Pensions - DO NOT MISS OUT!

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Perhaps there is someone who can help me with one confusion I have on pensions. It relates to taxation at 75.
A person has been taking drawdown and lets say for ease they have drawn down prorat on tax free and taxable elements. Coming up to 75 I believe there are 3 options.
1. take an annuity on the balance in the fund
2. take out the whole amount, which would mean 25% tax free and the rest would chargeable at marginal income tax rates.
3. and now can continue drawdown. However this is where I get confused. I believe there is an instant 55% charge on any balance, so
a) is this correct?
b) assume it is only only 75% (ignoring the 25% tax free)
c) what happens to drawdowns afterwards - do they continue to be charged at income tax rates? If so there seems to be a double taxation here.
Are there relatively simple answers to these questions? perhaps some-one like @golfaddick could comment please.

redman said:

Perhaps there is someone who can help me with one confusion I have on pensions. It relates to taxation at 75. A person has been taking drawdown and lets say for ease they have drawn down prorat on tax free and taxable elements. Coming up to 75 I believe there are 3 options. 1. take an annuity on the balance in the fund 2. take out the whole amount, which would mean 25% tax free and the rest would chargeable at marginal income tax rates. 3. and now can continue drawdown. However this is where I get confused. I believe there is an instant 55% charge on any balance, so a) is this correct? b) assume it is only only 75% (ignoring the 25% tax free) c) what happens to drawdowns afterwards - do they continue to be charged at income tax rates? If so there seems to be a double taxation here. Are there relatively simple answers to these questions? perhaps some-one like @golfaddick could comment please.

First question is.....what do YOU want to do ? If your funds are in a drawdown plan then at age 75 the provider has to assess your fund against the Lifetime Allowance. That's it.  The only other difference post age 75 is that on death the funds are then taxable at the beneficiaries marginal rate. Before age 75 the funds are tax free on death. 

There is no need to touch the funds if you dont want to. The excess tax charge is only if you are above the Lifetime Allowance. 

redman said:

Perhaps there is someone who can help me with one confusion I have on pensions. It relates to taxation at 75. A person has been taking drawdown and lets say for ease they have drawn down prorat on tax free and taxable elements. Coming up to 75 I believe there are 3 options. 1. take an annuity on the balance in the fund 2. take out the whole amount, which would mean 25% tax free and the rest would chargeable at marginal income tax rates. 3. and now can continue drawdown. However this is where I get confused. I believe there is an instant 55% charge on any balance, so a) is this correct? b) assume it is only only 75% (ignoring the 25% tax free) c) what happens to drawdowns afterwards - do they continue to be charged at income tax rates? If so there seems to be a double taxation here. Are there relatively simple answers to these questions? perhaps some-one like @golfaddick could comment please.

This is not easy to explain. The rules are also different if you elected for Enhanced Protection against the Lifetime Allowance limit in 2006.

You have not said what percentage of your Lifetime Allowance is used up.  The 55% rate tax only applies where you have reached the LTA limit and you take a lump sum out of funds in excess of the LTA limit.  Tax is 25% if you use the excess funds in drawdown or buying an annuity.

If you have uncrystallised funds your 4th option is to leave them to draw later and they will be taxed at 25% if above the LTA.  But because you will pay the tax out of your pension pot it is the same as taking a lump sum cash. So if you owe tax of £5,000 you need to cash in £7,750 from your uncrystallised funds to pay 55% tax on £5,000.

The impact of reaching age 75 is that it is the last time your DC benefits are assessed against the LTA for paying the LTA tax. If you have crystallised all of your funds before age 75 there is nothing to test.  The age 75 test is there to tax funds in excess of the LTA limit which have never been drawn, so have never been tested against the LTA.

To repeat, if you have crystallised all your funds there is no tax impact in reaching age 75.

if you have uncrystallised funds at age 75 that you could add to drawdown or take in cash AND the value takes you above the LTA limit you will pay 25% tax on the funds you allocate to drawdown or annuity or leave untouched and 55% on funds you take in cash at that time.

If you leave the uncrystallised funds after meeting tax untouched, you are allowed to subsequently take 25% of the funds tax free if that is within the prevailing LTA LESS lump sums taken before age 75. The rest must go into drawdown, taxed as income the same as before.

No 55% tax will ever be paid after the age 75 assessment.  Further lump sums of 25% of funds crystallised after age 75 are tax free but limited to not being more than 25% of the prevailing LTA limit less cash taken up to age 75.

TEL said:

I must look into my pension now Ive seen this.....I had a company pension which was building quite nicely, but the last time I looked (about 10 years ago) it had lost about 2/3rds of its value and I stopped contributing. Not sure where to look now as Ive moved continents since then...Im pretty sure it was with Scottish Widows.

It may have been that you looked at it when the market crashed in 2008/9?

Back then the FTSE was half the value it is now.

With checking what it's invested in and the fee charges as well.

holyjo said:

If for example someone had a pot of around say 600k . What kind of return ish might they expect of invested in low- medium risk stocks -4% reasonable ?

Yes I would think 5% average over a period, mine's probably more medium/high and have averaged double figure % mostly for the last few years. Remember the golden rule, reinvest dividends.

Rob7Lee said:

holyjo said:

If for example someone had a pot of around say 600k . What kind of return ish might they expect of invested in low- medium risk stocks -4% reasonable ?

Yes I would think 5% average over a period, mine's probably more medium/high and have averaged double figure % mostly for the last few years. Remember the golden rule, reinvest dividends.

@Rob7Lee Just shy of 10% in a month on BAT shares ;-)

bobmunro said:

Rob7Lee said:

holyjo said:

If for example someone had a pot of around say 600k . What kind of return ish might they expect of invested in low- medium risk stocks -4% reasonable ?

Yes I would think 5% average over a period, mine's probably more medium/high and have averaged double figure % mostly for the last few years. Remember the golden rule, reinvest dividends.

@Rob7Lee Just shy of 10% in a month on BAT shares ;-)

Even better, my wife had some ISA limit to use up so thought in for a penny in for a pound.... hers are up even more!!

Rob7Lee said:

@bobmunro

have just logged into the Wife’s ISA, she’s up 16% on BAT. £23.65 bought in at 26th Jan. Do I cash out

I'm holding at the moment as I believe they are still undervalued.

golfaddick said:

holyjo said:

If for example someone had a pot of around say 600k . What kind of return ish might they expect of invested in low- medium risk stocks -4% reasonable ?

How long's a piece of string  ??

Depends what the assert class split is. Over the last 10 years a 50/50 split portfolio should have given an average 6-8% pa return. Probably more.....but there are a lot of factors involved.

For those taking an income from a drawdown plan I usually suggest no more than 4-5% withdrawal per annum. Usually more defensive portfolios with money in more income bearing stocks & bonds....probably a 35/65 split. Most have still seem growth with this strategy, although this past year has been challenging 

Interesting comment. A lot depends, on what you have said before, what your objectives are. If you only drawdown 4-5% per annum and growth averages that level it would presumably mean your capital is left intact (for your beneficiaries). A person who is happy to plan for zero left at death can afford to drawdown more. 

I personally (and I'm not an IFA) choose to have a much higher % is equities. Historically equities have significantly outperformed bonds and gilts. As some of this fund could be invested for 30 years or so, then a higher % in equities to me is justified. It is though, by definition, riskier and I had lots of discussions with my IFA before he could sign this off. 

golfaddick said:

redman said:

golfaddick said:

holyjo said:

If for example someone had a pot of around say 600k . What kind of return ish might they expect of invested in low- medium risk stocks -4% reasonable ?

How long's a piece of string  ??

Depends what the assert class split is. Over the last 10 years a 50/50 split portfolio should have given an average 6-8% pa return. Probably more.....but there are a lot of factors involved.

For those taking an income from a drawdown plan I usually suggest no more than 4-5% withdrawal per annum. Usually more defensive portfolios with money in more income bearing stocks & bonds....probably a 35/65 split. Most have still seem growth with this strategy, although this past year has been challenging 

Interesting comment. A lot depends, on what you have said before, what your objectives are. If you only drawdown 4-5% per annum and growth averages that level it would presumably mean your capital is left intact (for your beneficiaries). A person who is happy to plan for zero left at death can afford to drawdown more. 

I personally (and I'm not an IFA) choose to have a much higher % is equities. Historically equities have significantly outperformed bonds and gilts. As some of this fund could be invested for 30 years or so, then a higher % in equities to me is justified. It is though, by definition, riskier and I had lots of discussions with my IFA before he could sign this off. 

Problem with your strategy is that if your portfolio is more weighted towards equities & we then have a downturn (it does happen) them your income payments are being taken from a decreasing fund....exacerbating the losses. Obviously in a drawdown pension you can easily reduce the income thus limiting the losses....but would you do this & how long until you decide you must bite the bullet & act. 

The objective in drawdown is to match the risk you can bear.  

Equities deliver capital growth and bonds deliver income.  It's how much you want to rely on cashing in capital growth which can evaporate, versus a reliable stream of revenue from investing in debt.  For most, as Golfie shows, it's a compromise, not either or.

if you know when you are going to die it's much easier, otherwise you have to consider mortality risk which only an annuity can cover off.  

For an average life, back running all scenarios, no single asset class optimises outcomes.  it always comes out as a moving allocation from equities to income to annuity.

holyjo said:

I had a final salary scheme ( now finished ) . The scheme is in defecit and although the member organisations have for 10 years been paying extra to reduce the defecit but each triennial evaluation shows little ground has been made due to increases life expectancy etc

later this year many of us will be offered to buy out at 110% of value. The pension regulator is involved and each pensionee will be offered free independent financial advice. 

I will I’ll need to make a choice of keeping my annual pension or taking the lump sum. At first glance one might think keep the pension. It gains a minimum of 3% increase per year and my wife would get half of my pension should I die before her

on the other hand should I not drawdown on the lump sum or only use some of it I will have additional funds to pass on to my children

its going to be an interesting choice. I have no idea how they value the pot . My pension in today’s money would be 12k per annum when I’m 65. I’m 50 now

The transfer value will assume the capital only grows in line with gilt yields of a few % above cash to service your 12k pension (probably £300k if retiring at 65 today).  Your pension scheme can’t invest heavily in equities, but you can. 

A TV is simply the current value of say £300k duscounted to a present value assuming a future return of x% pa.  If the TV assumes a 4% p.a return you will get more than £300k at 65 if you actually earn 7%. If it is increased by 10% you only need a return of 3.6% to break even.

 So the objective is to get a higher return than that assumed yield in calculating the TV.  Arm yourself by asking

1. what discount rate is factored into the TV calculation
2. Is it the value of your pension ignoring the deficit.

At 50 you can take some risk and if the TV is fair value the risk of you being worse off is a risk that is manageable with good advice.

This is a heavily regulated activity, so you should be well served with key information. 

redman said:

golfaddick said:

redman said:

golfaddick said:

holyjo said:

If for example someone had a pot of around say 600k . What kind of return ish might they expect of invested in low- medium risk stocks -4% reasonable ?

How long's a piece of string  ??

Depends what the assert class split is. Over the last 10 years a 50/50 split portfolio should have given an average 6-8% pa return. Probably more.....but there are a lot of factors involved.

For those taking an income from a drawdown plan I usually suggest no more than 4-5% withdrawal per annum. Usually more defensive portfolios with money in more income bearing stocks & bonds....probably a 35/65 split. Most have still seem growth with this strategy, although this past year has been challenging 

Interesting comment. A lot depends, on what you have said before, what your objectives are. If you only drawdown 4-5% per annum and growth averages that level it would presumably mean your capital is left intact (for your beneficiaries). A person who is happy to plan for zero left at death can afford to drawdown more. 

I personally (and I'm not an IFA) choose to have a much higher % is equities. Historically equities have significantly outperformed bonds and gilts. As some of this fund could be invested for 30 years or so, then a higher % in equities to me is justified. It is though, by definition, riskier and I had lots of discussions with my IFA before he could sign this off. 

Problem with your strategy is that if your portfolio is more weighted towards equities & we then have a downturn (it does happen) them your income payments are being taken from a decreasing fund....exacerbating the losses. Obviously in a drawdown pension you can easily reduce the income thus limiting the losses....but would you do this & how long until you decide you must bite the bullet & act. 

Don't disagree with with your comment. As I said depends what your objectives are. However I do think most pension plans and IFA's tend to give too risk advice advice. An example of this was the lifestyle pension plan (which admittedly aren't so common now) which switch a person's pot so that they have zero or very small proportion invested in equities at retirement ignoring the fact that some drawdown could be in 30 years time and no downturn (so far) has ever lasted more than a few years.. 

And I don't disagree with you either......

Unfortunately the advisor industry is very well regulated & the first thing (And I would  go so far to say the over riding thing) that compliance look at IS attitude to risk......and some advisors fear their compliance dept like the plague.

"Lifestyling" was introduced at a time when 95% of retirees simply bought an annuity & it was easier for a GPP to offer this strategy as their default option. Problem is that I still see client's in them who have no idea in what they are investing (esp those who have left the respective employer) 

Rob7Lee said:

Rob7Lee said:

bobmunro said:

Rob7Lee said:

@bobmunro

have just logged into the Wife’s ISA, she’s up 16% on BAT. £23.65 bought in at 26th Jan. Do I cash out

I'm holding at the moment as I believe they are still undervalued.

I'll keep mine but if the wife's gets to 20% up I may have to sell. Come on £28.40!

@bobmunro nudging £28.40 today...... decisions decisions....

If I recall you bought at £25.10 and applied a stop profit/loss of 10%.

Discipline, sir - you're sitting on a 13% return right now!

I would advise selling your wife's pot as well.

I bought my current tranche at £24.90 and have now set a sell at either £29.00 or £28.00 - the lower gives me a 12% return in a month or so - top end 16%.

Rob7Lee said:

bobmunro said:

Rob7Lee said:

Rob7Lee said:

bobmunro said:

Rob7Lee said:

@bobmunro

have just logged into the Wife’s ISA, she’s up 16% on BAT. £23.65 bought in at 26th Jan. Do I cash out

I'm holding at the moment as I believe they are still undervalued.

I'll keep mine but if the wife's gets to 20% up I may have to sell. Come on £28.40!

@bobmunro nudging £28.40 today...... decisions decisions....

If I recall you bought at £25.10 and applied a stop profit/loss of 10%.

Discipline, sir - you're sitting on a 13% return right now!

I would advise selling your wife's pot as well.

I bought my current tranche at £24.90 and have now set a sell at either £29.00 or £28.00 - the lower gives me a 12% return in a month or so - top end 16%.

The Profit/Stop loss on mine was a soft one, i.e. not system generated so moveable.

I'll sell the wife's and hold mine for a bit longer I think. :-)

Mine's moveable as well! If it gets to around £28.80 I'll move it to sell at £29.50 or £28.50.