Some freedom- huh!
I’m as free as a bird can be when “freedom” is defined and confined by HMRC.
“Me” as case study;
I have a pension pot which wealth managers call “big” but can only supply me with an income of £15,000 pa – not enough to keep me and my family and boats.
If I were to start the glide path to retirement and say work four days a week, I could start drawing down now (I am 55). But I am still building my pot and to take any money from it, I would have to limit my contributions to £4,000 pa (or pay back the tax).
I have a generous employer who pays more than £4,000 pa into my pension.
The idea of being “free as a bird” is relative. I am free to enjoy the idea of freedom, but exercising those freedoms would bring a load of regrets, negotiations with my employer and general discontent.
So I am reading with a jaundiced eye an update from the Treasury that showed that 162,000 individuals took cash from their pension pots in the last quarter of 2016, up from 158,000 in the previous quarter.
That in total £1.56bn was released in Q4 of 2016, slightly up on £1.54bn in Q3.
That £9.2bn of pension cash had been released by half a million individuals since rules were eased in April 2015.
And I gritted my teeth to read the Treasury’ Simon Kirby boast
“Giving people freedom over what they do with their hard-earned savings, whether it’s buying an annuity or taking a cash lump sum, is the right thing to do, these figures show that people continue to take advantage of the choices on offer.”
All the Treasury is giving me – is a headache!
As with my lifetime allowance calculations, my tapering annual allowance and my progressive income tax, my pension planning , which involves me reducing a sum of money from my employer each month, has become a constant source of bemusement!
I am quite happy to pay tax – when I have to.
But when there is an opportunity to maximise the tax-effeciency of how I get paid, there is that little demon in me which says –
“I want to do what’s best for me and my retirement”.
I’m as free as a budgie in a cage and I don’t appreciate a Treasury Minister accruing his defined benefit telling me that I can “take advantage of the choices on offer”.
It’s back to the drawing board. The reduction of the annual allowance from £10,000 to £4,000 in April means I will not be drawing on my pot, I won’t be working four days a week, I will be doing exactly what I planned to do before all this hullabaloo about pension freedoms started.
Man is born free and everywhere he is in chains, budgies are as free as the cages you perch them in. Frankly the manacles are (to coin William Blake’s phrase) “mind-forged” but once you set out , to be shoved back in the cage is a pisser!
I’m lucky enough to know the rules and not to have cyrstallised any part of my DC pot. I wonder how many of the 162,000 people who did raid their pot last quarter will live to regret it.
As you like an annuity you could use some of your taxable drawdown fund to buy an annuity and phase your tax free cash withdrawals to supplement your part time income without triggering the MPAA. As long as you use your ongoing earned income to further fund new pension contributions you will still be able to have your annual allowance less any tapering reduction.
Just a hunch, but I think that vast majority of the 162,000 were well over 55! Brian Gannon is quite right, too, in what he says. Although entering flexi-access drawdown by taking a PCLS and nil income is now viewed as taking benefits flexibly, only when an income is taken will the Money Purchase Annual Allowance be triggered.
An individual, therefore, can take his/her PCLS, or a portion thereof, draw no income, and still retain the Annual Allowance in full.
In my experience, this is quite a common approach at present.
Best,
I think that Pension Freedoms are in many ways far too liberal, for example where is the logic in making a pre age 75 death benefit tax free when the person would have paid their marginal rate of tax for withdrawals from the taxable part of their drawdown? And why should someone be free to blow their entire pot in one go when the reason they were receiving tax relief was to generate a lifelong post retirement income? All seems a bit wrong to me.
Conversely the Lifetime Allowance is an unfair retrospective tax on good planning and penalises good investment performance. There are all manner of silly rules which keep me busy advising clients which surround LTA and its various protections, so I don’t think that it is wrong to place some restrictions on “pension freedoms”.
As Mr Gannon says, why is it suddenly right that Dc pensions have become a (very effective) IHT mitigation tool? The oft-quoted “It’s my money” argument isn’t really the case in my opinion, but I’m old-fashioned, I suppose and must work with clients within current legislation and the planning opportunities that they throw up. I now have more than a handful of clients who have SIPPs invested in investment trust shares and index funds (for example) who are unlikely to need them to live on in retirement and they have nominated children & grandchildren as death beneficiaries, thus treating the pension fund as a kind of exempt life assurance arrangement. Whilst it is the case that a pension might be drawn in the future, I can’t imagine any of them purchasing an annuity!
Indeed, I last arranged a pension annuity 23 months ago, and wonder if my experience is common to others in the IFA community?