many cashing in pensions, this is not going to end well

many cashing in pensions, this is not going to end well

Author
Discussion

tescorank

Original Poster:

1,985 posts

230 months

Wednesday 22nd July 2015
quotequote all
Talking to someone in the trade and reckons over 40% are going for the cruise option, so this would appear plenty of tax in coming year but longterm huge amount of benefits to be paid out and the county will be fekked but we are not helping ourselves by baby boomers seeing wealthy people in nursing homes paying £800 a week as opposed to the spenders getting this for free-it now seems the government are creating a live for the day society.Is this madness?

Ozzie Osmond

21,189 posts

245 months

Wednesday 22nd July 2015
quotequote all
Pension, cash and tax - how does it all work?

Example 1

Assume you are already getting state pension which uses up your Personal Allowance for income tax.

If a dividend arrives in your pension pot it is tax free. But if it is then paid out to you there will be tax on your pension income at 20%.

If you cash in your pension pot you will pay some tax to get the money out. You can get 25% tax free lump sum and then pay, say, 20% tax on the remainder (spreading over a few years if necessary). If you then invest that money in shares you will obtain the £5,000 dividend allowance and only pay tax at, say, 7.5%. Looks like a huge reduction in tax.

Have I missed something or is this a “no-brainer”?

Example 2

Assume you are already getting a retirement pension which uses up your entire 20% income tax band.

If a dividend arrives in your pension pot it is tax free. But if it is then paid out to you there will be tax on your pension income at 40%.

If you cash in your pension pot you will pay some tax to get the money out. You can get 25% tax free lump sum and then pay, say, 40% tax on the remainder (spreading over a few years if necessary). If you then invest that money in shares you will obtain the £5,000 dividend allowance and only pay tax at, say, 32.5%

Is this still worth doing or less clear-cut than for a 20% taxpayer?


DoubleSix

11,691 posts

175 months

Wednesday 22nd July 2015
quotequote all
tescorank said:
Talking to someone in the trade and reckons over 40% are going for the cruise option, so this would appear plenty of tax in coming year but longterm huge amount of benefits to be paid out and the county will be fekked but we are not helping ourselves by baby boomers seeing wealthy people in nursing homes paying £800 a week as opposed to the spenders getting this for free-it now seems the government are creating a live for the day society.Is this madness?
The 'cruise' bit is a big assumption on you and your friends behalf though.

Many are accessing pension monies and reinvesting in BTL, redistributing amongst offspring, or investing in other value accretive areas.


Riff Raff

5,086 posts

194 months

Wednesday 22nd July 2015
quotequote all
Ozzie Osmond said:
Stuff......
As someone who is retired and going through these thought processes, one of the considerations that you didn't mention is that if you take all you can out of your pension pot tax free, it's in your bank account. You can do what you want with it. We (the wife and I) were terrified that there would be more changes to the regulations that would mean we couldn't take the 25% plus any Protected Tax Free Cash you might have in your pot.

OK, it might not be as tax efficient as leaving money in the Pension Funds when looked at over the longer term, in that we might have to pay a bit more tax on earnings on monies taken out of the funds, and there is a fairly big Inheritance Tax issue (your pension fund isn't treated as part of your Estate when you snuff it) but at least the risk of having the government change the rules on us again has gone away.

condor

8,837 posts

247 months

Wednesday 22nd July 2015
quotequote all
I'm going to cash in one of my small company pension pots early Jan or Feb 2016 and am waiting to get more information. How easy/difficult it is for starters, how long it takes, how much money I've earnt this tax year to decide which pot gets cashed in etc.
I also want to read some horror stories of how it all went wrong too - so I know what to avoid biggrin

Oakey

27,523 posts

215 months

Wednesday 22nd July 2015
quotequote all
Horror Stories?

My girlfriend's father took advantage of this, didn't do his homework and was somewhat surprised to be landed with a £5k tax bill. Because apparently he didn't know that taking out a large amount of his pension would push him into the higher rate tax band.

At least this is how the story was relayed to me, I have no idea how accurate these details are.

Still, her parents have a nice Audi A1 now. I guess.

aka_kerrly

12,416 posts

209 months

Wednesday 22nd July 2015
quotequote all
DoubleSix said:
Many are accessing pension monies and reinvesting in BTL.
Cashing in your pension early has got time bomb written all over it especially now there are companies set up who "specialise" in releasing pension funds early - scam central!!

Until recently I was working for a SIPP administrator, after the budget changes we were receiving requests to cash in SIPPs before our compliance team had even finished the updated literature and before we were 100% certain how the tax charges will be performed.

The majority are going for BTL and it hacks me off enormously. The usual quote is "my mate says he is getting 10-15% return on his rental property, my SIPP only got X amount last year. The thing that annoys me is if these clients had said to their advisers they had an interest in investing in property there are plenty of property based funds. Instead most of them have had SIPPs invested in largely mainstream barely average performing shares when there are far better options available.

What I expect is the SIPP/Pension providers an advisers will get the blame once these people have pissed all their money away and start whining that it was bad advice & a state pension isn't a suitable income.


PurpleMoonlight

22,362 posts

156 months

Wednesday 22nd July 2015
quotequote all
Oakey said:
Horror Stories?

My girlfriend's father took advantage of this, didn't do his homework and was somewhat surprised to be landed with a £5k tax bill. Because apparently he didn't know that taking out a large amount of his pension would push him into the higher rate tax band.
Doesn't surprise me.

I remember watching a BBC program on it last year, they didn't mention once that 75% of the payment would be taxable let alone the potential amount of that.

Ozzie Osmond

21,189 posts

245 months

Wednesday 22nd July 2015
quotequote all
aka_kerrly said:
The majority are going for BTL and it hacks me off enormously. The usual quote is "my mate says he is getting 10-15% return on his rental property, my SIPP only got X amount last year.
You're right. The lunatic rush to BTL as a cure-all is insane. Decent Stocks & Shares funds in a SIPP or ISA wrapper should outperform most other forms of investment whilst keeping a sensible spread of risk. As you say, if people want to invest in property it's very easy to buy a property fund.

SunsetZed

2,236 posts

169 months

Wednesday 22nd July 2015
quotequote all
Oakey said:
Horror Stories?
Still, her parents have a nice Audi A1 now. I guess.
I was believing you and then you said nice Audi A1, these don't exist

red_slr

17,122 posts

188 months

Wednesday 22nd July 2015
quotequote all
The problem is the rules have been updated to be "modern" and the investors from the 80s don't do modern. Thus for people in their late 30s / early 40s can kind of plan around the new rules. Those in their late 50s might find things a bit more tricky - esp if you have many pensions as is often the theme.

For me I am now limiting what I put in my pension. I would rather put excess into cash or ISA or bonds etc. At least I can convert these to cash when I need at 50, 55 etc. God knows what my pension age will be.

The plan was 55. Prob closer to 60 now, so I need something to last 10 years. Big ask is that. Anyway, it only money!

Ginge R

4,761 posts

218 months

Thursday 23rd July 2015
quotequote all
From an advisory perspective, it's a potential minefield. If you're in retirement or on the cusp of it, and unless you need the money, the smoke is clearing and the default setting to becoming one of leave alone.

If you're young, then the reality is, the pension wrapper is all but finished anyway. It'll save the state a fortune in tax relief now and it'll worry about the zero revenue from using the pension to claw back revenue as taxed income when Millennials start retiring. By then, George Osborne won't care.

If you're about to start retirement planning, take advice and reconsider the pension as the best/only wrapper. If you have a pension product which is costly, that's only going to add insult to injury. Instead, if you're starting off and if investing *is* right for you, consider something cheap and stay light on your feet.

The bottom line is, the state is intent on reducing debt. It can do that by reducing spending and by financial repression. The latter encourages liquidity, low savings rates and then illiquidity and inflation. It's probably how the Eurozone will deal with Greek debt and probably how we'll deal with debt too. The current reductions in public spending are probably an ideological side show.

The scary part (imho) is what we're going to do in thirty years time when we reap the results of inhibited wealth creation, and a (generally) low tax and low income regime.

Zigster

1,636 posts

143 months

Thursday 23rd July 2015
quotequote all
I'm still not convinced that many people will cash in the lot. If you've been thrifty enough to have stashed it away over the years, you're not suddenly going to go all crazy on retirement. Plus, you don't need a detailed understanding of tax to realise that you would get stung for a huge tax bill by taking it all out in one go.

I can see people taking money out a bit quicker than they really should. But I don't think it's too bad an idea to have a good life for the earlier period of retirement when you're still fit and active and then downsize the lifestyle a bit in your 80s when you start to get less mobile.

turbobloke

103,742 posts

259 months

Thursday 23rd July 2015
quotequote all
Zigster said:
I'm still not convinced that many people will cash in the lot. If you've been thrifty enough to have stashed it away over the years, you're not suddenly going to go all crazy on retirement. Plus, you don't need a detailed understanding of tax to realise that you would get stung for a huge tax bill by taking it all out in one go.
Is there somebody in the pensions industry who knows, and can explain, how the situation is likely to change from April 2016 when existing annuities can be sold i.e. cashed in? It could be that the detail is still missing but April 2016 isn't far off now and with the gov't elected to fly solo they may have taken the idea further.

Ginge R

4,761 posts

218 months

Thursday 23rd July 2015
quotequote all
The timeline has slipped by a year or so (announced in budget). Will it quietly die a death? Given that the guy in government who was originally behind it, was Lib Dem, you tell me..

darreni

3,759 posts

269 months

Thursday 23rd July 2015
quotequote all
PurpleMoonlight said:
Oakey said:
Horror Stories?

My girlfriend's father took advantage of this, didn't do his homework and was somewhat surprised to be landed with a £5k tax bill. Because apparently he didn't know that taking out a large amount of his pension would push him into the higher rate tax band.
Doesn't surprise me.

I remember watching a BBC program on it last year, they didn't mention once that 75% of the payment would be taxable let alone the potential amount of that.
This is correct, the media have not really focused on this, more on what you can spend the cash on.

The residual 75% of the pension (after the tax free lump sum) is added to your annual income. You then pay tax at the appropriate rate.

coetzeeh

2,641 posts

235 months

Thursday 23rd July 2015
quotequote all
Zigster said:
I'm still not convinced that many people will cash in the lot. If you've been thrifty enough to have stashed it away over the years, you're not suddenly going to go all crazy on retirement. Plus, you don't need a detailed understanding of tax to realise that you would get stung for a huge tax bill by taking it all out in one go.

I can see people taking money out a bit quicker than they really should. But I don't think it's too bad an idea to have a good life for the earlier period of retirement when you're still fit and active and then downsize the lifestyle a bit in your 80s when you start to get less mobile.
I agree - I can see the logic of cashing in a small pot of say £20k or £30k as it will harly sustain you financially for any lenght of time - take the cash and have some fun while you can.

As you say, those who have planned and been able to invest are likely to continue to be financially wise.

LdnShtr

2,929 posts

242 months

Thursday 23rd July 2015
quotequote all
How is the tax collected when you cash in pensions? Is it by self assessment or is it done before the money gets paid out? I can see people coming unstuck if it's not taken before it's paid out!

turbobloke

103,742 posts

259 months

Thursday 23rd July 2015
quotequote all
Ginge R said:
The timeline has slipped by a year or so (announced in budget). Will it quietly die a death? Given that the guy in government who was originally behind it, was Lib Dem, you tell me..
OK thanks, whatever the Coalition side of things was, the Conservative's solo manifesto said: "...we will allow pensioners to access their pension savings and decide whether or not to take out an annuity, so they can make their own decisions about their money..." and the March 2015 budget drew this commentary from the DT: "Mr Osborne also confirmed plans to allow pensioners to sell their annuities, from April 2016, the government will change the tax rules to allow people who are already receiving income from an annuity to sell that income to a third party, subject to agreement from their annuity provider" and that left me wondering under what conditions exactly an annuity provider might say no. There may be no answers at the moment.

The Chancellor's summer budget speech didn't say anything further that I could spot. It looks like a case of wait and see, as you suggest.

The Leaper

4,937 posts

205 months

Thursday 23rd July 2015
quotequote all
It's no surprise that the media concentrates solely on those who may wipe out their accumulated pension assets by splurging on a cruise or Lamborghini or both, and the bad news regarding the "surprise" of a tax liability on the lump sum. In this latter respect, what else do people expect given that they have received full tax relief on the contributions going towards that accumulating asset?

So-called guidance is available to anyone seeking information through Pension Wise, a government financed independent set up. The service is via a pre arranged telephone conversation lasting usually about 30 minutes to an hour. Pensions Wise is provided by the Citizens Advice Bureau and also The Pensions Advisory Service (I'd recommend using the latter). I'm aware that Pension Wise has had a huge number of sessions giving guidance and that in the vast majority of cases it seems people are wanting to act responsibly and want to be told the downside ie mostly the tax position and how taking cash affects their future pension expectation.

Of course, people acting responsibility will not attract the attention of the media.

R.