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#1657743
I am woefully under provided for when it comes to a pension, and to a large extent it is too late to do much about that.

However, AIUI I can put up to £3,600 pa in to a private pension, and get a tax credit(/rebate?) of 20% each year. When I come to draw on the pension (in a few years time) I will be able to opt for a 25% lump sum tax free. That all sounds far too good to be true from a tax perspective, so presumably it is. So what am I missing?

And yes, I do understand that any advise given is worth what I am paying for it :D

TIA
#1657778
The theory is that you don't pay tax on pensions contributions because your are deferring income to the future, when it will be taxed if it is high enough. So you don't get a tax rebate, rather what you pay in is not taxed now.

That principle is being whittled away at for those with high pension savings and some higher rate taxpayers, and may go entirely for higher rate taxpayers.

Also the 25% tax-free lump sum isn't certain, that's the current concession and there's no guarantee it won't change in future years. Bear in mind also that taking the lump sum reduces the annual income from the pension, so there is a trade-off there (and if you invest the lump sum, the investment income is taxable).
#1657780
CP, what you type is correct as a basic position.
Depending on present age and earnings you could do much better from it.

EG The £3600 is a basic minimum contribution allowance, even if one does not have any earnings (it was up to £10K a couple of years back). If you have earnings you can put in up to 100% of earnings (I think up to £40K) and get tax relief.

Again depending on age and earnings you may be able to take cash from your pension immediately (I believe if 55+). And, if your earnings are below the taxable allowance you would be advised to take the 25% tax free allowance and any unused allowance.

That's a simple explanation to get you going.
#1657783
profchrisreed wrote:...(and if you invest the lump sum, the investment income is taxable).

Not necessarily, depends what it is invested in.

Right now it is very hard to beat putting money in to pensions.

The concessions for money going in is good and with the removal of the restrictions providing the much needed flexibility for withdrawals, what's not to like.

For many years we stopped putting money in to pensions due to the restrictions on withdrawals. Had I known how flexible they would become I would have been borrowing to put money in (well maybe not literally).

With only a few years to go the risk of legislation change is small, especially if one can take benefits immediately.

I'm practicing what I preach. :D
#1657798
Miscellaneous wrote:Depending on present age and earnings you could do much better from it.

Errr, approaching a "significant" birthday, with zero qualifying earnings from here on in. I half thought about putting in, say, 5 years x £3,600 = £18,000 at a cost to me of 5 x 3,600 * .8 = £14,400. Then in 6 years time withdraw 25% = £4,500 tax free, and then live the Life of Riley (not) on an annuity from the remaining £13,500.

But perhaps I am just making life too complicated for my own good...
By avtur3
FLYER Club Member  FLYER Club Member
#1657801
Colonel Panic wrote:..... and then live the Life of Riley (not) on an annuity from the remaining £13,500. ....
...


From my experience annuity rates are so low as to be insulting, if you then you start to add on any bell and whistles like indexing or spouse benefit it becomes wholly unrealistic. I have a couple of friends who are making drawn down look a much more attractive alternative. Unless the annuity has a spouse benefit included it will snuff it when you do. A drawdown pot is still yours (or your estate's) so some value is retained for the family.
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By Tall_Guy_In_a_PA28
FLYER Club Member  FLYER Club Member
#1657802
But perhaps I am just making life too complicated for my own good...

Not really. Your plan is a good one.

You will have to give some thought as to what to invest your pot in. The relatively short term nature of your plan will have a bearing (i.e. nothing too risky).

There are better options than an annuity when it comes to taking money out.
#1657806
I see your thinking, however to make it as tax efficient as possible (and at the risk of upsetting some forumites :D ) you would want to maximise what you get out without paying any tax. So, for the purpose of explanation let's say you have £50K in your fund at present. Irrespective of what you do have the idea is the same.

You don't have earnings, so you could 'take out' up to the allowance of circa £11500 (or whatever your allowance is), without paying any tax and remembering to adjust for the 25% tax free element. This does not prevent you continuing to pay in the £3600.

Many are tempted to leave it until retirement (after all it is a pension), trouble then is that your OAP pension becomes payable, and for want of a better phrase uses up some of your tax allowance.
#1657808
My reference to an annuity was somewhat tongue in cheek - I am aware of the woeful rates. The amounts I am talking about are sufficiently small that I would probably just draw down on the remainder over a couple of years, managing marginal rates of tax etc in any one year.

Miscellaneous wrote:You don't have earnings, so you could 'take out' up to the allowance of circa £11500 (or whatever your allowance is).

Not quite - I don't have any (pension contribution) qualifying income, hence the need to concentrate on marginal rates of tax (as above).
#1657812
Okay, it just needs adjusting accordingly to meet your needs.

Do you have savings? There may be sense in paying your savings in to the pension and getting the tax benefit. From memory I'm sure the arithmetic showed a circa 6% benefit between getting the tax relief on contributions vs paying tax on 75% of 'withdrawals' (assuming zero growth).

A better option to drawdown may be utilise UFPLS, although be aware doing so limits what you can put in going forward. This may not work if you decide to pay all your savings in up to the level of your present income.

EDIT; I think you are on the right track and there is benefit to be had. :thumleft:
Last edited by Miscellaneous on Fri Dec 14, 2018 8:40 pm, edited 1 time in total.
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#1657846
On the annuity / drawdown question, I went for drawdown five years ago and find that it may have been set a little on the pessimistic side as my "pot" has increased by a few hundred quid. With Mrs P coining it there's no imperative to change this state of affairs, the whole pot being in the estate when I exit.

Rob P
#1657860
I’ve taken a chunk out of one of my pensions to protect it from Brexit and in case the rules change at some point.

Anuities seem to assume some form of smoothed regular income and life isn’t like that.

Most people I know have a fit and active life in their 70s as long as they keep their health. Will focus on enjoying 60s and 70s and will reduce the cost of hobbies over time - fresh air is free.

If I make it into my 80s then as long as I can afford a high chair, blender, TV remote and some Internet access then I’m not sure that I’ll need much more. I’ve known many people in their 80s and 90s who have coped well with a state pension as their needs have reduced. The real need is to avoid social isolation as the final years, for many, seem to be behind closed doors.
#1657864
@Colonel Panic apologies, sorry I rushed posting earlier between being asked to shift furniture to make way for a Christmas tree. What I posted wasn't quite right, I have edited my post and put the edit in bold.

In very simple terms using a UFPLS (Uncrystallised Funds Pension Lump Sum) to access your pension fund permits you to take a lump sum from the pension pot without drawing it down. In other words what you don't take is left in the fund as was. As I said previously though, once you decide to do so it limits what pension contributions can be made.

When I did it the contribution limit was £10k per annum, however due to recycling (folks taking money from pensions and then putting it back in) the limit was reduced to £4k gross (it may have gone up recently).

Some years I have earnings above my tax allowance, some not. By using UFPLS I can withdraw an amount to maximise my allowance if need be and leave my pension alone (other than contributing) if I don't have any unused allowance.

Withdrawing it and using my tax allowance makes sense whether the money is needed or not, since leaving it until my OAP kicks in will limit what can be withdrawn without paying tax.

This may mean I take a few k out and put it back in to attract the tax relief again (ie I recycle). :thumleft:
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