit that saving 50-50 with the employee.

Assuming that you are 55 or older there is some significant advantage to starting to take pension money now. You can recycle the pension income into more pension contributions and get a second chunk of tax relief on it. To do this you must start capped income drawdown no later than 5 April 2015. After that date no more capped drawdown plans can be started. Once you have a capped drawdown plan you can take out the GAD limit amount of income while still preserving your £40k annual pension contribution allowance. Wait until 6 April and you can't take out even a penny above the tax free lump sum without triggering the reduction from £40k to £10k. You don't have to put all of the money into drawdown at once, just get at least some into drawdown. You can take benefits - lump sum and income - from more later.

If doing this you can recycle pension tax free lump sum money, within the limits to which this is allowed. The easiest limit to work with is the lump sum size limit during each twelve month period, not calendar or tax year. This is currently £12,500 and drops to £7,500 from 6 April 2015. So one convenient and useful option is to take benefits from £12.5k via capped drawdown this tax year, £12.5k tax free lump sum, the rest in capped drawdown. At least 12 months later take another £7,500lump sum and £7,500x3 into the capped drawdown pot and repeat as desired.

An alternative limit is the increase in pension contributions rule. If you take the lump sum and wait until the third tax year after the year in which you take the lump sum there are no recycling restrictions. So take maximum possible lump sum this 2014-15 tax year and you can recycle the lump sum for pension contributions freely starting in the 2017-18 tax year. Until then you can recycle some of it by ensuring that the increase in pension contributions over the two tax years before taking the lump sum, the year you take it and the following two is no more than 30% of the lump sum amount.

kidmugsy

jamesd wrote: »

Your plan isn't crazy, it just doesn't make sense since it makes you worse off..

Too kind, jamesd: it's a bonkers scheme.



"I agree taking out the cash at 40% rate seems bad".

"Seems," [sir]? Nay, it is; I know not "seems." Shakespeare.

atush

Well yes.

I hadn't got that far as because the OP didn't answer my Q (twice!) about with profits fund lol.

oldguy9519

atush wrote: »

Well yes.

I hadn't got that far as because the OP didn't answer my Q (twice!) about with profits fund lol.

Yeah, I was trying to find the paperwork, so don't panic; not everyone is able to get information instantaneously.

Thanks for the advice, some very detailed and considered. I think the long and short of it is that I'll move the fund (private pension with Abbey so not a company one) to a new home, take the transfer penalty hit and forget about accessing any of it for now. It seems that while I'm still paying 40% tax putting more into the pension fund is a good thing (this was my original gut feeling on this) but just wanted to see if I've missed an opportunity under the new rules.

Seems to me that this idea of people over 55 accessing all their pension pot from next month is fraught with danger.

oldguy9519

jamesd wrote: »

Your plan isn't crazy, it just doesn't make sense since it makes you worse off.

If pension 3 is performing badly that's your fault. You are the person responsible for selecting and changing the investments inside it.

Thanks for the considered opinion, but I thought that's what I was paying an IFA for all those years ... strikes me that IFA is a misnomer, as the I bit doesn't always appear to be correct.

FYI I've not had any reason to poke around inside the investment vehicles, I suspect most normal people don't either. Not an excuse I know.

jamesd

Ah, now paying an IFA changes things somewhat, since the IFA has responsibility if they were taking ongoing payments from you or the funds selected, as they probably were. If you weren't getting any sign of servicing from the IFA then maybe it's time to switch just to stop making those payments.

agarnett

oldguy9519 wrote: »

Thanks for the considered opinion, but I thought that's what I was paying an IFA for all those years ... strikes me that IFA is a misnomer, as the I bit doesn't always appear to be correct.

You got that bit right!

What astounds me, now that the capped drawdown opportunity is coming to an end, is how awful it is that the Exchequer has been systematically plundered by the "recycling" arrangements jamesd has just very helpfully disclosed in such simple terms as gospel.

I know the opportunity has been discussed many times over a long period, but really, a second chunk of tax relief on the same pension money, and the persons most able to play the game and milk it for all it is worth are those on very high salaries ?

How much has the Exchequer been losing this way and for how long ? I imagine for some canny people it completely obviates the difference between the marginal rates of income tax which they as high earners are 'supposed' to pay ?

What is the quickest and simplest way for us, who have missed or not quite believed the hints up till now, to get one of these things, or would it be breaking moral principles and make me a hypocrite if I of all people even tried ?

If any clued-in undergraduates are reading this and resigning themselves to a 9% surtax once they start working, they must be totally appalled by the tricks we baby-boomers are still up to at the other end, siphoning off what they have been recently conned into putting in just to get their birthright educations completed.

What a $¤</`n9 stinking morass we have created :mad:

jamesd

agarnett wrote: »

I know the opportunity has been discussed many times over a long period, but really, a second chunk of tax relief on the same pension money, and the persons most able to play the game and milk it for all it is worth are those on very high salaries ?

The existing rules are most limiting to those on high salaries who probably have accumulated high pension pot values. Those on lower incomes have much less trouble sticking to recycling no more than £12,500 of lump sum every twelve months and are limited in how much income can be recycled by their pension pot size.

The new lump sum rules are more limiting to those on normal and lower incomes than on high earners. This is because high earners are more likely to be able to fund continued pension contributions from other resources and take a 25% tax free lump sum without needing to recycle that lump sum within the time limits. If you've got a half million pound property and a top income tax rate income it's easy enough to borrow to fund many years of the annual pension contribution limit, then take out the money only after paying in the maximum for many years.

The new income recycling aspect is on its face more limiting to those not on low incomes and not close to retirement or receiving redundancy payments because they are less likely to exceed the reduced £10k limit after recycling income. But as described in the last paragraph those with higher incomes and assets can just skip recycling the income altogether and contribute the maximum for as long as their borrowing capacity or income allows.

agarnett wrote: »

I imagine for some canny people it completely obviates the difference between the marginal rates of income tax which they as high earners are 'supposed' to pay ?

The pure gain is on the tax free lump sum. The ongoing income gain would be eliminated if the person has the same tax rate in retirement as when working.

agarnett wrote: »

What is the quickest and simplest way for us, who have missed or not quite believed the hints up till now, to get one of these things, or would it be breaking moral principles and make me a hypocrite if I of all people even tried ?

Phone a pension provider of yours that offers capped income drawdown and say that you want to put a pot into capped drawdown. If you do this I recommend taking a 25% tax free lump sum. You do not need to put the whole pot into capped drawdown, you can do it for any part of the pot.

agarnett wrote: »

If any clued-in undergraduates are reading this and resigning themselves to a 9% surtax once they start working, they must be totally appalled by the tricks we baby-boomers are still up to at the other end

Such undergraduates may wish to consider the joys of not having a 32% basic income tax rate. The baby boomers may well remember those days as well as such joys as the poll tax, much higher borrowing interest rates and living with a much higher risk of nuclear war. The undergraduates also benefit in general from substantially higher standards of living than the boomers lived through.

greenglide

the joys of not having a 32% basic income tax rate.

Was it not 35% with higher rate bands (15% wide?) with an investment income surcharge (15%) and the final band was only 13% wide as otherwise the final rate, including investment surcharge) was 100%.

And people complain about higher rate tax now!

agarnett

jamesd wrote: »

Such undergraduates may wish to consider the joys of not having a 32% basic income tax rate. The baby boomers may well remember those days as well as such joys as the poll tax, much higher borrowing interest rates ...

Did those things really bother us baby-boomers? As a graduate recruit straight from university and buying my first home with a 100% mortgage inside 18 months of starting work, looking back that all seems like water off a ducks back to me ! Maybe for early baby-boomers past their early prime, it was a bit worrying, but I was a late baby-boom DINKie until my 30s!

... and living with a much higher risk of nuclear war.

Erm ... by the 90s we had started to breath easy and forget about tank battles across the plains of Germany, but are you sure about that particular assertion right now? I remember seeing tv pictures of a lady Prime Minister careering around a mud patch on a Chieftain tank in the 80s. Yesterday I could not help but admire the way another lady Prime Minister famous for selfies jumped into an F16 on tv. It conjured reminiscences of a somewhat similar scene from Independence Day when the US President became wing leader !

The undergraduates also benefit in general from substantially higher standards of living than the boomers lived through.

Do you mean iPhones, ? As a recent graduate, I had the latest Sony tv connected via telephone line to BT Prestel in 1980. Could eventually post on select message boards with it, I think, but not Facebook

Beer was about 50p a pint and we already had a McDonalds if we fancied eating out!

Seriously, we baby-boomers never had it so good as kids and we've been coining it big-time compared to what we expect our kids and grandkids to swallow, and we continue to do so on a dog eat old dog basis ...