27 Jan 2017, 11:21am
personal finance
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  • the siren song of the tax-free bung

    Rule 1, on page 1 of the book of war, is: “Do not march on Moscow. Various people have tried it, Napoleon and Hitler, and it is no good”.

    Monty

    So it is with pensions. Rule 1, on page 1 of the book of personal finance is: “Never give up any defined benefit pension”. Various people want to try it, so many that they had to set up a law that you need to take independent financial advice when transferring even a DC pension which has been run by the same administrators as a DB pension, never mind actually trying to transfer a DB pension into a SIPP.  Nevertheless I am thinking of giving up some of mine, for a 25% tax-free bung (PCLS). Not right now, but at a later stage. Not only that, I am not planning to invest it, merely use it for a consumption good, although not a wasting one 1.

    I’ve already take a bite of a PCLS when I sprang my additional voluntary contributions into a SIPP. I’d saved roughly a third of the notional capital behind my main defined benefit (DB) pension into defined contribution AVCs in my last three years at work, ramming my pay down to nearly minimum wage at times and winning both tax and NI savings using salary sacrifice, saving in three years what it had taken me nearly 8 years normal accrual of employer and employee savings.It’s not a recipe for a huge amount of consumer spending fun, but you get to buy a lot of your time back from The Man.

    Those were the days when there was little point in me taking out a SIPP, because I’d have had to convert 3/4 of the SIPP to an annuity for life, where I really wanted an annuity for five years until my DB pension kicked in. By taking out AVCs I wanted enough tax-free lump sum to be able to invest to compensate for the actuarial reduction in drawing the DB pension in my early 50s 2. There are many good points about a DB pension, but flexibility in retirement age is not one of them. In general you want to take a DB pension close to whatever the normal retirement age (NRA) is for the scheme, which in my case is 60 for most of my contributions. And I wanted to retire at 52. The inflexibility of pensions was also why I chose to build up ISA savings at the same time, because I made this choice according to the old rules.

    Then George Osborne wandered along and shook up the system so you could front run a DB pension with a SIPP, running it flat between your early retirement age and the DB pension NRA. So I grabbed this opportunity, started to run down my AVCs in a SIPP and left the ISA alone. As it happened the uplift of the Brexit brain-fart has increased my nominal SIPP capital so it will take me to a year later than 60 if I want to sneak it all out below the tax threshold, which hasn’t been lifted to compensate for the 20% devaluation in the worth of the pound. On the upside the 25% PCLS got a Brexit boost in my ISA, so I probably won all round. The idea of paying tax hurts, though, when I didn’t need to on the original plan.

    Still, we’ll have well and truly Brexitted by the time I am 60 and that nice fellow Michael Gove tells me that it will all go swimmingly so maybe the supine pound will have increased back to its former Imperial glory, making each pound count like it used to in the days of the Raj. I’d settle for its power in the 1960s when you used to get twelve Deutschemarks for a pound 3. One can live in hope that it’ll be all right on the night and a pint of beer won’t cost £10 4 a few years hence…

    A pint of Brexit Doom? That’ll be £10, sir.

    So I now ask the DB admin guys what I would get if I draw at 58, 60, and 62. The reason for that is I have 23 years DB pension accrued, for 20 years the promise was to pay from 60, then they switched that to 65 for the last three years. They demand I take both accruals at the same time and don’t pay any uplift on the NRA 60 contributions. A moment’s thought indicates that delaying two years after 60 should give me much less uplift than the difference between 58 and 60, but it’s always nice to have one’s gut feel confirmed in writing.

    It was. I lose 5% of the pension at 60 if I draw it two years early, and I gain 1% if I draw it at 62. So it’s daft to delay after 60. I then go and factor in the  effect of tax, because although the headline actuarial reduction is 5% for two years 5 it so happens that all the difference is well over the basic rate tax threshold. So I get to lose 20% of it, making the actuarial reduction 4% net. I have already done all my duty paying tax for one lifetime, so it really doesn’t make my heart bleed that HMRC will lose out each year. Stuff ’em.

    What about taking another 25% PCLS?

    It appears that I can still take a pension commencement lump sum, which reduces the annual pension by ~ 25%, natch. Whether this is a good idea or not is all about two things. One is the commutation rate, ie if you take the PCLS and divide by the annual loss of pension what is the ratio. The other thing is how you feel about the stability of the pension scheme, changes in tax rates and investment returns, and if there is anything else you want to do with the money like pay off a mortgage. Taking the PCLS insulates me against changes in tax rates and the stability of the pension scheme, but of course if I were to invest it I get exposed to investment risk. I can easily pay my essential bills from the reduced pension since it is more than my current income. The natural yield of my ISA would make up more than the net difference to where it was without the lump sum,  and I’ve never needed to draw income from the ISA yet.

    It so happens that I have a use for a lump sum in a couple of years, I may want to move a little bit upmarket housing-wise. I am hoping that Brexit slows down or hopefully hammers the housing market. Unlike every other Briton I don’t personally believe that property is a good investment at all, but sod it, I have come to the stage where I just want a little bit more house and I’m not really looking forward to the experience of  when my current  semi-detached neighbours go to a retirement home in a few years and I end up living next door to a baby 6, or a teenager into Throbbing Gristle, or the little toe-rag that used to live next door to my mother who used to do his baseball practice. Against the upstairs bedroom party wall FFS, just as well she was getting hard of hearing but still needed earplugs to deal with that little tyke…

    So the 25% lump sum is attractive. The commutation factor is 20 (ie I get 20 times the loss of annual gross income as a tax-free lump sum). However, since that is gross income, I would get to pay tax on the income. Probably tax and NI in the coming years, since the differing tax rates on earned and pension income is an obvious target for governments to hit without raising tax rates. So when I look at the difference in net income, the commutation rate is 25 times, possibly more if the dreaded integration of tax and NI comes to pass. A PCLS is tax-free.

    Everybody says don’t ever sell any of your valuable DB annuity promise. I have some good reasons here, and I have enough to be able to do fine surrendering the income. I take the point that you shouldn’t just blow it on a Lamborghini, although pouring it into the bottomless toilet that is British residential property isn’t much better IMO, but at least it is a fixed asset. Another factor is that I am ten years older than Mrs Ermine, and a DB pension pays a widow’s pension of a half . So if/when I kick it before her, assuming property hasn’t fallen by a half in real terms, she has more preserved value from the DB pension 7, though she will need to move to realise it. There are other ways to hedge that risk though – term life insurance to insure my death to the value of the PCLS until Mrs Ermine reaches her three-score years and ten is about £500 pa

    Housing? WTF?

    The general theme on housing seems people want to downsize post work, but although I don’t want a huge upgrade I want to get away from some hazards. I am probably housing-lite relative to many readers of a similar age; my ISA was probably worth a little more than my current house before the Brexit boost. Most people my age at The Firm seemed to have the majority of their networth in housing. They probably share SHMD Jim’s perspective and want to change down, not up. But hell, I had a different experience of housing. And while you can go into a retirement complex in your 50s, I don’t yet feel that I have one foot in the grave, so I am happy to swim against the tide here.

    I have a couple of years to mull this over before actually needing to do it. A lot can happen over two years, and there’s no need to rush it, but it was worth getting those quotes from the pension administrators so I can sketch out an action plan, even if it does go against rule 1.

     

    Notes:

    1. Cars and iPhones are wasting assets, because they are degrade, and are worth less in ten years than they are now. Other assets, like gold, housing and worthwhile education, preserve value across the years because they don’t degrade, although the value can still be volatile
    2. I had protected rights so I could have drawn it from 50, not 55
    3. In that case the large Brexit increase in unitised price of my ISA will become a large decrease. But then I’ll be living in a country with cheap beer, energy and all that good stuff! I am also toying with some of Monevator’s hedged ETFs
    4. Londoners will probably tell me it’s already £15 in City watering holes, but such usury has yet to creep out into the sticks, because the rest of Britain is a lot poorer than you guys
    5. I find this surprisingly low but that’s what the estimate says when I compute the difference. Are they really expecting me to live for 40 years after 60, such that two extra years of payment is 5% of the total expected period of payment?
    6. I lived next door to people that had a baby in a terraced house in my early thirties. I had to move my bedroom to get any sleep.
    7. this is a complicated calculation, because it depends on how long I live as to whether the total amount coming into the household ends up more or less. If I really get to 100 taking the PCLS will have been a bad move
    27 Jan 2017, 1:33pm
    by The Rhino

    reply

    ‘Unlike every other Briton I don’t personally believe that property is a good investment at all, but sod it’

    Yeah. I am after quality of life – it is consumerism, though not with a wasting asset as most consumerism is. In a distant past Britons bought property to live in, and I am considering this on such an old-skool basis.

    It sounds to me that you’ve done the thinking and know what you want to do. Nobody knows if it will turn out to be a good decision, but it sounds like you’re ok with the idea of picking up any gains/ losses that come out of it.
    If I had a DB pension, and knowing myself, some part of me would be itching to draw on it because that thing is opaque and in somebody else’s hands and not mine. I hate it when I have to rely – for things that are important to me – on something that’s outside of my sphere of control.
    One thing to point out about DB pensions is that as an early retiree might just beat whatever odds they’ve given you. I doubt they make adjustments for the health benefits of an early retirement. Works stress chews people up, but also, with more time on your hands, you’re more likely to take proper care of your health rather than pilfer time from GP checkups, healthy diet and exercise so you can spend a few more hours finishing that thing at the office or seeing family and friends on weekends.

    Interesting that they may not qualify the increased liability for early retirement πŸ˜‰ Although I think early retirement is only good for retirees that don’t end up with the feeling they miss the meaning aspect of work, if they have a Calvinist streak it seems to be bad for their well-being.

    I don’t have this problem. Four and a bit years after leaving work, I really can’t say I miss it one bit πŸ™‚

    I guess there’s a generational difference in the attitude to a DB pension, I am deeply grateful that it pretty much underwrites my essential spending and a bit more. I don’t really trust the ISA, which is where my DC savings are, and worked hard to try and defer my DB pension to normal retirement age. I have a couple of years to decide if I can get use to exchanging some of it.

    There was an FT podcast about giving up DB pension benefits a short while ago. If you want to do it, now is the time apparently, with bond yields being so low. Above Β£30K value you need financial advice. I have a small Β£1K per year pension from when I was a post doc at Oxford & Liverpool starting when I am 65. I was mulling over giving it up but have decided not to bother. It is marginal gains and I slowly learning that every financial decision does not have to be perfect. “Good enough” will do.

    I am FIREd now at 52 with my teachers DB pension kicking in at 60. I’ll be front running a SIPP at 55 like you.

    Good luck with housing upgrade

    Matt

    Thanks for the pointer – that FT article was interesting for the reasons why the multiple seems to be higher than I recall looking at when I was at work. I don’t need to take financial advice to take the tax-free bung because that option always was part of the terms of the pension. It didn’t look that attractive in the past, and when I last looked I hadn’t built up the ISA enough to pay the lost income from natural yield, which makes it an easier choice.

    The attraction of a DB pension is greater if (i) the index-linking is on good terms (e.g. not capped), and (ii) if the scheme is in good financial nick, or has a Crown guarantee (as I understand the BT scheme to have).

    My own principal DB pension didn’t satisfy (ii) so I took my 25% which, happily, did not penalise my wife’s eventual widow’s pension. The art then is to have something useful to do with the capital. You’re going to uphouse; seems fair enough to me. It’s the sort of thing money is for.

    I disagree though when you say “Other assets, like. .. housing … preserve value across the years because they don’t degrade”. Houses do degrade; it’s just that in Britain in my lifetime house price inflation has largely disguised the fact.

    I made the assumption that the spouse’s pension would be reduced, ‘cos obviously the capital underwriting the promise has been dropped by 25%, d’oh.

    So I go to my bookshelf and pull out the member’s handbook of my pension scheme that they pressed into hot little paws of a late twenty-something young pup some 29 years ago and there they say in black and white under Lump Sum on Retirement

    “Any pensions increase will only apply to the reduced pension, but any spouse’s or dependants’ benefits will be based on the amount of pension before it was reduced to provide the lump sum”

    Well blow me down with a feather. thank you for getting me to test that assumption! Happy days indeed. It shifts the balance in favour of the bung quite significantly

    “Cars and iPhones are wasting assets, because they are[sic] degrade, and are worth less in ten years than they are now.”
    Not all cars – classic cars and bikes can make you money. But you do need to be canny (and it helps to be handy with a spanner) and have good problem solving skills! They aren’t particularly ‘liquid; assets, but if you’re looking at similar timescales to equities and have an interest, then why not? Works for me…

    hehe – keeping the rust that never sleeps at bay is still more like work than a passive income, but whatever lights your fire!

    After 35 years in front of a computer screen, working with my hands is good for my soul πŸ™‚

    Matthew Crawford got a whole book out of that principle! It was a good read.

    Yes I have read it. Made me wish he’d written it 40 years ago! I may have made a few different decisions – and just maybe avoided a heart attack πŸ™‚

    Hi Ermine,

    Is that really you are has someone hacked your site?!?! Buying more house?! πŸ™‚
    I can totally understand the desire for a bit more space – I would certainly love to move to a fully detached home for the pure peace and quiet, but in London that isn’t going to happen!
    You now have the time, and if it isn’t going to break the bank then it isn’t too bad, may as well enjoy it and leave Mrs Ermine some space as well πŸ˜‰

    Is it just to avoid the oik’s that are likely to move in next door, or are you going to look for somewhere with a greenhouse, potting shed and its own well? πŸ˜‰

    In terms of the DB sales that are going on at the minute – a lot of people are cashing in given the valuations, but not all companies give such a good valuation. The other thing to think about, how likely is the old firm to default on its mortgage obligations? At least if it passes to Mrs Ermine should the worst happen then the DB pension will kick to her, as opposed to potential IHT hit if it is in cash…

    Cheers,
    FiL

    Hacked into my skull indeed. Though at least I haven’t decided to get into BTL. After all, the classic thinking would be I could buy the house next door cash when my neighbours move on, rent it out for a pseudo-passive income and then get to kick out any tenants whose taste in music/indoor sports hack me off πŸ˜‰ But no. Not doing that. I hope my neighbours live long and prosper, but I am younger than they are by some way.

    When they had their grandchild to stay over Xmas I did learn that while this house is far better than that terrace I still don’t want to live long term with only a party wall against a baby. And I do hear their TV more now as he’s getting harder of hearing, although in fairness no doubt they have heard my hifi over the years, and everyone knocks it off by 11pm because we are all reasonably civilised. Dunno how they crack that because they are night owls and I see the TV coming back from the pub, but don’t hear it.

    It’s a load of things – after all when I bought this house (before Mrs Ermine was on the scene) I wanted one with a small garden. Mrs Ermine wants something a lot bigger. Barmy IMO but each to their own. At least a bigger garden gives me space to put up some decent aerials.

    I’m not after more internal space in particular, but perhaps shifting to a bungalow would be good, and having a garage where I could have a bench with a pillar drill, maybe a mitre saw. My current garage is just too brass monkeys in winter. And full of junk, though that’s my own damn fault.

    I feel good about the DB pension’s chances of survival for reasons specific to The Firm, if it goes titsup that’s likely to be either from a period of 1970s inflation or because there are zombies running amok in the streets, and I’m a goner in that case, that’s a twenty-something’s game fighting that sort of thing πŸ˜‰

    The inflation cap is a concern, that would be a bastard if that happened in the first 10 years of drawing it. The cap is 5% RPI so it would have been just breached in 2011, and mroe seriously in the early 1990s, I would have taken a permanent devaluation in real terms of 8% from the early 1990s recession

    Well,when you start to talk about buying the neighbours house then I will be worried!

    A bigger garden could be nice especially in the summer, but it is extra effort! Bungalow is an interesting option – I have always shied away from them as the limit of space, although your own good size garage could be good (if you can avoid filling it with junk!).

    If The Firm is safe on the DB, and you don’t need the cash my inclination would be to hang on, but it is a difficult one – how much do you (both!) want the extra space?
    Cheers,
    FiL

    > A bigger garden could be nice especially in the summer, but it is extra effort!

    That’s Mrs Ermine’s department. I’m happy to drink iced coffee and maybe Pimms in the garden, but an aversion to gardening is exactly why I favoured a small garden. A bigger one wouldn’t distress me as long as I didn’t have to garden in it, and since this is dear to Mrs Ermine’s heart I’m happy to go along with it.

    I’m not dead set on the bungalow – I figure I will be late seventies in 20 year’s time and 20 years is a decent amount of time to recover the costs of moving. It wouldn’t be a terrible thing to move again in 20 years. I am in decent health now, so I’d hope to still be mobile then.

    I have a couple of years to chew this one over – the NRA of that scheme is 60, and the actuarial reduction of two years is 5%, which seems a good deal to me. I have a slight problem in that I won’t have pounded my SIPP into the ground by the time I am 58, so I need to consider paying a bit more tax on that πŸ™

    Ah you are in luck if Mrs Ermine will look after the garden – neither of us are green fingered, but would love a bigger garden (do I need to save up for a gardener? ;-))

    Well, if you think you may need to move in late 70’s then you could think about completely downsizing and moving into a retirement village? πŸ˜‰ If you aren’t working the likelihood is that you will be reasonably healthy without the hassle of work!

    Well, in avoiding tax – could you not just leave the money in your SIPP? Take the DB, let the SIPP keep building up, and see what the future holds in tax changes – if they do push the 40% band up to 50k, then you could take more out?
    Cheers,
    FiL

    Maybe it’s because I am reading this from the colonies, but the whole concept of PCLS on a DB pension strikes me as a bit balmy. After all the whole idea of a DB pension is to pay you a living income in old age. God knows very few of us have that anymore. You are just stealing from your future self as far as I can see.
    That said, I did take my DB pension early and got “discounted” there. I had a choice of two discounting algorithms and took the lesser of two evils.
    However my pension never amounted to what my wife gets and she received the Full Monty when she left teaching. Also I have collected for 12+ years now so I am evening the odds somewhat.
    My DB is with Unilever so I am not sweating the solvency. My wife’s is a government guaranteed one.
    As far as “investing” in real estate – pah. Right now it has never been as overvalued as it is in Canada. I live in a relatively low cost area and I have all the house I want thank you. I moved far away from high cost RE when I retired and although I haven’t enjoyed the paper gains of some of my old neighbors I am happy living in my little town with clean air and dark night skies.

    Historically, and I recall people talking about this when I started work, people often used the PCLS to pay off the remainder of their mortgage and use anything left over for a round the world trip or a cruise or somesuch.

    It was/is a quirky feature of the tax system that this 25% is untaxed, but only if you take it as a lump sum. Most of my erstwhile colleagues will indeed be doing this, most of them seem to carry a mortgage through to retirement age. But them most of them lived in houses where they don’t need to worry about babies next door. I discharged my mortgage ten years earlier in life than they did, but had less house, which si why I could do that.

    Moving to a lowest cost area as you did is the way to get more house. In my case I also need to mull over moving westwards, closer to hills and megalithic sites, and away from work opportunities, which raise the cost of housing. It’s one of those things that the more attractive parts of a country tend to be those away from employment opportunities!

    If you felt like some high risk punting, you could always get back some tax paid on SIPP withdrawals by buying VCTs.

    It’s trying to gauge the risk profile of VCTs that really does my head in. That Monevator fellow puts a picture of a hard grenade on his description and the words aren’t much less scary!

    I would recommend a bungalow very highly, my parents are in their 70’s now & the lack of stairs is a huge help with increasing lack of mobility, it somehow feels freer, easier all-round & more comfortable too.

    You come across as a thoughtful, creative, smart guy, so have you considered if you might enjoy the challenge of buying a plot, designing your bespoke home & building it from scratch? Even if you want as little involvement as merely supervising/keeping an eye on all the processes, it could be satisfying & the end result personalised…..

    I know it’s not easy to do, what with the gatekeeping against DIY homes built into the system to keep house prices high, but some opportunities slip through the cracks & you said you do still have some time.

    hehe, now building a house sounds like serious hard work to me πŸ˜‰ I’ve been fortunate in that what a house is like and decor is something I’m relatively indifferent to, compared to most. But where it is and freedom from noise outside my control is important.

    Interesting on the mobility, it’s hard to really qualify this. I’ve been on hikes with people in their 70s, but I guess the less mobile I’d be less likely to come across, so my anecdotal experience will have serious sample bias.

    Ermine, I’m confused. I thought your SIPP was funded by AVCs linked to your DB scheme, where you exercised the option of taking the entire AVC fund as being equivalent to the 25% PCLS on the DB fund, which presumable would prevent you from taking another 25% PCLS ?

    The DB pension has always offered a 25% PCLS option to take advantage of the tax-free bung. If you have no AVC fund, then it reduces the pension by 25%.

    When I started in 2009 I expected to draw the pension early, once I had burned through the redundancy money less the income from my ISA. That would have given me an actuarial reduction, in one’s early 50s it ran at about 5-6% a year. I figured the crunch point when I would start drawing it would have come at 55, hence a 25% actuarial reduction. Saving the AVCs would let me avoid another 25% PCLS reduction, I could take the AVCs tax free and invest them to compensate me for the actuarial reduction.

    Then Osborne went and changed the rules in 2014, two years after I retired πŸ˜‰

    I could now transfer the AVCs into a SIPP, and start burning that up without crystallising the DB pension. One gains advantages not drawing a DB pension too early, the yearly actuarial reduction seems to fall as you get closer to NRA for reasons I don’t really understand. If I draw at 58, I only lose 5% for two years, whereas at 52 I would be eating nearly 6% a year actuarial reduction until ~55

    I don’t have any AVCs now – I had to transfer all or none. I still have the original option, however, to take a 25% PCLS from the pension, which reduces the gross amount by 25%, but the net amount by 20% (all the difference is above the BRT threshold to 20% so tax is the reason why). Because running down the SIPP allowed me to leave my ISA alone, and indeed carry on maxing it, the natural yield of the ISA is more than the gross difference. Of course it isn’t guaranteed, on the other hand it is tax-free, I will continue to add to the ISA for three years. I feel happy taking the risk, in which case although Ray is right in that I am stealing income from my future self, so I shouldn’t use the PCLS to go on a bender or a few round the world cruises or other wasting assets while I am still in my fifties, If I buy something my future self may gain utility from, be that an absence of stairs or a better life long term then I feel good about that.

    One thing is clear looking back is nearly all my projections from the 2009 right up to leaving work were all fearsomely overconservative. I have 81% of the AVC fund left where I should have got through half by now, so I will be paying tax on that. Of course Brexit means it’s worth 20% less and Brexit did a lot of the nominal lifting. I need to get out of stocks ASAP on this SIPP though, because my investing horizon is two years now rather than the four it was before I got the quote from the pensions admin.

    Ah, got it. My mistake – so you didn’t have to exercise the “take all your AVCs in lieu of the DB PCLS” option; you simply transferred the AVCs out instead, to take advantage of new legislation.

    My mistake. So you simply transferred your AVCs out into a SIPP, with the new pension freedoms giving you the access you wanted, thus negating the need to take up the option of using the AVCs as the PCLS part of your DB scheme.

    On the subject of tax-free bungs, you, amongst others, have written before about non-earners being able to contribute Β£2,880 to a pension with HMRC topping this up to Β£3,600.
    I recently discovered a similar trick for those who have earnings. Most folk know tax relief is given on pension contributions up to 100% of relevant earnings (subject to annual cap), but what I’ve never seen written is that this applies even to the earnings on which no tax was paid (i.e. earnings under the personal allowance)
    As an simplistic example, let’s say two FI-seekers, Bill and Ben, each earn Β£11,000, exactly the amount of the personal allowance. Bill puts all his salary into his workplace pension which uses the ‘net-pay’ method, i.e. the contribution is made prior to the deduction of income tax, so Bill would have Β£11k in his pension.
    Ben on the other hand takes all his salary. Because he doesn’t exceed the personal allowance, no tax is due, so he has Β£11k in his pocket (I’m ignoring NI for simplicity). He contributes Β£8,880 to a SIPP which works on the ‘relief at source’ method, meaning his pension provider claims back Β£2,200 tax reflief from HMRC giving him Β£11k in his pension just like Bill. However, he still has another Β£2,200 in his pocket – a 20% bonus.

    https://www.gov.uk/guidance/pension-administrators-reclaim-tax-relief-using-relief-at-source

    How relief at source works

    A member making a contribution to their pension scheme will automatically get tax relief at the basic rate of 20%. The amount paid to the scheme is treated as having had an amount equivalent to basic rate tax deducted.

    The scheme administrator claims the basic rate tax relief from HM Revenue and Customs (HMRC) and adds it to the pension pot. This applies whether or not the member pays tax.

    Indeed. I used exactly that wheeze last year when I had about 6k of earnings despite my best efforts to be an idle bastard. It seemed terribly rude not to toss a shade under 5k into the pot and collect my free Β£1200. Anybody over 55 earning less than the personal allowance should wash their entire earnings through a SIPP.

    That gets less fun from this April, because as soon as you have accessed your SIPP flexibly your annual contribution (MPAA) is limited to Β£4000 (was Β£10k I believe up to TY 2016/7) which isn’t that much more than the non-taxpayer’s Β£3600

    Mind you, what with the Brexit bonus I fear I’m going to have to pay some tax this year and next and try much harder to avoid Work in any of its forms. It’s rude to my time to pay tax on 20% of it working for HMRC πŸ˜‰

    Excuse me, but what’s wrong with Throbbing Gristle? It could be Beyonce. I found your post quite impressive in terms of your understanding and thinking on your pension options, and quite depressing in that I’m hardly off first base on this subject. At 53, I really need to get a grip on my options and am willing to spend SFA on an FA. Things like my spouse’s pension out of my DB pension if I kick it first I’m only dimly aware of (perhaps because I won’t be spending it) but what of hers to me if it’s me that’s left? Then there’s how I maximise my pension income while avoiding as much tax as possible. Sometimes I wish I could just post all the financial detail of my pensions onto the web and ask for advice, but I was brought up to keep private stuff private. I guess I’ll just have to resolve to do the work.

    I have about three years on you so maybe the imminence of using it concentrated the mind πŸ˜‰ I also had to do a pirouette on the original plan when Osborne changed the rules.

    You don’t usually have to take financial advice to elect for the 25% PCLS or not from a DB pension, so if you don’t have AVCs you’re fine. But it is worth thinking about the spouse pension both ways, particularly if there is any asymmetry there.

    The interaction between tax and when you take the pension is very hard to simulate. You need to get a written quote from the DB pension admin for several scenarios spaced by a couple of years each.

    Trouble is, they don’t guarantee these quotes unless you act on it within three months.So the economy could boom massively because Brexit was in fact a fantastic idea, the Bank has to raise interest rates against an overheating economy, bond yields improve, and all of a sudden the value of the PCLS drops through the floor and invalidates this plan. In that case all bets are off and in a couple of years I get to hear and Throbbing Gristle and a baby next door πŸ™

    “I made the assumption that the spouse’s pension would be reduced, β€˜cos obviously the capital underwriting the promise has been dropped by 25%, d’oh.”

    If you have the rule book to hand why not check whether your DB scheme offers “Allocation”? That means that you’d give up some of your pension so that your wife would eventually get a bigger widow’s pension. It might be … pause for effect … tax efficient.

     

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