More Pension Freedoms To Be Set Out By Treasury

[arrgee1991]

Now, with free access to the pension pot, the receiver in bankruptcy has the authority to demand a full draw-down on the pension pot, provided that the bankrupt is 52 or older (3 years before free access to the pot becomes available).

This is highly unlikely as all pension pots are in trust. It would require the trustees to agree to this which is unlikely.

[arrgee1991]

Many people plan to live of the initial lump sum until the state pension kicks in. In my case, I would use it to pay off the mortgage early.

The best thing most people can do is exhaust all other savings before going anywhere near the pension pot. Extend the mortgage term to your 75th birthday and then take the tax free lump sum and pay it off if need be. Should you die before you are 75, the whole pot is tax free and free from IHT. Better to use 100% of the fund to pay off the mortgage rather than 25%.

[kzb]

You can only take out take out a maximum of 25% tax free, after that withdrawals are taxed at your marginal tax rate.

"The Government announced at Budget 2014 proposals to allow people aged 55 and above, from April 2015, access to their money purchase pension savings as they wish during retirement, subject to their marginal rate of income tax."

Yes, thanks for that. It's what it looked like to me as well. So what is all the excitement about? WHy is it so newsworthy that I can spread out taking out that 25% over more years?

Seems to me I might as well get all the bureacracy over with in one hit rather than have to go through it time after time.

[porca misèria]

So what is it that old people buy?

Is it time to go long on werther's original.

I might buy a house when I retire.

If they change the rules so I can buy it within the pension fund then I get it from un-taxed money.

The other thing old people need is a bit more comfort. For example, I can't sit in the cheapest seats in many theatres as I did when young, 'cos my back simply won't take it. So I have to fork out for higher-priced seats (or standing room where available).

[porca misèria]

Yes, thanks for that. It's what it looked like to me as well. So what is all the excitement about? WHy is it so newsworthy that I can spread out taking out that 25% over more years?

Seems to me I might as well get all the bureacracy over with in one hit rather than have to go through it time after time.

If you don't have an immediate use for the 25% (like paying off a mortgage), you might prefer to spread it.

But more to the point, it makes it feasible (in principle at least) to pay into a fund while also drawing out of it.

[ChumpusRex]

This is highly unlikely as all pension pots are in trust. It would require the trustees to agree to this which is unlikely.

However, at present, a trustee in bankruptcy can order that a bankrupt draw-down any pension lump sum which he is entitled to claim. Unless the pension freedom aspects of the finance bill are revised before they become law, this will still appear to be the case, in that a bankruptcy trustee could order that the maximum draw-down be made.

The same is also thought to be possible with regard to unpaid debts. There is caselaw which allows a creditor to enforce judgement on entitled, but not drawn, pension lump sums.

Edited October 15, 2014 by ChumpusRex

[sleepwello'nights]

You can only take out take out a maximum of 25% tax free, after that withdrawals are taxed at your marginal tax rate.

A good tax planning opportunity. If you can keep the amount you withdraw each year and the total of your other income at or below your personal allowance then your top marginal tax rate will be nil. If you have other savings you can use to cover your living costs whilst withdrawing your pension fund then you may be able to withdraw your entire pension without paying any tax on it.

I'm sure some of you frugal gits on here could manage to do that. I'm working on ways to do it.

Edited October 15, 2014 by sleepwello'nights

[porca misèria]

A good tax planning opportunity. If you can keep the amount you withdraw each year and the total of your other income at or below your personal allowance then your top marginal tax rate will be nil. If you have other savings you can use to cover your living costs whilst withdrawing your pension fund then you may be able to withdraw your entire pension without paying any tax on it.

I'm sure some of you frugal gits on here could manage to do that. I'm working on ways to do it.

You only avoid tax altogether if you keep your income below the threshold. Paying in to a pension helps with that, but withdrawing doesn't. Either the pension is too small to incur tax, or you die without ever having accessed more than a minimal pension.

Could be good for inheritance tax, though.

Edited October 15, 2014 by porca misèria

[19 year mortgage 8itch]

All you tax dodgers, I hope NI is merged with IT and higher rate relief on contributions removed. Then all bets are off.

[sleepwello'nights]

You only avoid tax altogether if you keep your income below the threshold. Paying in to a pension helps with that, but withdrawing doesn't. Either the pension is too small to incur tax, or you die without ever having accessed more than a minimal pension.

What I'm planning is to keep income below the personal allowance and top up income to the personal allowance with pension withdrawals. The balance of income I need will be taken from savings. Eventually my savings will be exhausted but by then personal allowances are likely to have increased and I can then withdraw larger amounts from my pensions. The value of my pensions will, I hope, continue to have increased.

If I need to withdraw any amounts that would take me over my personal allowances, I will at the very least have minimised any tax I have to pay.

[porca misèria]

What I'm planning is to keep income below the personal allowance and top up income to the personal allowance with pension withdrawals. The balance of income I need will be taken from savings. Eventually my savings will be exhausted but by then personal allowances are likely to have increased and I can then withdraw larger amounts from my pensions. The value of my pensions will, I hope, continue to have increased.

If I need to withdraw any amounts that would take me over my personal allowances, I will at the very least have minimised any tax I have to pay.

That way, you get to keep your money, but only inside the pension fund.

Other things being equal, I would expect to withdraw rather more from the pension fund each year, and avoid tax on it by offsetting the tax liability against other ways of tax-saving: in particular, tax-efficient investments. Just being sure to keep the amount withdrawn each year within the basic rate tax band.

Or perhaps, live for one year in a tax haven, and withdraw the lot during that year.

[VeryMeanReversion]

So, I'm a banker. I've got a load of non-performing mortgages in forbearance. I'm going to get on the phone and start calling people, and telling them that finally, I'm going to have to repossess unless they can find a way to address the shortfall, plus accumulated interest. And by the way, have they considered using some money from their pension, which might be a way to avoid ending up homeless and on the street?

I know someone in this situation where their (elderly) parents are paying their mortgage to stop the bank repossessing. It will be tempting to access the last of their pension to help them out.

[VeryMeanReversion]

I might buy a house when I retire.

I think it's now more tax effective to buy your first house shortly after your death

[Bloo Loo]

That way, you get to keep your money, but only inside the pension fund.

Other things being equal, I would expect to withdraw rather more from the pension fund each year, and avoid tax on it by offsetting the tax liability against other ways of tax-saving: in particular, tax-efficient investments. Just being sure to keep the amount withdrawn each year within the basic rate tax band.

Or perhaps, live for one year in a tax haven, and withdraw the lot during that year.

any tax havens with a caravan park on the beach.

The issue here is that a large part of the population have no pension at, some have just compulsorily started, while others have what appeared to be great sums when they started the scheme 30 years ago and actually ended up with trivial amounts of annual entitlement.

Cashing out is sensible for many when you appear to need a pot of at least £150K to do any better than someone just on state benefits and aid.

[VeryMeanReversion]

All you tax dodgers, I hope NI is merged with IT and higher rate relief on contributions removed. Then all bets are off.

The current system taxes me at 65% and allows me to defer it to 15%. So I keep working then retire later.

A combined IT/NI system with higher rate relief removed means pensions are pointless. So long-term, part-time work would be better.

Alternatively, I can just emmigrate again. Leaving the UK for 4-5 years to build up savings worked well for me last time.

They set the rules, I follow them. What they can't (yet) do is force me to work and hand all the money over.

Edited October 16, 2014 by VeryMeanReversion

[19 year mortgage 8itch]

The current system taxes me at 65% and allows me to defer it to 15%. So I keep working then retire later.

A combined IT/NI system with higher rate relief removed means pensions are pointless. So long-term, part-time work would be better.

Alternatively, I can just emmigrate again. Leaving the UK for 4-5 years to build up savings worked well for me last time.

They set the rules, I follow them. What they can't (yet) do is force me to work and hand all the money over.

How do you buy a house with part time work?

[VeryMeanReversion]

How do you buy a house with part time work?

Don't be silly, no-one can save up enough to buy a house these days.

The only way to get a house is :

1. Sell one

2. Inherit one

3. Steal one (tricky)

4. Cheat (play the planning system)

5. Emmigrate to a lower tax country and save up

I know examples of each case except 3. I don't know anyone that has started from scratch, saved up a deposit and bought a house in the last 10+ years. I am now seeing more examples of 4. I did 1/4/5.

One neighbour with very detailed knowledge of the planning system managed to recently get permission to convert a crappy old shed into a cow-shed. He let cows run around the garden for a year before applying. The new cow-shed is two storey with lots of nice large windows. Lucky cows, I wonder if they will ever live in it?

[arrgee1991]

I think it's now more tax effective to buy your first house shortly after your death

It is!

The best thing to do is to die aged 74 and 364 days and then get the whole pension fund tax free and possibly life insurance as well. Just hope my kids don't work this out in about 20 years time.

Still it worked for Mr and Mrs Darwin for a while...

http://en.wikipedia.org/wiki/John_Darwin_disappearance_case

Edited October 16, 2014 by arrgee1991

[porca misèria]

Don't be silly, no-one can save up enough to buy a house these days.

No problem. I've saved up enough to buy a house since joining HPC.

It's just a shame I couldn't've done that 30 years ago when tax+rent ate up all my income.

[winkie]

Don't be silly, no-one can save up enough to buy a house these days.

The only way to get a house is :

1. Sell one

2. Inherit one

3. Steal one (tricky)

4. Cheat (play the planning system)

5. Emmigrate to a lower tax country and save up

I know examples of each case except 3. I don't know anyone that has started from scratch, saved up a deposit and bought a house in the last 10+ years. I am now seeing more examples of 4. I did 1/4/5.

One neighbour with very detailed knowledge of the planning system managed to recently get permission to convert a crappy old shed into a cow-shed. He let cows run around the garden for a year before applying. The new cow-shed is two storey with lots of nice large windows. Lucky cows, I wonder if they will ever live in it?

I wondered why some green land was sold to put stables and horses on instead of crops......I wonder what that will eventually be turned into, some luxury habitable stable maybe?

Edited October 16, 2014 by winkie

[Billy soy]

So, I'm a banker. I've got a load of non-performing mortgages in forbearance. I'm going to get on the phone and start calling people, and telling them that finally, I'm going to have to repossess unless they can find a way to address the shortfall, plus accumulated interest. And by the way, have they considered using some money from their pension, which might be a way to avoid ending up homeless and on the street?

Bail in indeed - one last cash grab before they let the whole thing drop and start writing new mortgages at levels that people can afford to repay.

Happy days, no?

Looks like it, there are a lot of older peeps out there with interest only mortgages coming to the end of their term, I recall the banks and government being very worried about how all these IO's taken out in the last bubble had no repayment vehicle set up.

[Fully Detached]

Yep, I guess the pressure on the individual will be massive even before the lenders start pushing from their side. Once the lenders start "suggesting" pension withdrawal as an option, I be the vast majority in that position will go for it.

I know someone in this situation where their (elderly) parents are paying their mortgage to stop the bank repossessing. It will be tempting to access the last of their pension to help them out.

Looks like it, there are a lot of older peeps out there with interest only mortgages coming to the end of their term, I recall the banks and government being very worried about how all these IO's taken out in the last bubble had no repayment vehicle set up.

[kzb]

What I'm planning is to keep income below the personal allowance and top up income to the personal allowance with pension withdrawals. The balance of income I need will be taken from savings. Eventually my savings will be exhausted but by then personal allowances are likely to have increased and I can then withdraw larger amounts from my pensions. The value of my pensions will, I hope, continue to have increased.

If I need to withdraw any amounts that would take me over my personal allowances, I will at the very least have minimised any tax I have to pay.

The tax threshold is £10k per year -you're living the life aren't you ?! The state pension (if any of us live long enough to see it) is taxable income also.

I cannot see why some people are getting so worked up about this measure and its affect on property prices. It's going to make bog all difference either way.

Someone else was asking about public sector defined benefit schemes. In one of the documents linked to above, it says you can't take from those yet, but they are consulting on its possibility. That means it will come in eventually, perhaps with a few tweaks. After all, otherwise it would be unfair on the public sector.

Edited October 16, 2014 by kzb

[VeryMeanReversion]

I cannot see why some people are getting so worked up about this measure and its affect on property prices. It's going to make bog all difference either way.

Using pension as the repayment vehicle for a mortgage would make a big change to affordability. Lenders would need to let you do interest only and allow pension lump sum and instant withdrawal to be used for final repayment. The lump sum method was available in the 80's I believe.

In some circumstances you can halve your mortgage repayments (not the interest portion).

Old way : Borrow £120K over 10 years. Repayment portion is back £1k/month from net income

New way : Borrow £120K over 10 years. Give up £500/month net into pension via sacrifice scheme. Gets £1500 into pension. Withdraw 25% tax-free (£375), pay the full 40% tax on the rest -> £675 left => £1050 month (£50 to cover fees). => Mortgage repaid.

=> Repayment part of mortgage cost just halved. (interest cost still the same).

=> Basically tax-free mortgages for those in DC schemes.

One way to look at it is that it puts first time buyers in a better tax position than BTL'rs which many of us have complained about.

The relationship between pension and mortgages is about to get very interesting. It only works because mortgages are only likely to be repaid when you are eligible for pension withdrawals.

Edited October 16, 2014 by VeryMeanReversion

[arrgee1991]

Using pension as the repayment vehicle for a mortgage would make a big change to affordability. Lenders would need to let you do interest only and allow pension lump sum and instant withdrawal to be used for final repayment.

Lenders still do this. However they do have a tendency to add on 0.5% to the mortgage rate for interest only these days. The lack of availability of Interest only mortgages for older borrowers (50+) is a factor in the low number of property transactions.

Very few people borrow on a repayment basis for much less than 25 years as this makes the monthly payments very high. Most end up staying put and just continuing with the mortgage they are already on. It's insane that people with large pension pots are forced into repayments.