Gain 6.25% by reinvesting drawdown

aroominyork

My guess is this one has already been discussed but here goes. At age 55 I can drawdown from my pension takking 25% tax free. Say I take £1000, £250 tax free and £750 taxed at 20%, I have net £850. If I reinvest that in my pension, and assuming I have paid enough tax to cover it, it is grossed up to £1062.50. So what have I missed?

jamesd

Your annual allowance for pension contributions will be reduced from £40,000 to £10,000 if you take out even a penny more than your tax free lump sum, unless you are using a capped drawdown setup started before new ones are banned from 6 April 2015, in which case you can take out the GAD limit amount as well each year.

You also need to stay within the tax free lump sum recycling rules. The easiest one is no more than £7,500 of tax free lump sum taken within any twelve month period, £12,500 until 6 April 2015. There is no rule blocking recycling of pension income, however much you do, other than the reduction in annual allowance. Carry forward from past years cannot be used to increase the amount once you have triggered the cap.

Other than that what you're considering doing is fine and sensible.

redbuzzard

jamesd wrote: »

Your annual allowance for pension contributions will be reduced from £40,000 to £10,000 if you take out even a penny more than your tax free lump sum, unless you are using a capped drawdown setup started before new ones are banned from 6 April 2015, in which case you can take out the GAD limit amount as well each year.

That could be a good last minute reminder for anybody else who wants to do some drawdown but wants to keep the existing AA, or at least not have a reduction to £10,000.

I am putting my SIPP into drawdown now, except for £1,000 of it. It means I can take 25% tax free (Balls-proofing is an incidental benefit here); take a year's GAD maximum in this tax year; and by leaving £1,000 uncrystallised I have the ability to move more money in (I have a company pension DC section pot I might have to transfer) under the existing rules and keep the AA. I might never need it but there's no disadvantage to me in keeping it at the moment.

I don't need the dosh immediately but I can get £60k into ISAs in the next month using both our allowances so get a good chunk straight back into a sheltered product.

I will still have the option to switch to flexi-drawdown should I want to draw more than the GAD maximum at any point.

jamesd

One thing I'm considering doing when I reach 55 is taking the maximum tax free lump sum but also taking enough above that to raise my taxable income to just under £100,000. Then spending the money to buy VCTs. The combination of VCT 30% relief on the basic rate band plus VCT relief on the higher rate band could make this tax neutral up to about £64,000 of withdrawing and only 10% above it. If still working I'd also try to fit in £40,000 of pension contributions under the £100,000.

General idea is to eliminate the legislative uncertainty of pensions and maximise my investment flexibility as rapidly as I reasonably can.

Only suitable for those who have a place in their investment mixture for VCTs but for me it'd be appropriate enough.

coyrls

Perhaps I've misunderstood you but the 30% tax relief for VCTs is based on 30% of what you subscribe to a VCT, so if you subscribe £10,000, you get £3,000 off your tax liability. The relief is not linked to tax bands.

jamesd

Say the basic rate tax band is £30,000 wide. Take out £60,000 from a pension with no other basic rate income and £30,000 will be taxed at 20% and another £30,000 at 40%. Put the £60,000 into VCTs and the 30% VCT relief would eliminate the whole tax bill.

No actual tax profit like you'd get if you did it just for the basic rate band but basic rate band takes longer to get the money out of the pension.

If someone wanted more than that they could rely on the fact that VCT money can be reinvested to get new tax relief to cover more of the missing 10% from the 40% band that the VCT relief wouldn't cover.

itm2

jamesd wrote: »

Your annual allowance for pension contributions will be reduced from £40,000 to £10,000 if you take out even a penny more than your tax free lump sum

I'm going into SIPP drawdown in the coming tax year (I turn 55 on April 6th), and have a question re. the new limit on contributions: is the £10k a limit on grossed-up contributions (i.e. is the limit actually £8k in terms of contributions made by the individual rather than HMRC?)

I'd like to maximise my annual drawdown to take advantage of:
- my personal allowance (£10,600)
- the TFLS
- my capacity to recycle.

So in theory I could drawdown £13,250, of which £2,650 would be the TFLS and the remaining £10,600 would be tax-free as it's within my personal allowance. I could then draw down another £10k, pay £2k tax on it, and feed the remaining £8k directly into another SIPP, where it would be grossed back up to £10k.

So my total annual drawdown would be £23,250, of which £13,250 would be tax-free, and the remaining £8k of net income (after £2k tax) would be grossed up as a net £10k contribution to my other SIPP.

Have I done my sums correctly, and is this the most tax-efficient drawdown plan?

jamesd

The limit is grossed up contributions, so 8k with basic rate tax relief.

I'm not sure just when in the tax year the 10k limit takes effect. I think it's for the remainder of the tax year and the L&G document reference below seems to support this. If so you could pay in £30,000 then take out the money from the 75% and still do an additional £10,000 after that. Or say £50,000 then £10,000 more if you have £20,000 carry-forward and sufficient earned income available.

According to HL and L&G you can still use the £10,000 small pot rule if that takes out all of the money in a pension. Might be a good use for the Virgin stakeholder pension that seems not to have fees to get things done, though I haven't checked this. So you might consider creating two or three small pots now... The plan was to reduce the small pots age from 60 to 55, enabling you to do this.

Annuity income also doesn't trigger the limit but I'm not sure whether say a one year term annuity to withdraw more at a high rate would be a workaround. I think not, it looks as though that only applies to lifetime annuities, not short term ones.

Take some care with the L&G document, it's commenting on the draft bill and for example mentions the £10,000 PCLS recycling limit that was subsequently reduced to £7,500.

kidmugsy

itm2 wrote: »

I could then draw down another £10k, pay £2k tax on it, and feed the remaining £8k directly into another SIPP, where it would be grossed back up to £10k.

As long as you have earnings of £10k per annum after any other pension contributions, yes you could recycle income like that.

But if you had £10k in earnings your first £10,600 of withdrawal wouldn't be tax-free. If you have no earnings so that the first £10,600 is tax-free, then you can contribute only £3600 gross (=£2880 net) into a pension.

itm2

kidmugsy wrote: »

As long as you have earnings of £10k per annum after any other pension contributions, yes you could recycle income like that.

But if you had £10k in earnings your first £10,600 of withdrawal wouldn't be tax-free. If you have no earnings so that the first £10,600 is tax-free, then you can contribute only £3600 gross (=£2880 net) into a pension.

I had to read that 5-6 times and I'm still not sure I get it (it's late, and I'm not getting any younger...)

So if I have no other source of income, and choose to take £27,000 from my SIPP, by my calculations I'd have £24,588 after tax (taking into account the 25% TFLS and a PA of £10,600), of which I'd like to recycle £8k into another SIPP. Is that permissible?

jamesd

It is not permissible. The first limit is your earned income of £3,600 gross if higher. After that comes the cap at the £40,000 annual allowance or £10,000 reduced annual allowance.

Since you don't have earned income the most you can pay into a pension and get tax relief is £3,600 gross.

You would be allowed to give money to someone else so they could make a pension contribution. Maybe a spouse.