feelbritish

I thought of Chriss 955 when I read this and as we are retiring to UK hopefully next year, this is what I read on BBC from the 2014 Budget!

Pensioners will have the freedom to cash in as much or as little of their pension pot as they want, removing the need to buy an annuity (an annuity is effectively a bond which pays out a fixed income for the rest of your life).

Mr Osborne also outlined a new Pensioner Bond savings scheme to be available from January to all people over 65, paying interest rates of 2.8% for one-year bonds and 4% for three-year bonds.

He said the changes - due to come into law by April next year - were "the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921".

The cap on the amount of Premium Bonds a person can own will rise from £30,000 to £40,000 in June and £50,000 in 2015. The number of £1m winners will also be doubled.

chris955

You thought of me? I'm not close to officially retiring yet

feelbritish

no, just your happy upbeat personality!

cyrian

This applies to personal pensions (money purchase).
They are talking about allowing you to transfer your company pension but there are complications. Many people with company pensions or old-style personal pensions will not be able to access this because of the terms of their pensions. Several pension providers have stated that they cannot accommodate this change and would instead offer to allow a change into another scheme - at a cost
People with a company scheme which provides inflation increases and/or spouse pensions may be better to stay where they are.
It was always possible to "cash-in" small pension pots. This has simply been increased for some with a small pot or several small pots.
Money taken from the pension fund will attract income tax at the recipient's highest tax rate.
If you want to cash-in £500k from your pension to buy a Lamborghini then you would likely receive £300k after tax.
Money taken from the pension pot will be part of the persons estate and on death will be liable to inheritance tax at 40% on amounts greater than £325k including property.
An alternative choice for those with larger pension pots (£100k +) is simply to draw the pension. The budget allowed for a 25% increase in the amount that can be taken in drawdown after taking the 25% tax-free cash.
Anyone considering these options should take proper financial advice.

feelbritish

Thank you for clarifying that! I like the fact that we have some better interest rates and can put more cash into premium bonds!

J.JsOH

Rather than sign up to a trivial pension of £100 per year I recently cashed in a small pot of £3300 under the new rules. This was also recomended by my Financial Advisor. The pension company withheld 20% of the pot as a tax deduction towards my annual tax or refund.

cyrian

Sounds like they offered you £100 pa to get rid of you.
It isn't worth the admin costs to manage such a small pot.
You always could cash in small pots.
I think that the figure was under £10k - tbh I can't remember the calculation.
Sounds like you did the right thing.

bigglesworth

It is surprising how many people overestimate what a pot will buy, or underestimate the value of an income stream.
Pension providers normally cover most of their obligations in payment with gilts. (a tendency that was reinforced by a certain Mr Brown's perennial stealth raids on pensions).
Gilts pay roughly 3 percent. £3300 at 3 percent = £100 p.a. Depending on age, you might better that slightly but you would need to check the index linking.
Looking at it from the other perspective, I have a friend who is close to retiring from the Civil Service who is bemoaning the (to her) trivial pension of £5,800 p.a. That is for less than twenty years service of which much was part time. It is also index linked and available to her 5 years before retirement age. The cost of buying such a pension in the open market (IF she could) is close to £250,000. In another example in 2010 the NUT disclosed that the average full time teachers pension was £18,000 (index linked) AFTER taking a tax free lump sum with a retirement age of 60. To buy such a pension would cost in excess of three quarters of a million quid.

The reason I make those two points is that IMO the Government has HUGELY underestimated the value of public sector pensions. As it stands under the new arrangements, most public sector employees are excluded from cashing in their pensions as lump sums. I cannot imagine that the unions will allow that to stand unchallenged. To put it in perspective the sum of the average private sector pension pot is £40,000 (although I have seen one article that suggests it is closer to 60K).

If they do successfully challenge, then expect the recent changes to be reversed very quickly indeed.

dunroving

If they allowed public sector pensions to be cashed in, the country would go bankrupt.

cyrian

The multiplier used by insurance companies (and approved by HMRC) is x20 as per the example below. This calculates the theoretical pot that is providing the pension basically to check whether the pension has exceeded the lifetime limit of £1.25M.

How does the calculation of Lifetime Allowance work?

For the purpose of the Lifetime allowance the HM Treasury have instructed pension schemes to use a multiplier of 20 to the value of annual pensions to calculate the value of pension benefits held.

Example A: Based on an annual pension of £50,000 with a lump sum of £125,000

Annual pension x 20 Plus lump sum = £1,125,000, well within the allowance


Example B: Based on annual pension £75,000 plus £200,000 lump sum

Lump Sum of 25% of lifetime allowance (£375,000) no charge. Allowance for annual pension £1,500,000 less £375,000 (£1,125,000)

Annual pension £75,000 x 20 = £1,500,000

£375,000 x 25% over 20 years leads to deduction of £4687.50 permanent reduction from annual pension

Apologies this calculation uses the previous years limit of £1.5M which is reduced in 2014-2015 to £1.25M but the x20 figure still applies.

bigglesworth

DR = absolutely. and I think that is my point.

Cyrian
No dispute there.
But it is a calculation of the Lifetime Allowance for tax free pension saving.

My point is as to the cash value of the pension.

I am not sure a court would allow the Government to place a wholly artificial value on the value of an asset.
The Lifetime Allowance calculation is equivalent to an interest rate of 5 percent. If only....

cyrian

Is that not a theoretical value of the pension as defined by the government?
If you go above this theoretical value then you are taxed on the excess.
I suspect that the unions and their members would react if the Govt tried to apply a lower value.

cyrian

For Govt pensions there is no cash value as such.
There are the terms of the pension and this is provided by general taxation.
Therefore the "value" can only ever be theoretical.
You can use the x20 rule or you can use the GAD tables or annuity rates or whatever.

bigglesworth

Sorry Cyrian, I don't understand what you are trying to say.

J.JsOH

Re:

Bigglesworth, It seems that you are speaking generally, but just to expand on my statement that you quoted;

When I said trivial £100 I was referring to the value of £100 rather than expressing that it was less than what I expected. I had no expectations, no over or under estimating. No bemoaning or any other moaning here, sure, I am not going to throw away £100 pa but then I could equally live well without it.
The whole pension pot was a bit of an unexpected extra, it being funded entirely by my employer over 18 months of employment after I moved back. I would have retired upon moving back but the employer asked me stay on and work from home in the UK to help them out through a difficult period which I did with no expectation of earning a pension from it.