As I didn’t dare hope, the Treasury continue down the pension reform fairway.
Having hit a 325 yard drive into position A with their Budget reforms, they’ve hit a 275 yard second to the heart of the green with ‘uncrystallised funds pension lump sum’ (UFPLS)’.
They might have been looking at the legislative equivalent of an albatross if they’d hit on a clever name like ‘Flumps’ but we’re still looking at a regulatory eagle and are back on course for a Championship Win in April 2015.
The excellent Will Robins has produced a very good summary of the different pension options available which are published on Citywire here. The only issue I’d take with his conclusion that
for individuals in a scheme offering flexi-access drawdown there will be little difference between taking a UFPLS (Flumps) and choosing flexi-access drawdown and maximum income.
Actually Flumps looks brilliant for the average Joe who doesn’t want to spend half his time with his adviser and accountant messing about with numbers- tax forms and investments.
What Flumps offers is the tax free cash on a “collect as you draw”, basis and to illustrate its benefits I give you a Pension Plowman fable.
The instructive tale of Tony Lamborghini and Freddy Flumper
Tony has had an eye on the £30k tax free cash from his £120k pension savings for some time.
His anticipation increases when he hears that he can get all £120k (less a bit of tax) from April 2015 (provided he’s 55 or more). Happy days! Tony was born on April 1st 1960!
Now he’s eying up a taster motor in his showroom which (along with his little blue pills) will do his status with the “laydeeez” a power of good.
On his 55th birthday Tony gets a cheque for £84k (he had to pay 40% on the £90k taxable) and invests in a second-hand Diablo (remembering to keep back a few bob to pay for the petrol and servicing).
Tony’s accountant reminds him that he will be liable to 40% tax on any income from these savings but Tony is off chasing the chicks and will be till his next meeting with his accountant in 2016, by which time the car will be back in the showroom and Tony worrying about being 56 with no pension
By contrast, here’s Freddy Flumper, also 55 next April.
He’s chosen to draw down his pot in bits, gets the first 25% of each drawdown tax-free (or as he says he gets 25% back in tax each month)
And Freddy has had the benefit of tax free growth on all his savings as he didn’t take his big tax free sum- what’s more, he’s continued to enjoy investment growth on his money rather than the puny interest he got from the bank.
But what makes Freddy happiest of all is that it’s all so easy. Deciding what he’s going to pay himself each month is down to a quick call to his drawdown provider, or a quick adjustment via his provider’s website- heh!- Freddy can even work out what he wants to pay himself using his smartphone.
And because the people who operate the drawdown payment system are payroll experts, they know how to net off his tax and make sure (using RTI) that his Flump and his earnings and his final salary pension are all treated as one by HMRC so he doesn’t have to fill in lots of ghastly tax assessment forms.
For Freddy Flumper, his DC pensions have turned from a nightmare to the sweetest of dreams.
True Freddy is worried that his Flump might run out one day, especially if he lives too long or goes doo-wally in a nursing home. But he’s got an adviser helping him out and he’s looking at all kinds of options that are open to him including these new CDC pensions, the new super-annuities, he’s even looking at buying some extra state pension.
Freddy had a couple of month watching Tony parade his Diablo up and down the high-street and it’s true that all the crumpet wanted a ride- but that was then.
Now the chicks are all over Freddy as he’s the bloke buying the rounds “steady Freddy” they call him!