stakeholder pension pot recoverable in full after Apr.06?

PenL

Have I read correctly in The Mail that as I am 59 and a non-taxpayer, I could put £2,808 into a stakeholder pension today, and when I am 60 after Apr.06 I will be able to withdraw £3,600 to earn interest on from any source? Does the lump sum have to stay invested ad infinitum? Does this investment have to be an annuity? Any clarification would be appreciated.

EdInvestor

Do you have other pensions -either in fund form or already in payment worth more than 15k?

dunstonh

Anybody who is not in a final salary pension scheme and earns more than 30k can pay the £3600 into a pension this year and next year and every year upto and including the tax year they are 75.

You put the £2808 in, Govt rounds it up to £3600 and then you decide how long you leave it there for. When you decide to mature it, you take 25% of the fund value back as a tax free lump sum. The remainding 75% purchases an annuity. Subject to investment performance, leaving it for 7-10 years should your personal contribution returned with an income provided via an annuity thereafter.

You can turn round the pension within 24 hours. There are known as immediate vesting personal pensions. You do the above process but all at once. So, you put your £2808 in, Govt round it up to £3600. You then take back £900 tax free and the remaining £2700 purchases an annuity. At age 60, you can get back an equivalent of just over 10% p.a. on the real cost of the annuity.

Personally, I dont do too many like that, most I do for the retired like to leave it in for some years before they take it. That way it acts as a boost to income later in retirement. Also, if they dont make it and die beforehand, the wife/husband gets the full payout.

PenL

Editor wrote:

Do you have other pensions -either in fund form or already in payment worth more than 15k?

no. only state pension when I am 60

PenL

dunstonh wrote:

Anybody who is not in a final salary pension scheme and earns more than 30k can pay the £3600 into a pension this year and next year and every year upto and including the tax year they are 75.

You put the £2808 in, Govt rounds it up to £3600 and then you decide how long you leave it there for. When you decide to mature it, you take 25% of the fund value back as a tax free lump sum. The remainding 75% purchases an annuity. Subject to investment performance, leaving it for 7-10 years should your personal contribution returned with an income provided via an annuity thereafter.

You can turn round the pension within 24 hours. There are known as immediate vesting personal pensions. You do the above process but all at once. So, you put your £2808 in, Govt round it up to £3600. You then take back £900 tax free and the remaining £2700 purchases an annuity. At age 60, you can get back an equivalent of just over 10% p.a. on the real cost of the annuity.

Personally, I dont do too many like that, most I do for the retired like to leave it in for some years before they take it. That way it acts as a boost to income later in retirement. Also, if they dont make it and die beforehand, the wife/husband gets the full payout.

Thanks so much! Will digest info over a cuppa. Cheers!

EdInvestor

PenL wrote:

Have I read correctly in The Mail that as I am 59 and a non-taxpayer, I could put £2,808 into a stakeholder pension today, and when I am 60 after Apr.06 I will be able to withdraw £3,600 to earn interest on from any source? Does the lump sum have to stay invested ad infinitum? Does this investment have to be an annuity? Any clarification would be appreciated.

This looks like a nice little loophole in the new trivial commutation rules coming in next year. AFAIK there would be no restrictions on what you could do with the cash.

Mail article

It's not quite as good as it might be, but will still be worthwhile for a few people who have very small pensions totalling under 15k.

PenL

Thanks so much . I hoped that might be what they were saying in the paper. I have no income myself and am trying to build a sum of money for the future. I am dependant upon my husband at the moment until I get my state pension which will be small. This will be a very good return for my savings so far. An annuity would not be much use with such a small sum to invest. I am very grateful for everyone's help as I have no brain for these things.

Milarky

Editor wrote:

This looks like a nice little loophole in the new trivial commutation rules coming in next year. AFAIK there would be no restrictions on what you could do with the cash.

Mail article

It's not quite as good as it might be, but will still be worthwhile for a few people who have very small pensions totalling under 15k.

This is an interesting angle - I never thought of that before. Women typically have little or no private pension provision and rely on their husband's. They are thus the group most likely to be able to use the trivial pension rules, therefore.

So, some questions:

1) What upper age limit applies to commutation? [the lower limit is 50, rising to 55] From next year, as I understand, the age 75 rule slips away which means that it can be deferred - but what would be the point of that? Commutation is designed to realise full surrender value.

1.1) How would small pensions already in payment affect the access to a TP commutation? [I assume the annual pension is converted to a fund equivalent and this amount subtracted from the TP limit to establish if any such option exists?]

2) What is to stop someone over 75, without personal/private pension provision, from starting a pension to take advantage of commutation? [the paying in conditions for Stakeholders et al, I assume?]

3) Commutation will allow £3600 paid in this year to be claimed as a 'once off' exercise if taken from next year. But from next year, the greater of £3,600 or one's income can also be contributed. So should not the target range for this be £7,200 [i.e. £3,600 this year, plus £3,600 next] upto the £15,000 limit?

Finally, more of an observation...

4) Knowing that the fund remians fully commutable back to cash, provided it stays below the TP limit means that it could make sense to leave the pension invested in this way for some time [in cash, or near cash form] rather than drawing it straight off. If the person has savings, for instance, they could be drawing these down. Each new tax year they could add to the TP fund [i.e. by at least another £3,600] and could draw the fund down at the 'latest; opportunity [i.e. just before it got to the limit for TPs]. If the person dies first then their estate benefits to the full value rather than the commuted value.

5) How does the tax clawback work if [say] a £15,000 fund is taken but the person's separate taxable income does not amount to £11,250 in that year? The Mail articles suggests they would only pay a reduced tax charge in that case?

Thanks

Milarky

http://www.champainfs.com/Employer%20A%20Day.pdf

Here is a good summary of the provisions [including a 'penalty'!] relating to trivial pensions

Trivial pensions

As from 6 April 2006 individuals can be paid the whole of their pension funds as a cash lump sum, as long as the value of those funds are ‘trivial’. To be trivial, the value of their funds under all schemes must not be more than 1% of the SLA, i.e. £15,000 in the 2006/2007 tax year, although this will of course increase in line with any increase in the SLA. This includes the value of pensions already in payment.

Pensions already in payment are multiplied by 25 to work out their value. The value is increased in line with any growth in the SLA since A-Day (or the date the pension came into payment, if later).

Payment of trivial funds as a cash lump sum must take place during one single 12 month period, chosen by the individual, between their 60th and 75th birthday, and the individual must not have exhausted their lifetime allowance.

25% of unvested benefits may be paid tax free. The remainder is taxed as earned income.

Pensions in payment may also be paid as a cash lump sum but the lump sum will be taxed in full as earned income.

There is a penalty of up to £3,000 for individuals who negligently or fraudulently obtain an unauthorised payment; this would include payment of trivial funds and pensions as a lump sum when the value of benefits from all schemes is more than the 1% limit.

... thus to be eligible any 'in payment' pension needs to be less than £600 [25 x £600 = £15,000]. I assume that state pensions don't count towards this..

margaretclare

dunstonh wrote:

You can turn round the pension within 24 hours. There are known as immediate vesting personal pensions. You do the above process but all at once. So, you put your £2808 in, Govt round it up to £3600. You then take back £900 tax free and the remaining £2700 purchases an annuity. At age 60, you can get back an equivalent of just over 10% p.a. on the real cost of the annuity.

Personally, I don't do too many like that, most I do for the retired like to leave it in for some years before they take it. That way it acts as a boost to income later in retirement. Also, if they don't make it and die beforehand, the wife/husband gets the full payout.

Yes, this is what I'm doing. I started a stakeholder a couple of years ago and as of today the fund sits at £5601.00. I'm going to be 70 soon, if I pop off today B gets the £5601.00, but I'm still adding to it at the rate of £150 per month including the taxman's contribution. I intend to leave it to grow until I'm 75 because I reckon that by then we could use a little bit extra, and the 25% tax-free will pay for what might be our last really good holiday.

I looked into the 'trivial commutation' rules some while ago but it doesn't apply to me because I already have pensions and annuities in my own right, not earned through a husband.

Aunty Margaret