Pension pot - getting the ball rolling

atush

Basically, they are just income projections for annuities and if you aren't going to buy one, just ignore them.

What I have done is some calculations showing 4, 5 and 6% income from our total pot. To draw higher ie 6% in the years before state pensions, and lower ie 4% after.

It is considered (over time) that you can safely draw on your pot at 4% income w/o running the pot down to zero.

To do this though, you need to have cash equiv to at least 2 years income in case markets perform badly so you dont have to take money from the pot?

jamesd

If you contact the individual firms they will probably just tell you what their individual product that you have with them currently allows, which won't include the full range of options that you could get buy transferring out to a place that does offer the full range.

When taking a full pot as a lump sum you need to know that this will reduce your future money purchase pension contribution allowance from £40,000 a year to £10,000 a year. The best way to avoid that is to combine pots and take out the 25% tax free lump sum from the combination up to the value you want.

The pension income projections are pretty much rubbish. They use low investment growth and assume that you throw away half of your potential inflation-linked guaranteed for life income by buying an inflation-linked annuity instead of deferring the state pension. Those annuities are such poor value that only a few percent of annuity sales are that type, with level annuities that don't increase with inflation around 90% of all annuity sales.

The general pension freedom options are:

1. Take some or all of a pot as a lump sum, 25% tax free, 75% taxed and have your annual money purchase contribution allowance reduced from £40k, to £10k. This is the uncrystallised funds pension lump sum (UFPLS) option.
2. Buy a guaranteed income for life either by deferring the state pension or by buying an annuity. You can take a 25% tax free lump sum first.
3. Use a non-guaranteed income from flexi-access income drawdown. You can take a 25% tax free lump sum first.
4. Leaving it as it is.
5. Some combination of these.

All of these options can be used for any portion of a pot, they don't have to be used for it all.

For a person retiring relatively early the optimal combination may look something like this:

A. Use flexi-access drawdown as soon as possible to take the 25% tax free lump sum to reduce legislative risk and allow reinvestment, subject to the limits on lump sum recycling into more pension contributions if pension reinvesting is to be used. The usual don't take it early guidance assumes that the money is being spent, this assumes that it is being reinvested so it's doesn't vanish or reduce retirement income. As soon as possible might sometimes be usefully done in stages to draw enough to fill the ISA or VCT limits for each year, rather than leaving some money outside a tax wrapper. Also note that money outside a pension is not protected from bankruptcy or benefits means tests so those at significant risk of those may want to consider not doing this at all.

B. Use flexi-access drawdown of taxed income on the remaining 75% to meet income needs until state pension age, topped up as tax efficient buy income from the investments from A and other money.

C. From state pension age defer the state pension until the amount of guaranteed for life income being produced meets the guaranteed income need or reduces investment sensitivity of the income level enough. In a few cases enhanced annuities might pay more than deferring so those and regular annuities should be checked just in case.
D. Continue with the combined state pension, deferred state pension and drawdown and former lump sum income while watching annuity rates. At some point between age 75 and 85 an annuity may become competitive with drawdown for income generation. If there's still a shortfall of guaranteed income this is the time to consider buying some annuity guaranteed income.

An individual's risk tolerance for investing and age at retirement vs state pension age will affect the desirable balance of these things, as well as how much money must be invested initially to provide a desired income level.

It's also necessary to consider things like desire to provide an inheritance and lump sum for contingencies like care needs. Those will tend to favour drawdown, though deferring the state pension provides a good level of guaranteed income and can actually increase expected inheritance value because it's expected pay rate is around long term equity growth level (5.8% plus CPI inflation for deferring, less inefficiency for deferring for many years, 5% plus RPI inflation for the UK market). If non-equity investments are used this will further increase the potential inheritance benefit of deferring to provide income, allowing more equity investing to be used without risking the income level excessively.

Options like increased mortgage terms or equity release can be used to allow earlier retirement or boost income until state pension age is reached, with optional repayment once the higher income level is available.

Grouchy

Jamesd - thanks for that, a lot to take in and digest which I will do, appreciate your time and effort.

In the meantime, can you tell me what this means, in more laymans terms, the first sentence I don't understand at all:

When taking a full pot as a lump sum you need to know that this will reduce your future money purchase pension contribution allowance from £40,000 a year to £10,000 a year. The best way to avoid that is to combine pots and take out the 25% tax free lump sum from the combination up to the value you want.

Thank you.

atush

If you take more from a pension, than your 25% tax free lump sump- ie any income- your annual allowance for pension contribution goes down from 40K to 10K.

AS one (ie her majesties govt) would rightly assume you have actually retired (ie taking income from your pension).

So if you have not retired, and want to put more than 10K into a pension each year, dont take income from a pension?

jamesd

Grouchy wrote: »

In the meantime, can you tell me what this means, in more laymans terms, the first sentence I don't understand at all:

When taking a full pot as a lump sum you need to know that this will reduce your future money purchase pension contribution allowance from £40,000 a year to £10,000 a year. The best way to avoid that is to combine pots and take out the 25% tax free lump sum from the combination up to the value you want.

Before the pension freedoms there was and still is an annual allowance for all pension contributions of £40,000. Along with the pension freedoms a new Money Purchase Annual Allowance was introduced. That also starts at £40,000 a year but it is reduced to £10,000 if you take more than the 25% tax free lump sum, unless it's part of capped income drawdown and within the GAD limit.

Once the reduction has been triggered the £30,000 difference between the reduced MPAA and regular annual allowance can still be used for defined benefit schemes like final or average salary.

coyrls

jamesd wrote: »

As soon as possible might sometimes be usefully done in stages to draw enough to fill the ISA or VCT limits for each year, rather than leaving some money outside a tax wrapper.

Unless you have separate pension pots, I don't think it's possible to take the PCLS in stages, isn't it a "one off" choice (how much to take, up to 25%)? You could stage using the UFPLS option but I know that is not what you are suggesting, as 75% of each withdrawal using UFPLS would be taxable.

kidmugsy

hyubh wrote: »

What has been introduced today is a removal of a need to buy an annuity in the first place for less wealthy people (the requirement had already been removed for wealthier people a few years back).

The requirement for anyone to buy an annuity was removed for everyone in (approx) 2006, wasn't it? What's new is the removal of restrictions on what to do instead.

jamesd

coyrls wrote: »

Unless you have separate pension pots, I don't think it's possible to take the PCLS in stages, isn't it a "one off" choice (how much to take, up to 25%)? You could stage using the UFPLS option but I know that is not what you are suggesting, as 75% of each withdrawal using UFPLS would be taxable.

You have complete freedom of choice about how much of a pension pot to crystallise/take benefits from at any time. The PCLS choice must be made at crystallisation time and can't be changed.

So you can crystallise £10,000 from a £100,000 pension pot, take £2,500 tax free lump sum and leave £7,500 in a flexi-access drawdown pot if you want to. If you chose to take just 10% PCLS, £1,000 worth, you couldn't take the other £1,500 later. But you still have complete freedom of choice for the uncrystallised £90,000 part of your pot.

jamesd

kidmugsy wrote: »

The requirement for anyone to buy an annuity was removed for everyone in (approx) 2006, wasn't it? What's new is the removal of restrictions on what to do instead.

Yes, that's when the Alternatively Secured Pension for those over 75 was introduced, removing the over age 75 annuity requirement and replacing it with a minimum and maximum income range.

coyrls

jamesd wrote: »

You have complete freedom of choice about how much of a pension pot to crystallise/take benefits from at any time. The PCLS choice must be made at crystallisation time and can't be changed.

So you can crystallise £10,000 from a £100,000 pension pot, take £2,500 tax free lump sum and leave £7,500 in a flexi-access drawdown pot if you want to. If you chose to take just 10% PCLS, £1,000 worth, you couldn't take the other £1,500 later. But you still have complete freedom of choice for the uncrystallised £90,000 part of your pot.

Yes, got it, thanks.