Poor article – Making the most of pension lump sums: overview for contractors

[contractorZ]

Thanks hgllgh I'll look into flex-access. I will very likely take the 25% ASAP because it'll be a nice little lump to spend before I get too old to enjoy it. The remainder is not needed as income so I can leave it and take it when needed, of course paying tax as due at that point.

You may already know this but the minimum retirement age is rising to 57 so worth checking out if this impacts you for when you can draw tax free cash

You might want to think about drawing the tax free cash in chunks just before you need it. Leave it in the tax free wrapper for as long as possible as you are a long way from even the old lifetime allowance. That may be what you were planning anyway.

What does this mean for me?

If you were born after 5 April 1973	The earliest date you can access your pension savings will be delayed by two years
If you were born after 6 April 1971 but before 6 April 1973	You’ll have a window from your 55th birthday to 5 April 2028 to access your pension savings before the NMPA increases to 57. If you choose not to take any pension savings during this period, you’ll need to wait until your 57th birthday
If you were born on or before 6 April 1971	You won’t be impacted because you’ll already have reached age 57 by 6 April 2028

[contractorZ]

No. go talk to a qualified Wealth Manager, not an IFA. Apart from anything else you don't need an annuity until 75, there are better ways to park £300k

You don't ever need to buy an annuity these days. The rules changed that you had to buy one at 75.

Interesting you highlighted the difference between a qualified Wealth Manager and a qualified IFA.

I have been making use of the free Wealth Management Service from Fidelity to meet my Relationship Manager who happens to be a Qualified Wealth Manager. So not a personal advice service with an additional fee. It may meet some peoples needs for someone to chat to about their goals etc. For some people it won't be enough.

It is not a formal personal advice service, but I have been very impressed at the offering and professionalism and reviews when meeting face to face. All sessions are recorded.

[ChimpMaster]

Thanks hgllgh I'll look into flex-access. I will very likely take the 25% ASAP because it'll be a nice little lump to spend before I get too old to enjoy it. The remainder is not needed as income so I can leave it and take it when needed, of course paying tax as due at that point.

[hgllgh]

I'll show my naivety here because I'm not much clued up on pensions. From historical posts you guys probably know that I used my contractor earnings to build up property investments for a long term income, rather than put money into a pension.

I went permie a couple of years ago, and now I'm nearing 50 in age. Due to my high tax burden I'm using salary sacrifice to put 70% of my pre-tax salary into the employer pension (with Aviva). At 55 I estimate I will have around £300k in my pension pot. I realise this is low but it's fine, it's a bonus in my financial plan.

At 55 my plan is to take 25% out tax free and do whatever with it. With the remainder I'll probably buy an annuity, I guess - I have no better knowledge so far.

Does this sound about right?

If I had property investments along with Pensions I would be tempted to get a proper retirement plan from qualified financial planner. Fag packet financial advice... which is not financial advice as I have no qualifications and no idea about your situation other than what's above... if you have income from property coming in and don't need the extra income from the pension, I would just leave it in the pension accumulating as a warchest when needed. What if there is a bad property downturn or problems with tenants etc etc. That warchest would give you complete peace of mind with is worth a lot.

Maybe take the odd flex-access payment (once in retirement and only contributing MPAA going forward) which gives you your 25% tax free of whatever that payment is and leave the rest invested in the drawdown pot to accumulate. Then just take as taxable income when tax efficient to do so. This is why most IFA's (as I understand it) advise flexi-access as opposed to UFPLS as it give much better options for tax efficient drawdown.

I haven't personally looked at annuities much as yet, but apparently they are making a comeback purely because rates have gone back up, but how long will that last? Likely they will come down again, especially if the global economy does start to head towards deflation. Even at the higher rates though, at 55 I can't imagine you would get a great deal especially if its an inflation adjusted annuity. These guys have crunched the numbers and will weight annuities in their favour. Annuities are also not great for tax planning. Annuity income is added to your taxable income by default so you can't control the tax as you can with flex-access drawdown.

[malvolio]

I'll show my naivety here because I'm not much clued up on pensions. From historical posts you guys probably know that I used my contractor earnings to build up property investments for a long term income, rather than put money into a pension.

I went permie a couple of years ago, and now I'm nearing 50 in age. Due to my high tax burden I'm using salary sacrifice to put 70% of my pre-tax salary into the employer pension (with Aviva). At 55 I estimate I will have around £300k in my pension pot. I realise this is low but it's fine, it's a bonus in my financial plan.

At 55 my plan is to take 25% out tax free and do whatever with it. With the remainder I'll probably buy an annuity, I guess - I have no better knowledge so far.

Does this sound about right?

No. go talk to a qualified Wealth Manager, not an IFA. Apart from anything else you don't need an annuity until 75, there are better ways to park £300k

[ChimpMaster]

I'll show my naivety here because I'm not much clued up on pensions. From historical posts you guys probably know that I used my contractor earnings to build up property investments for a long term income, rather than put money into a pension.

I went permie a couple of years ago, and now I'm nearing 50 in age. Due to my high tax burden I'm using salary sacrifice to put 70% of my pre-tax salary into the employer pension (with Aviva). At 55 I estimate I will have around £300k in my pension pot. I realise this is low but it's fine, it's a bonus in my financial plan.

At 55 my plan is to take 25% out tax free and do whatever with it. With the remainder I'll probably buy an annuity, I guess - I have no better knowledge so far.

Does this sound about right?

[Andy2022]

Not uncommon. They've had a couple of articles that the same accusations could be levelled against in the past. I think it was on here but there was an article about SPV's that painted a very rosy picture although all the advice in the forums is not to do it. There have been many others that have left open questions from the people that know a lot about the topic.

Thing is you have to take it at the level it's offered if you get me. It's a simple one page overview on a specific topic that's been offered by an unpaid expert so is, as you state, and overview and always end with a 'speak to a professional' comment. I was 54 yesterday so this article was very interesting to me and has given me something to investigate, including downsides so I can make a decision. I'm not taking it as professional advice but more a reminder to check something I might not have been aware of. At worst I can look in to it and forget about it because of the downsides and that's that. I know they can't cover every situation in detail and give me tax advice based on my exact situation so don't expect that from the article. Yes it's unfortunate they didn't mention it but it's not designed to do that and the whole way the information is solicited and presented can't cover everything.

I am not sure I'd go as far as to say these articles are poor. They address and issue and it's up to you to investigate further so kinda does what it was meant to.

Yeh, I get that it’s buyer beware… I just expect a company that’s FCA regulated to present the full facts including the downsides of the approach they’re promoting

I’m a couple years ahead of you, and fortunately worked in Life and Pensions for part of my career so have a fair knowledge of some of this and the legislation around it so it rang alarm bells for me but that might not be the case for everyone

[malvolio]

It's just as taxable as any other pension income - you're just choosing to think of that as the first part of your income. Your personal allowance applies to all income in whatever order. Given that it only kicks in at age 67, you may well have been drawing a personal pension for several years already.

Given the freezing of the personal allowance and the increase in the state pension, you might find that at some point you're paying tax on some of it, even if that's how you look at it.

OK, have it your way. I have no knowledge or experience of drawing private and state pensions after all. However following the last rise in the state pension I am now paying more tax on my private one. Semantics apart, the overall result is my net pension income has gone down slightly.

However the logic of doing it the way they have - by reducing the TFA - rather than simply adding it to your taxable gross income is to ensure the state pension stays sacrosanct. More political mind games...

[Smartie]

It's not taxable. It comes off your tax free allowance, meaning any other incomes or pensions you may have will become taxable much sooner since the threshold is now around £2k...

It's just as taxable as any other pension income - you're just choosing to think of that as the first part of your income. Your personal allowance applies to all income in whatever order. Given that it only kicks in at age 67, you may well have been drawing a personal pension for several years already.

Given the freezing of the personal allowance and the increase in the state pension, you might find that at some point you're paying tax on some of it, even if that's how you look at it.

[malvolio]

...

Remember that when you get to 67 (currently) you'll get around £10.5k (currently) state pension if you paid enough NI. This is taxable but no NI is payable as with all pension income.

It's not taxable. It comes off your tax free allowance, meaning any other incomes or pensions you may have will become taxable much sooner since the threshold is now around £2k...

[Smartie]

There are a few considerations around taking a lump sum from your pension.

Once you take out any money which is taxable then your maximum tax free contribution allowance to your pension is £10k. This was introduced to limit people from taking money out and putting it back to get another tax free contribution.
This doesn't kick in if you take a maximum of 25% tax free only.

When the lifetime pension contribution allowance was scrapped (around £1.073M), the tax free allowance of 25% of that figure was not scrapped so it has effectively been capped at around £268k (with exceptions for some people with protection). Whatever the value of your pension, that's the max so no longer necessarily 25%.

You might take 25% to e.g. pay off a mortgage with £125k of a £500k pension pot.
Equally though, you could choose to take individual sums with 25% of that amount tax free e.g. £60k withdrawal with £15k tax free (in addition to your personal allowance). That might suit you better if you don't need a large amount immediately.
You could also decide to take the larger amount and then gradually (£20k/year) put it into an ISA, gaining the benefit of tax free income from it.

When you do start taking money from your pension, HMRC often assume that it is going to be a regular monthly payment rather than a one off and tax it on that basis. You then have to claim that tax back. This has caused a lot of people problems with a huge amount of tax over-collected in this way.

If/when Labour get into power, there's a fair chance they will re-apply a lifetime allowance which might affect when you want to start drawing your pension if you're close to 55.

Remember that when you get to 67 (currently) you'll get around £10.5k (currently) state pension if you paid enough NI. This is taxable but no NI is payable as with all pension income.

[northernladuk]

Not uncommon. They've had a couple of articles that the same accusations could be levelled against in the past. I think it was on here but there was an article about SPV's that painted a very rosy picture although all the advice in the forums is not to do it. There have been many others that have left open questions from the people that know a lot about the topic.

Thing is you have to take it at the level it's offered if you get me. It's a simple one page overview on a specific topic that's been offered by an unpaid expert so is, as you state, and overview and always end with a 'speak to a professional' comment. I was 54 yesterday so this article was very interesting to me and has given me something to investigate, including downsides so I can make a decision. I'm not taking it as professional advice but more a reminder to check something I might not have been aware of. At worst I can look in to it and forget about it because of the downsides and that's that. I know they can't cover every situation in detail and give me tax advice based on my exact situation so don't expect that from the article. Yes it's unfortunate they didn't mention it but it's not designed to do that and the whole way the information is solicited and presented can't cover everything.

I am not sure I'd go as far as to say these articles are poor. They address and issue and it's up to you to investigate further so kinda does what it was meant to.

[Andy2022]

Stumbled upon an article on lump sum withdrawals from pensions in the Money section – Making the most of pension lump sums: overview for contractors – https://www.contractoruk.com/money/m...ntractors.html

Amazes me that this got published without mentioning the implication that making withdrawals has for future contributions to Money Purchase pensions and the tax implications of contributing more than the Money Purchase Annual Allowance (MPAA)