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Pension Question


man o' the year
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man o' the year

I really didn't think I would be in this situation as I was previously under the impression that my pension was simple and straightforward. However it is not quite as straightforward as I thought as I have no experience of a SIPP. I would therefore be grateful for any advice from those who do have experience.

My pension will start in February when I turn 60. This is mainly a teachers' pension ( Yay - hooray for me!) but I also contributed to an AVC with Prudential which would normally be accessed at the same time. I had envisaged to simply take 25% of this tax free and to buy an anuity with the remainder. However it looks as if "drawdown" by transferring to a SIPP would be the way to go. I understand this would operate in the same way as my ISA with Interactive Investor and they say it will cost me no more than another £10 per month on top of the £10 per month I pay at the moment for the ISA. I would be OK with this.

My questions are :

Can I continue to contribute to the SIPP? I understand there are tax advantages to doing this - ie that the government will effectively add to the amount I pay in. How does this work?

Can I pay in and take money from the SIPP at the same time?

 

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Democorruptcy
On 22/12/2020 at 14:00, man o' the year said:

I really didn't think I would be in this situation as I was previously under the impression that my pension was simple and straightforward. However it is not quite as straightforward as I thought as I have no experience of a SIPP. I would therefore be grateful for any advice from those who do have experience.

My pension will start in February when I turn 60. This is mainly a teachers' pension ( Yay - hooray for me!) but I also contributed to an AVC with Prudential which would normally be accessed at the same time. I had envisaged to simply take 25% of this tax free and to buy an anuity with the remainder. However it looks as if "drawdown" by transferring to a SIPP would be the way to go. I understand this would operate in the same way as my ISA with Interactive Investor and they say it will cost me no more than another £10 per month on top of the £10 per month I pay at the moment for the ISA. I would be OK with this.

My questions are :

Can I continue to contribute to the SIPP? I understand there are tax advantages to doing this - ie that the government will effectively add to the amount I pay in. How does this work?

Can I pay in and take money from the SIPP at the same time?

 

Maybe have a read about Money Purchase Annual Allowance

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On 22/12/2020 at 14:00, man o' the year said:

Can I continue to contribute to the SIPP? I understand there are tax advantages to doing this - ie that the government will effectively add to the amount I pay in. How does this work?

Can I pay in and take money from the SIPP at the same time?

Yes you can continue to contribute;

https://www.youinvest.co.uk/faq/can-i-make-additional-contributions-my-sipp-after-starting-drawdown

Yes you can pay in and take money out, but after the 25% tax free element it's all liable for tax at whatever rate you pay.:) 

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On 27/12/2020 at 19:28, NogintheNog said:

Yes you can continue to contribute;

https://www.youinvest.co.uk/faq/can-i-make-additional-contributions-my-sipp-after-starting-drawdown

Yes you can pay in and take money out, but after the 25% tax free element it's all liable for tax at whatever rate you pay.:) 

This is a tricky subject that needs proper advice depending on personal circumstances and goals.  For example, while the above seems true, I was also told you can still make the full cintributions (maybe the carry forwards too) if you only took the tax free 25% and did not drawdown beyond that. But I still won't believe that until I try.  So that could be both a yes and a no depending on the precise personal goals and circumstances.  Then there's the recycling rules.  Advice, not via internet forums, is easy and essential.

Edited by Harley
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  • 2 months later...
Chewing Grass

Here is another one, a few of the people I know, me included were in an old government superannuation scheme based on 40ths of final salary. Some of us paid more in to have an earlier retirement date of 60.

Guess what it turns out that it is non-deferrable and since 2015 non-transferable.

Now this means that we are effectively prevented/discriminated against by the fact at 60 we can only pay 4K per year into another pension and this is not through our choice.

I have a hole I now cannot fill and a tax bill I cannot offset and a friend who is 59 is royally pissed off.

Surely this is no acceptable legally or under pension freedoms.

Opinions / anecdotes please.

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Democorruptcy
3 minutes ago, Chewing Grass said:

Here is another one, a few of the people I know, me included were in an old government superannuation scheme based on 40ths of final salary. Some of us paid more in to have an earlier retirement date of 60.

Guess what it turns out that it is non-deferrable and since 2015 non-transferable.

Now this means that we are effectively prevented/discriminated against by the fact at 60 we can only pay 4K per year into another pension and this is not through our choice.

I have a hole I now cannot fill and a tax bill I cannot offset and a friend who is 59 is royally pissed off.

Surely this is no acceptable legally or under pension freedoms.

Opinions / anecdotes please.

Is that because you are 60 and have started taking the pension?

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Chewing Grass
11 minutes ago, Democorruptcy said:

Is that because you are 60 and have started taking the pension?

No, I'm 56 but the day I'm 60 I'm forced to take it, unless I kill myself.

Non-deferrable, non-transferrable.

Those are supposedly the T&Cs.

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Democorruptcy
Just now, Chewing Grass said:

No, I'm 56 but the day I'm 60 I'm forced to take it, unless I kill myself.

Non-deferrable, non-transferrable.

Those are supposedly the T&Cs.

If you mean you cannot put more than £4k into a another pension because when you start taking your pension at 60, you will trigger the MPAA, then I think you are wrong. The MPAA wasn't brought in for that, it was to stop people recycling money for the tax relief. DYOR etc but found one here:

Quote

 

The MPAA was introduced alongside the 'pension freedoms' changes of 2015 to discourage people from repeatedly taking money out of a pension, benefiting from the chance to take tax-free cash, and then reinvesting all the money back into a pension with another slice of tax relief top-up from the government.

The way that the system works is that the first time you take taxable cash out of a 'pot of money' pension, the MPAA is triggered.

When this happens, the annual amount of money you can contribute into a 'pot of money' pension in future years is limited by the MPAA.

Two things follow on from the definition I have just given:

1. Taking money from a salary-related pension does *not* trigger the MPAA; in your case, there is nothing to stop you contributing substantial sums into pot of money pensions even though you are drawing a salary-related NHS pension;

What are defined contribution and salary-related pensions?

Defined contribution pensions, sometimes called money purchase in industry jargon, take contributions from both employer and employee and invest them to provide a pot of money at retirement. 

More generous gold-plated defined benefit pensions, also known as 'salary related' or final salary pensions, provide a guaranteed income for life after retirement. This is Money

2. Just taking your tax-free cash from a pot-of-money pension does *not* trigger the MPAA; provided that the rest goes into a flexible drawdown account and is not touched, then the MPAA does not apply;

https://www.thisismoney.co.uk/money/pensions/article-7103723/Can-draw-old-pension-40-000-year-schemes.html

 

 

 

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Chewing Grass
7 minutes ago, Democorruptcy said:

If you mean you cannot put more than £4k into a another pension because when you start taking your pension at 60, you will trigger the MPAA, then I think you are wrong. The MPAA wasn't brought in for that, it was to stop people recycling money for the tax relief. DYOR etc but found one here:

 

 

Excellent answer, thanks, we shall see where that gets us tomorrow.

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SpectrumFX

I've got a non deferable final salary pension that kicks in at 60 and I had a bit of a panic about the MPAA. I read around a bit and came to the conclusion that the MPAA probably doesn't apply to defined benefit schemes. They change all the rules so much mind that i'm fucked if I can keep up it with all.

 

 

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  • 5 months later...

Just got a CETV valuation for a DB-type pension and I want to know how to work out if it worthwhile to transfer out; I know that if I decide to go forward with it I have to use a Financial advisor [criminal!].

As a starting point I am assuming the following initially a) that a DB pension is very similar a role in retirement planning to buying an annuity i.e. that it gives you a regular, interest protected monthly/yearly payment, and so b) a good starting point would be to 'plug in' the CETV lump sum value into an annuity to see what the market comes up with.

That said, what are others thoughts i.e. what could I expect realistically as a return on this capital i.e. gilts=1-2% above inflation AFTER costs, investment grade bonds=2-3%, 3-5% for large cap stocks?...someone [think @FrankHovis] also made a good point about delaying buying an annuity if you are healthy as this is wasted 'insurance' i.e better waiting until you have a comorbidity etc.

Finally, I know several of us are vehemently opposed to paying tax, and so have tried to keep our post-retirement pension/earnings below/within the personal tax code, but could we actually be 'cutting our nose off to spite our face'?...a recent example I thought about was making addition NI pension contributions to gain additional years, OK it may push your final pension sum over the £12570 personal allowance [and so taxed at 25%] but the extra expense of contribution usually pays backs within three/four years, so after that its 'free' money [hopefully people understand the point I am making here].

Thoughts/comments?

NOTE, I know we have had similar posts before but this was sometime ago; they are now locked, things can change, and as I have found with DOSBODS, others comments can make you reformulate your own opinions.

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Frank Hovis
1 hour ago, MrXxxx said:

Just got a CETV valuation for a DB-type pension and I want to know how to work out if it worthwhile to transfer out; I know that if I decide to go forward with it I have to use a Financial advisor [criminal!].

As a starting point I am assuming the following initially a) that a DB pension is very similar a role in retirement planning to buying an annuity i.e. that it gives you a regular, interest protected monthly/yearly payment, and so b) a good starting point would be to 'plug in' the CETV lump sum value into an annuity to see what the market comes up with.

That said, what are others thoughts i.e. what could I expect realistically as a return on this capital i.e. gilts=1-2% above inflation AFTER costs, investment grade bonds=2-3%, 3-5% for large cap stocks?...someone [think @FrankHovis] also made a good point about delaying buying an annuity if you are healthy as this is wasted 'insurance' i.e better waiting until you have a comorbidity etc.

Finally, I know several of us are vehemently opposed to paying tax, and so have tried to keep our post-retirement pension/earnings below/within the personal tax code, but could we actually be 'cutting our nose off to spite our face'?...a recent example I thought about was making addition NI pension contributions to gain additional years, OK it may push your final pension sum over the £12570 personal allowance [and so taxed at 25%] but the extra expense of contribution usually pays backs within three/four years, so after that its 'free' money [hopefully people understand the point I am making here].

Thoughts/comments?

NOTE, I know we have had similar posts before but this was sometime ago; they are now locked, things can change, and as I have found with DOSBODS, others comments can make you reformulate your own opinions.

 

I looked at annuity rates, which are criminally low, and decided that if I could get anywhere near those for my valuation then I'd take it.

HL lists the best, the word is relative, annuities so pick the one that is nearest to your benefits, e.g. starts at 65 and RPI linked, and then scale up your defined benefits to the capital required to buy them as your expectation for transfer value.

You are highly unlikely to get quite there, annuity sellers must make their coin, but if you're close then it seems a screaming buy as you can outdo their return (long term) on the stock markets plus keep your capital.

I didn't get anywhere near with mine; as expected the private sector funds offered far better than the public sector ones but none of them were the effective lottery win for which I was hoping.

 

One other consideration, for me anyway, was that given how heavily I am invested in the stock markets it did serve to spread the risks by keeping my DBs as a back-up inflation proof income stream.

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Chewing Grass
On 17/03/2021 at 20:49, Chewing Grass said:

Excellent answer, thanks, we shall see where that gets us tomorrow.

Well I forgot to post my findings, these are the results of my efforts.

  • Scheme (Final Salary) does not trigger MPAA - big tick.
  • Taking it early results in 2.5% per year reduction in benefit - worth it.
  • Decided to take it early because I don't want the rules changing on me in the autumn - risk management.
  • Will be officially drawing pension in two weeks time - 3.5 years early.
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On 26/08/2021 at 10:20, Frank Hovis said:

 

I looked at annuity rates, which are criminally low, and decided that if I could get anywhere near those for my valuation then I'd take it.

HL lists the best, the word is relative, annuities so pick the one that is nearest to your benefits, e.g. starts at 65 and RPI linked, and then scale up your defined benefits to the capital required to buy them as your expectation for transfer value.

You are highly unlikely to get quite there, annuity sellers must make their coin, but if you're close then it seems a screaming buy as you can outdo their return (long term) on the stock markets plus keep your capital.

I didn't get anywhere near with mine; as expected the private sector funds offered far better than the public sector ones but none of them were the effective lottery win for which I was hoping.

 

One other consideration, for me anyway, was that given how heavily I am invested in the stock markets it did serve to spread the risks by keeping my DBs as a back-up inflation proof income stream.

OK @FrankHovis [or anyone else i.e. @DurhamBorn] can you confirm that a) I have understood the post above, and b) my interpretation is correct.

1. So I plugged the CETV lump sum figure into the HL annuity calculator and specified the same/similar options that I get with my DB pension i.e. inflation increase with RPI, dependents benefits etc. The result was at best an annual pension payment 37% less than that with my DB pension.

2. I then tweaked the figures in the calculator to see what figure I would need to pay as an annuity to get the same annual pension payment offered by my DB [basically reverse of above], and found the sum would be ~1.7 times the CETV figure currently offered.

Now my interpretation of this is that the CETV is pretty poor, as it is only allowing me to buy a 63% of the pension benefits [on the annuity open market] I could gain by staying 'put' with the DB pension provider. I appreciate that with a CETV payment there is no obligation to buy an annuity, one could invest in S&S, and as a result [hopefully] pass on the original capital to partners/offspring i.e. it doesn't 'die' with the annuity/you....would an average annual return [after inflation] of 3-4% doing this appear realistic after accounting for trading expenses etc?

 

A final question, when others have spoken on here about 'cashing in' their DB pensions they mention x30 or x40,

a) I assume this is referring to the factor the annual pension has to be multiplied by to get the CETV value offered, is this correct? AND if so,

b) what would be considered a good minimum value/multiplication factor?

Thanks

 

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DurhamBorn

At the moment id consider a CETV of 35 to 40 times good,30 to 35 probably yes.

To transfer a DB pension for me isnt just about the hard money,its about emotions.Im not married,and if i died a day after starting the pension in DB id lose the lot.Die that same day with a transfer and my kids get the money tax free.

The cashflow graph the IFA drew up stated id need to increase the CETV by 34% in 16 years to equal the DB benefit,but he based that on my living to 96 O.o so said no,but wink wink insistent client.I increased it 54% within a year,but of course an easy year to increase it.

My partner is going to transfer a DB pension and run the lot down between 55 and 67.She can get the lot out tax free that way without ever going into drawdown.She has another one from 67 from the council,plus a big ISA.

A SIPP is hugely flexible in all sorts of ways,and for me the main benefit is being able to jack in at 55 and withdraw £16700 a year tax free,at least until state pension age,or 74 id there is no decent state pension.

I should add for anyone who lets an IFA manage the money after a transfer the fees are eye watering and over say 30 years of investment and drawdown around a quarter to a third of the value will go to the IFA.

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With a SIPP is it possible to just live off the dividends when the time comes, and then when i pop my cloggs for all the money in the SIPP to be transferred to my kid .... or is it dependant on the age i die?

I'd imagine it'd be close to £250,000 and i like to think i'd not have been a UK resident for a few decades by then.

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Frank Hovis
1 hour ago, Hancock said:

With a SIPP is it possible to just live off the dividends when the time comes, and then when i pop my cloggs for all the money in the SIPP to be transferred to my kid .... or is it dependant on the age i die?

I'd imagine it'd be close to £250,000 and i like to think i'd not have been a UK resident for a few decades by then.

 

Under 75 and it goes to them without being taxed.

This isn't the case from 75.

 

https://www.hl.co.uk/help/sipp,-drawdown-and-annuity/sipp/retiring/what-happens-to-my-SIPP-when-i-die

 

 

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