Sipp and drawdown

jayship · 18 April 2012 at 12:13PM

My friend has £9000 in a protected rights benefit pension to which she contributed to only for a couple of years long time ago. Now she has the option of 25% tax free and purchase an annuity with the balance. She does not qualify to take a lump sum under triviality rules due to another pension from her present employers.

We want to know if it would be possible to put the balance into a SIPP and drawdown with HL that would allow her to reinvest into funds and take a punt for several years as she does not require to draw any income for now. Eventually the idea is to keep on drawing until the money runs out. However as the amount is so small would it be worth while doing this considering the charges involved in a drawdown? She is aware of the risk and happy to gamble.

We would like to learn from the experience of the forum readers before we proceed please.

dunstonh · 18 April 2012 at 12:23PM

We want to know if it would be possible to put the balance into a SIPP and drawdown with HL that would allow her to reinvest into funds and take a punt for several years as she does not require to draw any income for now.

Why not just leave it uncrystallised and invest it as desired?

CannySaver_2 · 18 April 2012 at 12:59PM

Agree with Dunstonh

If the tax free lump sum isn't needed then simply continue 'as is' potentially considering a transfer to a more suitable arranagment such as HL.

leaving it uncrystalised improves the benefits on death, is likely to cost less, and will give access to a wider range of providers given the fact that many won't take such a small amount into Drawdown.

The Canny Saver

Linton · 18 April 2012 at 1:20PM

I think the drawdown aspect is irrelevent....

Unless you have guaranteed pension income of more than £20K the maximum amount you can drawdown annually is currently a bit less than what you could get from a fixed rate annuity so you would be unlikely to be able to drawdown sufficient to run out, unless of course your investing was unsuccessful.

As the previous responders have said, if you dont want to draw the pension keep it invested. This should be in a pension that provides the flexibility you want. It neednt be a SIPP if your range of desired investments were simple and could be cheaper if it wasnt.

jamesd · 18 April 2012 at 4:10PM

jayship wrote: »

My friend has £9000 in a protected rights benefit pension to which she contributed to only for a couple of years long time ago. Now she has the option of 25% tax free and purchase an annuity with the balance. She does not qualify to take a lump sum under triviality rules due to another pension from her present employers.

We want to know if it would be possible to put the balance into a SIPP and drawdown with HL that would allow her to reinvest into funds and take a punt for several years as she does not require to draw any income for now. Eventually the idea is to keep on drawing until the money runs out. However as the amount is so small would it be worth while doing this considering the charges involved in a drawdown? She is aware of the risk and happy to gamble.

Yes, this is entirely possible. The HL charge for drawdown is £75 for a GAD calculation once every three years until she is 75, then that each year.

After taking a £2250 lump sum she'd have £6,750 left in the pension. Assuming she's around 60 years old the GAD limit would cap her income to something around 4.5% of that initially, so £303 a year.

Spreading the cost of the GAD calculation over the three years effectively reduces that to £25 a year, a cost of 8.25% of the income.

That's not particularly efficient, nor is it horrendously bad. It'll get better as the GAD limit increases, either because fiscal easing ends or because she gets older. Those things increase the income she can take, so reduce the percentage that the cost takes out of it. If she was 70 and the gilt yield was a more normal 4.5% the income would be more like 7.5%, an income of £506 a year and the cost would drop to 4.9%. That's still not hugely efficient.

She can't avoid the GAD calculation by not taking any income, it's mandatory once she takes the lump sum. So unless there are undesired tax effects it's probably better to take the income then reinvest it in exactly the same investments inside the ISA. That will also accumulate a lump sum in the ISA that she can later draw on at any rate she likes, without the restriction of the GAD limit for that accumulated income.

At HL there is an advantage because a fund held inside their ISA has lower charges than the same fund in their SIPP. So it's cheaper to hold a fund here outside the pension than inside. But this effect is small compared to the cost of the GAD calculation.

The £25 a year is only 0.37% of the £6,750 so it's not a problem to recoup the cost with investment growth and/or income.

jayship · 18 April 2012 at 5:36PM

Thanks to everyone who has responded so far. She is 57 @ the moment and intends to continue working until 60 (3 Years). Would you please clarify the following.
1)Leave it uncrystallised. What does it mean?
2)£75 for GAD calculation seems high as a percentage because the fund is small. ( £25 per annum)
3) The annuity quoted by Abbey Life is £401.59 or £296.70 after taking 25%. May get a slightly better rate in the open market.
4) Is it likely that the GAD limit will increase or removed in the future.
5) Should the fund be left invested and continue with Abbey indefinitely until her death when her children will inherit. Would that attract a tax rate of 55% which effectively reduced the pot to 45%.
We thought we can do better by managing the investment ourselves and that was the only reason to transfer to HL. Are there any alternatives please?

dunstonh · 18 April 2012 at 5:44PM

1)Leave it uncrystallised. What does it mean?

When you "commence" a pension you crystallise it. Until you commence it, it is uncrystallised. So, if you dont need it you dont commence it/crystallise it.

2)£75 for GAD calculation seems high as a percentage because the fund is small. ( £25 per annum)

Part of the reason drawdown is meant for larger values.

5) Should the fund be left invested and continue with Abbey indefinitely until her death when her children will inherit. Would that attract a tax rate of 55% which effectively reduced the pot to 45%.

Death before crystallisation incurs no tax charge. Death after crystallisation incurs a 55% charge.

We thought we can do better by managing the investment ourselves and that was the only reason to transfer to HL. Are there any alternatives please?

You can do that without crystallising it.

jamesd · 18 April 2012 at 8:00PM

jayship wrote: »

2)£75 for GAD calculation seems high as a percentage because the fund is small. ( £25 per annum)

It's the cheapest I know of, same as SIPPDeal until age 75, when that one becomes £250 a year, though there might be one out there that is cheaper.

jayship wrote: »

3) The annuity quoted by Abbey Life is £401.59 or £296.70 after taking 25%. May get a slightly better rate in the open market.

Yes, quite likely. The annuity quote is 4.4% and that won't increase unless the quote is for one with inflation linking.

jayship wrote: »

4) Is it likely that the GAD limit will increase or removed in the future.

It's unlikely to be removed. It's almost certain to increase. The GAD limit is related to the interest rate paid on 15 year term UK government bonds, called the gilt yield. Because of quantitative easing that's at 2.75% at the moment. The normal rate is 4.5%. It also increases with the age of the person taking the income.

For a 57 year old woman it currently produces a GAD limit of 4.5% of the capital. At the normal 4.5% gilt yield it would be 5.7%, 27% higher income.

At 65 it's currently 5.4% but at a more normal 4.5% gilt yield it'd be 6.6%.

At 75% it's currently 7.5% but at a more normal 4.5% gilt yield it's 8.7%.

Unlike my earlier post I've checked those with a GAD limit calculator, rather than estimating.

jayship wrote: »

5) Should the fund be left invested and continue with Abbey indefinitely until her death when her children will inherit. Would that attract a tax rate of 55% which effectively reduced the pot to 45%.

The 55% tax charge doesn't apply until part of the pension benefits has been taken or until the person is 75 or older. So if she was to not take income and also died before age 75 it could pass to children without a tax charge.

jayship wrote: »

We thought we can do better by managing the investment ourselves and that was the only reason to transfer to HL. Are there any alternatives please?

She can also leave it invested inside another pension after a transfer or could probably change to different investments within the Abbey pension, it's normal to have at least a few choices.

She could take the lump sum and income and pass that to the children over time. She'd pay normal income tax on the pension, they would pay no tax on the gift.

If here are grandchildren she could pay into their child trust funds or Junior ISAs for them and that money would be locked up until they reach the minimum age to get at it.

She's a bit young to be buying an annuity. They tend not to pay out most until after age 75, because that's when the rate at which people are dying starts to increase and allow for more of a subsidy from those who die to those who live and continue receiving annuity payouts.

If she doesn't need the lump sum or income it's best to just leave it invested in some pension unless she wants to get started on passing on the money.

jayship · 19 April 2012 at 12:14PM

Thanks to everyone who have responded and gave their insight to the options available. That's why it is confusing for a lay person and am learning from your experience. Thanks

I thought that we no longer have to buy an annuity at 75 and can continue indefinitely. Hence why does the GAD charge increase to £250 per annum where it becomes uneconomic to a small fund. The investor will be forced to crystallise and will have no choice of passing on to beneficiaries tax free at death. With improved healthcare age 75 will be quite common.

jamesd · 19 April 2012 at 10:19PM

Right, the need to buy an annuity at age 75 was abolished in 2006 when Alternatively Secured Pensions were introduced. The current government increased the death tax charge on pensions for those who die before age 75 and decreased it after 75, making pensions more useful for inheritance tax avoidance. at the expense of the beneficiaries of those with lower life expectancies.

The GAD charge is up to the provider. They can charge whatever the market will bear. HL's stays at £75.

The GAD charge is only applicable when a pension has been crystallised. It applies to drawdown and that's one of the crystallisation options. Taking a lump sum also causes crystallisation.

jayship · 20 April 2012 at 3:09PM

Thanks jamesd for replying to my last question.

Am i right to believe that the unchrystallised fund will incur a tax charge of 55% after the age of 75 irrespective? Forum members input is really appreciated.

Sipp and drawdown

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