Pension/ISA contribution split

jamesd

atush wrote: »

Will taking his DB pension mean his AA is lowered to 10K per annum?

No. Buying a lifetime annuity without the new capability capability of decreasing income also doesn't cause it.

peterg1965

jamesd wrote: »

that's good news because it means that it is unlikely that the total extra will be more than 30% of the lump sum.

Well, recycling pension income isn't restricted in any way so that extra bit of taxable income tends to both provide a reason for starting higher contributions and part of the funding source.

Not sure what you mean by your first sentence here James. My lump sum is £117,000, it is £100,000 plus I have commuted a portion of the annual pension which increases the lump sum by £17,000 by giving up £3400 per year until I am 55. It is then restored and the whole pension increases by CPI from now until my 55th birthday. So where does 30% come in?

I didn't know that pension income is unrestricted in terms of recycling - thanks. I have also decided that for now, I may as well contribute £1200/month to the ISA as well, this amount to slowly transferring some of my lump sum into the ISA wrapper. I am also going to put £1270/month into a cash ISA wrapper in my wife's name.

I have another question regarding the efficiency and efficacy of fund choice , this is where I have been a little random in the past!

jamesd

One of the lump sum recycling rules relates to how much higher pension contributions were possibly as a result of the lump sum. When "the cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum. Further guidance about the cumulative basis of the recycling rule is at RPSM04104950". That 30% of the lump sum increase is measured over the five years I described.

A bigger lump sum is helpful for avoiding being affected by that particular rule because 30% of a bigger lump sum is bigger so less chance that an increase can exceed it. With a £117,000 lump sum HMRC would need to show that the increase in your pension contributions over those five years were more than 30% of that. That is, more than an average increase of £117,000 / 5 * 0.3 = £7,020 average increase.

Up to March 2013 your contributions were £1,300 a month, £15,600 a year. That seems to be what will be your historic pattern of contributions. So what happens if £7,020 is added to it? Total is £22,620. And you've already had one year of low contributions. All you need is to be within the limits of one of the rules and I think you will be for this one, so it'll protect you. Assuming I understand correctly how HMRC applies their rules, which I don't guarantee. But I think you can stop worrying now.

No harm in using the ISA, it's easy enough to take money out later if you want to. Or not if you don't.

peterg1965

James, really useful, thank you for your time. I shall now sleep a little easier!

A quick question regarding fund allocation in the SIPP. As I didn't contribute for nearly two years, i left my funds untouched. I have now selected another 5/6 funds that I intend to contribute too

HL Multi-Manager Balanced Managed Trust Accumulation
Fundsmith Equity (Class I) Accumulation
CF Woodford Equity Income Accumulation
BlackRock Corporate Bond Tracker (H) Accumulation
HL Multi-Manager European Accumulation

My dormant funds ( 7 of them and primarily UK and US equity funds) are a mixed bunch but seem to have done quite well. Old Mutual Mid Cap and UK Dynamic equity and also Threadneedle Smaller US companies are sat there with 80-90% gains. Is there conventional wisdom that says just leave those funds alone and let them grow, or should I start to contribute again, or sell…..

jamesd

I'm sorry, there was a substantial error in my earlier post, I used 100% of the lump sum instead of 30% of it. I still think that you'll be OK but it's not as clear as it could have been.

jamesd

OM UK Mid Cap should be fine, the UK market isn't hugely over-valued. It's one I own and added some to not so long ago.CF Woodford Equity Income is another of those that I hold. I don't use the HL multi-manager funds as policy, I prefer to hold the underlying funds tather than pay HL an extra premium.

The US is perhaps a place to start becoming under-weight because its cyclically adjusted price/earnings ration is currently quite high, which correlates with reduced future returns. But there's no telling when it will drop so reducing weight can cost profit in the short term and it could easily continue rising for another couple of years.

Portugal and Italy are a couple of reasonably safe countries with moderately low cyclically adjusted P/E and I've been considering shifting some money out of the US into ETFs for them. There are others with higher risk level, like Greece or Russia, and lower P/E.