Pension - do you have to buy an annuity?

[superlightr]

A few years from maturity on a private pension - whats the options open to me when it does mature?

The pension only given an illustration of a annual annuity payment.
I understand I can take out 20 or 25% tax free on maturity.
what happens to the rest?

[Testaburger]

Essentially, whatever you like. You’re no longer obliged to buy an annuity.

You can leave it invested and draw upon it how you wish, and get taxed on it at your marginal rate.

[superlightr]

thanks testaB

Currently a higher rate tax payer.

If I pay into the pension now I save on the higher rate
When I retire if im at the 20% tax rate and simply draw down the pension over say 10 years I will be taxed at 20% on that drawdown?

If Im still at the higher rate at retirement and again draw down the pension over 10 years that would then be at the higher rate?

Could I take the whole lot out and then be taxed on the whole?

[Testaburger]

I’m not an accountant, and there are some very knowledgeable folks here, but for what it’s worth;

You currently get higher rate tax relief by contributing to your pension pot, but your marginal tax rate at the moment of your retirement doesn’t matter.

Essentially (using nice round numbers, for my benefit!), if you have 1m in your pot, you can take 250k as a tax-free lump.

With the remaining 750k, assuming it didn’t grow at all, you could indeed take 75k a year for a decade, or 37.5k a year for 20 years.

The amount you draw down will determine your tax, as it’s just income at this point. Of course, you can take the 750k out as one and be taxed at additional rate on it if you’re feeling particularly benevolent.

Depending on other income/ISAs/investments, there are ways to achieve a more tax efficient income than plainly pulling your entire income out of a pension.

I’ll let the Gurus come along and add some meat to the bones, but hopefully that helps. In short, you pretty much have complete freedom of your pension pot now - and you’ll be taxed income tax on what you take as income from it - save for the 25% tax free chunk.

[JulianPH]

Testaburger is pretty much spot on in his summing up.

There is no longer any requirement to buy an annuity, but it sounds like your pension provider may not offer income drawdown.

This may mean you have to switch to a different provider that does, but before doing this you need to establish whether your current provider has any additional benefits you may loss (such as a bonus at maturity or guaranteed annuity rates that you would not want to lose).

Also, why would you want to take it all out over 10 years? What would you live on after this?

If your pension grows at a higher rate than you withdraw from it it would technically never run out of money.

There a many options open to you and your circumstances will dictate which is the best option for you.

If you would like a chat without giving out personal details here please feel free to PM me and I can go over these with you.

[Mr Pointy]

superlightr said:

A few years from maturity on a private pension - whats the options open to me when it does mature?

The pension only given an illustration of a annual annuity payment.
I understand I can take out 20 or 25% tax free on maturity.
what happens to the rest?

Here are a couple of on line resources that explain some of the terms you'll come across:
https://www.pensionwise.gov.uk/en
https://www.hl.co.uk/retirement

[WhiskyDisco]

Good info here. Can I ask one more question, when the time comes and I get tucked up in the that garage in the sky, what would happen to my pension? Does it go into my estate, and therefore subject to IHT? Does my estate lose it altogether?

[superlightr]

Mr Pointy said:

Here are a couple of on line resources that explain some of the terms you'll come across:
https://www.pensionwise.gov.uk/en
https://www.hl.co.uk/retirement

thank you.

Just looked at the annuity part of the above. It mentioned that you could get a higher annuity if you have a medical condition or smoke.

If it was ticked "yes Im a smoker" how would they know if that is correct or not and does that mean a higher annuity?
How many do you have to smoke to qualify?

[Testaburger]

WhiskyDisco said:

Good info here. Can I ask one more question, when the time comes and I get tucked up in the that garage in the sky, what would happen to my pension? Does it go into my estate, and therefore subject to IHT? Does my estate lose it altogether?

I believe that if you pass away before you’re 75, then your pension is passed on free of IHT, and your beneficiaries would pay income tax or CGT on what that pension generates.

Julian will know precisely (sorry JPH!).

[JulianPH]

WhiskyDisco said:

Good info here. Can I ask one more question, when the time comes and I get tucked up in the that garage in the sky, what would happen to my pension? Does it go into my estate, and therefore subject to IHT? Does my estate lose it altogether?

If you buy an annuity the money is gone on day 1 unless you have taken a lower annuity rate to provide for a guaranteed period (typically 5 years) or a widows pension (a smaller amount paid to your partner).

If you use income drawdown the entire value of your pension fund can be left to your wife and then passed onto your children.

It is also classed as being outside of your estate for IHT purposes.

If you die before your turn 75 the whole sum is available tax free (for your wife and/or children). If you die after you are 75 your wife/children will simply have to pay tax at their marginal rate (just as you will have) on any money they withdraw.

[JulianPH]

Testaburger said:

I believe that if you pass away before you’re 75, then your pension is passed on free of IHT, and your beneficiaries would pay income tax or CGT on what that pension generates.

Julian will know precisely (sorry JPH!).

I had started to write my response above before a phone call took me away and I could finish and post it!

Before 75 completely tax free, after 75 income tax on withdrawals (no CGT). No IHT in any event.

Cheers mate!

[Drumroll]

One of the reasons I took my money out of the "company" fund and put it in a SIPP is that under the company scheme my wife would have only got half my pension. With my SIPP she gets it all and can even go to our daughter. So worth checking what your partner will get.

[Jimmy Recard]

superlightr said:

thank you.

Just looked at the annuity part of the above. It mentioned that you could get a higher annuity if you have a medical condition or smoke.

If it was ticked "yes Im a smoker" how would they know if that is correct or not and does that mean a higher annuity?
How many do you have to smoke to qualify?

If you died a couple of months after the annuity starting to pay, I'd imagine you'd get away with it.

If you lingered on for a couple more decades, they might check that you do smoke or have a medical condition.

I can't imagine the company would be that happy if there was proof that you don't smoke or have a medical condition! I suppose you could start smoking, or is there a requirement to have smoked for many years prior to retirement?

[superlightr]

With some Noddy figures: excluding personal allowances.

say a higher rate tax payer. I put in £100 Govt puts in £40 = £140 pension pot.

At pension age I can take out upto 25% tax free = £35 tax free

If I draw down the rest £105 but now as lower tax payer at 20% = 105-20% =£21 tax =£84


84 +35 =£119 draw down for putting in £100?

[Heres Johnny]

superlightr said:

With some Noddy figures: excluding personal allowances.

say a higher rate tax payer. I put in £100 Govt puts in £40 = £140 pension pot.

At pension age I can take out upto 25% tax free = £35 tax free

If I draw down the rest £105 but now as lower tax payer at 20% = 105-20% =£21 tax =£84


84 +35 =£119 draw down for putting in £100?

I think it’s better than that, if you put in £100, the gov puts in £66 (you pay 60% of the total contribution, the tax man pays 40%)

There are limits on how much you can put in, around 40k I think, and be earning 100k+ and the amount starts to fall, at 150k earnings the limit is about 10k (each year although you can access previous years allocations up to a point)

And the more you put in and the faster you take it out, the more likely you are to get taxed at the higher rate. Essentially you’re giving up a lot of liquidity for the gain.

[Stay in Bed Instead]

superlightr said:

With some Noddy figures: excluding personal allowances.

say a higher rate tax payer. I put in £100 Govt puts in £40 = £140 pension pot.

At pension age I can take out upto 25% tax free = £35 tax free

If I draw down the rest £105 but now as lower tax payer at 20% = 105-20% =£21 tax =£84


84 +35 =£119 draw down for putting in £100?

For higher rate tax payers.

If you put in £100 the Government puts in £25 to the pension arrangement and gives you another £25 back personally. The pension pot is therefore £125.

At pension age you can take out £125 x 25% = £31.25 tax free.

Drawing down the rest, £93.75 x 80% = £75.00

So your net £75 (£100 - £25), results in a net return of £106.25 (£31.25 + £75.00)

[TwigtheWonderkid]

superlightr said:

If I draw down the rest £105 but now as lower tax payer at 20% = 105-20% =£21 tax =£84


84 +35 =£119 draw down for putting in £100?

If you've got no other earnings, you can still draw down your annual personal allowance tax fee I assume, just over £1K a month currently?

[Mr Pointy]

TwigtheWonderkid said:

superlightr said:

If I draw down the rest £105 but now as lower tax payer at 20% = 105-20% =£21 tax =£84
84 +35 =£119 draw down for putting in £100?

If you've got no other earnings, you can still draw down your annual personal allowance tax fee I assume, just over £1K a month currently?

Miss, miss, I think I know this one - yes you can.

[JulianPH]

Mr Pointy said:

TwigtheWonderkid said:

superlightr said:

If I draw down the rest £105 but now as lower tax payer at 20% = 105-20% =£21 tax =£84
84 +35 =£119 draw down for putting in £100?

If you've got no other earnings, you can still draw down your annual personal allowance tax fee I assume, just over £1K a month currently?

Miss, miss, I think I know this one - yes you can.

Another gold star for Mr Pointy!

Superlightr - Your figures were off though as Stay in Bed Instead has highlighted. The reality is better than what you thought it was.

A £100 contribution would be grossed up to £125 within your pension and your would get a further £25 back through your tax return.

You could then withdraw £31.25 tax free (25%).

If you placed your tax free cash and the £25 higher rate tax rebate into your ISA then this would give you £56.25 of taxable income that will never be taxed.

You would also get a net £75 back from your pension (as a basic rate taxpayer).

So the net cost to you is £100 (a slight correction from SiBI's figures) and the net return is £131.25.

Now is the last time you can max out pension contributions (as much as is affordable) and get a 31.25% uplift without even worrying about investment returns (though any inflation or potential investment losses need to be factored in).

If you could, for example, put another £80,000 into your pension before you retire you will get £20,000 of basic rate tax relief into your pension and another £20,000 of higher rate tax relief into your pocket.

If you put the £20k higher rate tax relief into an ISA and then place the 25% tax free cash on the additional £100k now added to your pension (£25k) into your ISA you would have £45k worth of taxable income that will never be taxed.

Obviously you can apply this to the entire pension value (apart for higher rate tax relief previously received and not placed within an ISA).

If you would like to know more please feel free to post on the IM sticky and Nik can walk you through all your options.