Pension Basics

[Green]

Basically, you get tax relief on pension contributions, so you put in £60 if higher rate payer or £75 if basic rate payer to get £100 in your pension plan.

This money can be invested in shares, funds, ETFs, commercial property, bonds, gilts, etc and the growth is also tax free.

When you draw on the pension anytime after age 55(used to be 50), you can take 25% of its value as a tax-free lumpsum. The rest can go into income drawdown or annuity. currently, you have to buy an annuity at age 75 at the latest, but this rule is set to go. Annuity is generally 6K/100K at age 60 but can be higher on ill-health. Depends on age, sex and health.

Also the maximum pension contribution contribution that qualifies for tax-relief is going down from 255K to 50K but you can carry forward 3 years worth of unused contributions.

If you are happy to decide investments yourself, there are lots of low cost providers. Google on SIPP.

[d000hg]

So using something like a SIPP to take an income after 55, you're literally taking money out of what you put in... there's nothing magical. Does that mean you can empty your SIPP if you live long enough - what you put in is what you can take out?

I think I've been confused by state pensions... these don't work the say way in my understanding, you get paid as long as you live so your NI contributions are basically a membership fee rather than paying into your own pot of money.

[Fred Bloggs]

No, once in drawdown at the start of the drawdown and then every 5 years, your SIPP provider has to do an actuarial calculation. From that your maximum drawdown income is calculated. This is to prevent the SIPP running down to zero in order to provide an income. Ofcourse, if the stock market crashes and your portfolio decreases markedly in value just before the 5 yearly calculation is done, then your maximum drawdown income from the SIPP will be lower for the next 5 years. This is all part of the risk of SIPPs. My SIPP drawdown is presently, by choice, at a rate of 0%.

[Ignis Fatuus]

If the coalition pension legislation goes through you may not need to buy a annuity,
I believe you can just withdraw money from your pension pot assuming
Labour don't can it when they get back in.

You already do not need to buy an annuity, you can just withdraw money from your pension pot up to a certain rate. Far from the Coalition doing that for you and Labour possibly canning it in the future, it was Labour that did it.

I see history is being rewritten already.

[Ignis Fatuus]

Blimey - so you've got to live at least 15 years just to get your money back!

Of course. Annuity providers are not fairy godmothers. The best you can expect is on average to get your money back minus their profit.

[Green]

Well, you get upfront tax relief on contributions and tax free growth and maybe employer contributions. 25% can be tax free lump sum and the income from the other 75% is taxed.

You can buy an annuity to have a fixed income for life. This depends on age, sex and health.

Or you can opt for income drawdown where every 5 years the maximum you can withdraw is calculated and you can take anything upto this figure, even 0%. This is typically 120% of a single life annuity. Its calculated on the 15-year gilt index yield.

Currently you have to buy an annuity at age 75 or convert to an ASP but this rule is set to go.

[Green]

The state pension is paid by the taxes of the current working population which is in the ratio of 4:1 for each pensioner. This is going to be 2:1 in about 30 years - hence the problem for the future.