Is that still true after the age of 75?
Good point. No, the buggers can get their hands on your money post 75
Hi Chris
I don’t understand what you mean by “without the option to reclaim the additional 20% you get in the higher rate band”.
The case I’m talking about is when someone has a hybrid workplace pension scheme (e.g. the USS) where you put AVC’s into a DC pot that is separate from the main DB pot.
As I understand it, for a higher rate taxpayer, the AVCs in this type of scheme initially reduce the person’s 40% income tax bill.
If she pays enough AVCs to reduce her 40% income tax bill to zero, then all further AVCs she invests in that tax year are then used to reduce her 20% tax bill.
So as I understand it, she would not need an “option to reclaim the additional 20% you get in the higher rate band” because she would have already got rid of her entire 40% income tax bill for that year.
[She would later pay at least 20% income tax when claiming the pension in future years.
But a quarter of her DC pot would be tax-free to take;
and she is expecting to have some retirement years of lower income before her state pension kicks in, so she is likely to be able to take much or all of this DC pot at only 20% income tax;
and this is a way for her to invest in stock markets with zero fees for buying and selling stock index funds.]
For me, that’s 15 years hence - but worth keeping an eye on.
I seem to recall ringing that service a few years ago and my experience was as you describe - i.e. a waste of time.
Would it be ok for me to ask Richard to pass on your contact details to me?
I just mean that your pension company automatically reclaims basic rate tax for you at 20%, and adds it to your pension, but if you are paying higher rate tax at 40% you will need to reclaim another 20% from HMRC yourself.
If your employer was handling all this in a workplace pension they should take care of it as they will know your tax situation, but a separate pension provider doesn’t, so HMRC, true to form, will keep the difference unless you reclaim it. Easy to do as part of an annual tax return.
Ok, I see what you mean now.
This was originally available as the ‘tax free lump sum” element. That’s a luxury many cannot afford these days, but many pensions allow you to take 25% tax free as you draw the pension in annual or monthly payments, often using the UFPLS scheme. It’s a minefield though, as not all pensions offer this, or they may have applied their own in-house rules or limitations to it. Always check with your provider, or consider moving the pot to a different provider if they offer poor terms.
I don’t think that is right.
The pension pot can normally be passed on free of inheritance tax regardless of age of death.
The beneficiaries would pay income tax at their rate on monies they withdraw from the pot if the death had been above age 75.
It’s my understanding that the ‘cash election’ aspect and any accompanying limitation (vis the max £268k – should you be lucky enough), is still up in the air with some pension funds/pensionco’s post the LTA changes e.g. how you can split any cash election across (say) a DB right (and notional fund sum) and a DC pot.
…and, of course, things could change.
This is axiomatic.
As self-evident as it may be, it’s my understanding that many people are ‘crystallising’ their pensions in this tax year (if not already done so), so as to mitigate/avoid future (very likely adverse) changes impacting their entitlements.
I’ve seen a pension quote that compares a maximum lump sum option vs. a maximum income (zero lump sum) option.
The quote shows that the max income option has a Lifetime Value that is 4% lower than the max lump sum option.
This seems to indicate that the conversion rates used between the 2 options pushes the user heavily towards the max lump sum option - i.e. in effect trying to force the beneficiary to give up a significant portion of their lifetime index-linked income and then have to manage their own investment pot far into the future.
Does that seem fair?
Why would the regulator not insist that the 2 options have the same/equivalent net present values?
Cannot answer that without seeing and understanding all the underlying assumptions and conversion metrics – and, even then, things are what they are.
There are several perspectives on lump-sum elections, one being around your income tax position and what you intend to do with any capital released/commuted e.g. while it would be beneficial to receive a relatively high index-linked pension (when tested to BRT threshold levels), if you have plentiful ‘other taxable income’, then you’ll be exposed to higher-rate tax on this. So, would it be beneficial (?) to commute some of the index-linked pension to allow headroom in the BRT-band for this ‘other taxable income’ (if allowable by the provider and tax rules).
Having a relatively high (to BRT exposure) index-linked pension sounds great, but when you add on State Pension i.d.c. (now 67 for many), which is effectively index-linked, you may need to think of your overall income picture down the line.
These are the things which often involve subjective decisions, outside of the spreadsheet maths.
That’s very interesting, HL.
By crystallizing their pensions, do you mean people do this by retiring, or by transferring their pensions value out of their pension scheme(s) and into some other form of investment?
What factors might cause very likely adverse impacts/reductions of UK pension entitlements?
Are you thinking of a likely change in the UK governing party?
Or something the current government might enact?
Or something else?
I’m tempted to respond with ‘it’s axiomatic’ vis all the newsflow in the media around pensions, the (to some, beneficial) changes which have been effected of late (e.g. LTA amendments), which are still being worked through (as JamieW has highlighted) – and this is before one gets to the differing terms of many schemes. Added to this list must be the P-word risk, and the signals which have been given about potentially rolling-back on the recent changes.
By crystallising, one way or another, this should offer protection from tax changes (as regards the underlying pension fund monies) and other things.
I’ve hardly seen any of this.
Where would be a good place to look?
The FT? Which? Other media?
Also, what is ‘the P-word risk’?
The quality press (all relative nowadays) of The Times, Telegraph, even Daily Mail (IIRC) all have financial sections, with pension sub-headers.
P-word is shorthand for a subject matter we cannot discuss on the forum (subject is, understandably, banned).
Looking back to the start of this thread, given the many questions (and pensions is a highly complex subject), I’d recommend seeking professional advices, and well ahead of when any decision-time arises, as there can be a fair bit to work through, some of which I suspect will be subjective in nature.
Yep, sure.
Fwiw, pension providers we’ve spoken to don’t expect any politically motivated changes to pension access any time soon.
Assuming we get a new Government, then the new ILSA and ILSDBA allowances, with built in fiscal drag given they are numbers now and not percentages, apparently satisfy ‘the other side’ (and these are easy to mitigate if you do the right thing per my hints in the SIPP thread…)
Further, the crash scene that is the unravelling of the LTA, which is still not finalised over a year down the line, shows how complex an issue this is. Chuck in trust law which is what you’re dealing with in terms of pension death bens and that’s a galactic scale can of worms that no-one’s going to want to open.
Finally, if anything was reversed, form suggests you’d get the opportunity to protect what you already have in good time.
However don’t rule out any future tweaks entirely.
In the meantime, it could be a good idea (even more so than it used to be) for everyone to check how the death bens on their pension are written and that the scheme provider of your choice offers you (or your beneficiaries) the ‘right’ way of receiving those benefits.