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How best to access a pension tax-free lump sum?
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Powerful Pierre
Posted: 05 February 2012 16:09:48(UTC)
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I have a reasonably large pension fund which I am about to put into income drawdown. The plan is to leave 75% invested for now and take the 25% tax-free cash - but how best to access the lump sum? My wife and I have had totally contradictory advice from different IFAs! One (A) says most people draw down the lump sum in tranches over (say) 10 years until the 25% cash is used up, to fund living expenses. This would give me tax-free income. Another (B) says that most of their clients take out the 25% as a single lump, to do with as they wish. In our case that might be to put it into a building society or to fund another buy-to-let property, which will also yield income.

In terms of reducing my risk, I would currently prefer to take all the lump sum out, as leaving it invested with the same firm as the 75% increases my exposure to that company. Did firm "A" recommend withdrawal in tranches simply to hold on to more of my pension cash for longer? Or to put less pressure on their investment performance?

How can 2 large firms give totally opposite advice? Any views on what is the "best practice" solution?
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Sinic
Posted: 06 February 2012 08:45:58(UTC)
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I was faced with a similar decision with my SIPP a year or so ago. Your first advisor seems to be guiding you towards what I understand to be 'phased retirement', which has the effect of reducing the income tax payable on your pension income because of the tax free element. However the downside is the expensive cost of administering it.

I manage my own mainstream investments and decided to take the 25% tax free sum as a lump. First of all, as you observe, it removes a sizeable sum from one basket. I then used a portion of it to buy my wife and my ISAs for 2010/11 and 2011/12. The rest I invested in a self selected basket of funds and stocks, in line with my existing investment portfolio and assuming the profits are there to be realised as they currently are, I will utilise my and my wife's CGT tax free allowance, which I will then reinvest in 2012/13 ISAs. I also pay toward a modest personal pension fund for my nineteen year old student son. Not sophisticated but tax efficient, not expensive to administer and manage, and within my own control. In conclusion I would rather have a large lump of capital under my control rather than moderate income under someone elses!
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martin hargan on 06/02/2012(UTC), Powerful Pierre on 06/02/2012(UTC), Cicero on 28/02/2012(UTC)
Powerful Pierre
Posted: 06 February 2012 13:07:33(UTC)
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Thanks, Sinic, for your cogent and helpful reply. Food for thought!
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Adrian Keenan
Posted: 06 February 2012 18:32:27(UTC)
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An interesting question. Presumably you have to balance the investment performance inside and outside the SIPP? If the SIPP 'pot' is returning stellar net growth (I wish) then unless you can manage the same, the money would be better off inside the SIPP notwithstanding the management charges? Of course the point about 'not having all your eggs in one basket' remains valid.
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Powerful Pierre on 06/02/2012(UTC)
sgjhaghsdg
Posted: 08 February 2012 12:49:57(UTC)
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Assuming HMG haven't changed the rules by then, I intend to take my full 25% as soon as possible as I'd worry otherwise about them changing the rules! I'll then invest in income equities and IT in my wife's name as we'll get the dividends tax free and can use CGT and ISA allowances for the 12 years until SP to get some of it in ISAs.
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Powerful Pierre on 08/02/2012(UTC)
Powerful Pierre
Posted: 08 February 2012 13:19:53(UTC)
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Thanks sgj etc - in about an hour I will sign up to taking the lump sum in one hit (rather than taking it in tranches). Like you, I'm worried that the tax rules might change.
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Adrian Keenan
Posted: 08 February 2012 17:09:28(UTC)
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Whilst rules may change in the future I would think it is unlikely they will be made retrospective? I think it seems more likely that once your SIPP is set up the rules in place at that time will continue to apply....as an example the government didn't alter the LTA without a Fixed Protection 'get out' for those with a pot already in excess of the new limit. Of course I may be wrong! : )
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Powerful Pierre on 08/02/2012(UTC)
webber
Posted: 08 February 2012 17:29:06(UTC)
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Adrian Keenan;13750 wrote:
Whilst rules may change in the future I would think it is unlikely they will be made retrospective? I think it seems more likely that once your SIPP is set up the rules in place at that time will continue to apply....as an example the government didn't alter the LTA without a Fixed Protection 'get out' for those with a pot already in excess of the new limit. Of course I may be wrong! : )


I wouldn't bank on that, I made significant contributions to my SIPP on the basis I would be able to access it in 2017, this was then changed retrospectively to 2022 (retirement age increased from 50 to 55).
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Powerful Pierre on 08/02/2012(UTC)
sgjhaghsdg
Posted: 08 February 2012 17:34:08(UTC)
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I made a lump sum contribution to my SIPP fully expecting 40% tax relief, and they changed the rules six months after my contribution such that there was a lower (they said "special"!) annual allowance, which my lump sum had gone over.

HMG have introduced *many* retrospective changes to pension legislation and will almost certainly continue to do so in the future.
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Powerful Pierre on 08/02/2012(UTC)
malcolm roberts
Posted: 08 February 2012 23:43:15(UTC)
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Thier are opportunities to place your cash for investment, you just need to know where.
Powerful pierre seems to have the right idea when he quoted buy-to-let property.
You can get a good return but you have to be prepared to lay out £200k. Your capital is safe and secured and earn a minimum £12k per annum from the let.
If you want to know more give me a call, I know of a few well known individuals looking for investment including a published book writer and film maker. All with proven track records.
01189810011.
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Powerful Pierre on 09/02/2012(UTC)
EA
Posted: 09 February 2012 10:43:23(UTC)
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As an experienced SIPP SSAS administrator I would comment as follows:

What used to be called Tax Free Cash (TFC) is now called Pension Commencement Lump Sum (PCLS) this in my mind would indicate that the 'tax free' aspect is already being looked into.

A bird in the hand is worth two in the bush!
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Powerful Pierre on 09/02/2012(UTC)
Powerful Pierre
Posted: 09 February 2012 10:57:56(UTC)
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Thanks EA - that was the conclusion I came to: grab the TFC/PCLS while it is indeed tax free. Although I think the government is doing its best to get the economy back under control, it's clearly short of cash and any tax reliefs must be under review.
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EA
Posted: 09 February 2012 11:42:56(UTC)
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Agreed, this is ringing very loud alarm bells.
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Powerful Pierre on 09/02/2012(UTC)
Philip Sutton
Posted: 10 February 2012 12:02:32(UTC)
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I would like to start by saying that this is a hugely complicated area of financial planning and therefore I would urge you to think about what you want from your pension:

- Do you pension your pension to provide you with an income in retirement?
- Do you wish to raise a capital lump sum?

The main points I would urge you to consider are:

- The change in death benefits associated with the different types of drawdown
- Any money withdrawn from your pension will immediately become taxable.
- The CGT implications associated purchasing an investment property
- The lack of liquidity associated with property investments

I would be more than happy to provide you with some further guidance in regards to your options however it would be inappropriate for me to do it via a forum setting.

If you would like to discuss your options further then please feel free to contact me on 020 7201 3048.
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Powerful Pierre on 10/02/2012(UTC)
banjofred
Posted: 17 February 2012 06:18:39(UTC)
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Hi,

Could you just clarify (as i am also nervous aboutmy lump sum and I am thinking now of grabbing it)

What is the difference between leaving it in a SIPP and withdrawing it and putting it in a couple of ISAS ?? (over two tax years)?

The ISAS can be in funds or shares just the same, and are tax free

The only downside I see if:

1) you can only take the tax free sum once, so in theory your 25% could be of a higher amount if you wait

2) if you die Clegg nicks 55% of your savings wheeras if you die before drawdown your wife can get the lot?

Anyone clarify?
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EA
Posted: 17 February 2012 10:23:23(UTC)
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Banjofred,
I can only clarify from a SIPP perspective.
On death before taking benefits there are two options. Firstly the whole fund can be paid out as a tax free lump sum to your spouse. Secondly, the fund can be used to provide regular income in the form of drawdown or by purchasing an annuity with the proceeds.
On death having taken benefits (and this includes taking your tax free cash) the options are almost identical to those I've outlined above. Firstly a dependant's income can be provided either in the form of drawdown, or by purchasing an annuity with the proceeds. The other option is that it can be paid out as a lump sum however, this will see the remaining fund taxed at 55% prior to being paid out to your spouse.
It should be noted that if you die after age 75 with any part of your fund uncrystallised it will be subject to the same tax consequences as above.
For funds paid out to a pre-nominated charity, zero tax is payable.
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Powerful Pierre
Posted: 17 February 2012 19:13:54(UTC)
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Having been through this debate too, I feel the "death" issue is a bit of a red herring. If I died during drawdown, my wife (widow) would probably continue with the drawdown. We both dislike the nature of an annuity (and the rates are low and may not increase) - and why would she choose to pay tax on a lump sum (which she would probably then use for income) when she could just use drawdown for income?

The other issue is whether or not you need income now (to fund a lifestyle) or a lump sum (to buy a house/car/yacht). Yes, you could wait until the fund increases in value, but this discussion has alerted me to the very real possibility that the tax free cash concession may well be reduced or removed in the foreseeable future. It looks like a "low hanging fruit" for HMG to grab. And of course stock markets are far from stable or offering "guaranteed" growth, especially with the Eurozone sword of Damocles hanging over them.

So I've decided to take the 25% cash and draw down income, for the next couple of years at least, to fund a gap in income before other pensions kick in.




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banjofred on 27/02/2012(UTC)
banjofred
Posted: 18 February 2012 05:38:35(UTC)
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EA and PP

Thanks fo ryour comments.

I really did not want to go with that, but I am quickly coming around to grabbing the 25% now

But .................... what pains me is the drawdown.

If I wait 3 or 4 years i will be a 20% taxpayer with say £7000 earnings allowance. OK I will have state pension (£5000?? I dont know), but part of my drawdown my be tax free as below this threshold (I am hoping that aint the case, and I might be still working, albeit at a 20% tax rate

If I take it right now i have the benefit of an extra 3 or 4 years drawdown, but it seems crazy to me to pay 40% tax when i dont need the money, just to squeeze that bit more out of the find

I think its approx like this

max GAD £5500

get now pay 40% tax and get only £3300, but at least its money bled out of the fund

leave 3 years.. thats three years less to bleed money out before death, BUT in those years the money will grow so a small power of compound interest kicks in.

take money then and pay 20% tax,so i get £4400 plus those extra earnings.

its the difference which is the loss

Version one lose £1100 a year say £3000-£4000 (and its growth) given to CleggCam
for no reason.

Other option is to take say a couple of grand this tax year and increase annually to the max

Cant decide.

Bearing in mind I dont yet need the money, and my intention is anyway to decimate the fund as fast as the law allows, spend the money on essentials like booze gambling and holidays then squander the rest, ideally becoming a burden on the state and die broke .........................

(OK would have to worry about the house etc later, but feel sure the kids will help me divest myself of wealth)

With this mindset, what should I do ????????????????
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EA
Posted: 20 February 2012 14:40:31(UTC)
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You have asked a very complex question here and much of it surrounds tax planning which I wouldn’t be prepared to comment on, your decision is made more difficult in that it depends on unknown future legislative changes.

Many of my clients fully crystallised their fund but then elected to take a lower level of income so that they didn’t overstep the earnings threshold for 40% tax, this worked for them and they were still 'bleeding' the fund. Others of course took their PCLS and deferred taking any income.

I would suggest you seek advice if you're unsure, if you let me know your area I may be able to recommend someone.
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EA
Posted: 27 February 2012 13:29:53(UTC)
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Thought this may be of some interest to you - taken from 'What to expect in the budget (Pensions)'.

" Tax-free lump sum

In the 1985 Budget former Chancellor Nigel Lawson described the tax-free pensions lump sum – that allows you to take 25% of your pension fund tax-free – as ‘anomalous but much loved’. But the 2012 Budget could see that love affair come to an end.

McLean predicted the government will place a cap on the lump sum you can take from your pension tax-free on retirement.

‘I think we could see a cap on the lump sum of £200,000, meaning you can only take that amount tax free and the rest is taxed,’ he said. ‘It would be madness to abolish the tax free lump sum though.’

Altmann agreed that a cap could be placed on the lump sum, but predicted a £100,000 limit."

Full article:-

http://www.citywire.co.u...-in-the-budget/a569643/2
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