Savers are being urged to take full advantage of their pensions to boost
returns as life expectancy rises.
The BBC, for example, allows staff aged 50 or over draw an income from their
pension while continuing to work. While few occupational schemes are as
generous, several let you take your 25% tax-free cash and continue to work.
Here we look at 10 ways to boost the flexibility of your pension:
1 TAKE BENEFITS WHILE WORKING
The BBC is allowing selected staff aged 50 and over to claim an income from
their pension while they work full time, The Sunday Times revealed earlier
this month — an option made possible by changes to pension rules in 2006,
known at the time as A-Day.
The size of the annual pension payment is cut by 4% for each year a worker
claims their pension early. This means that someone who opts to receive
their pension at 50 gets a 40% lower pension than if they had retired at 60.
However, members continue to rack up further pension rights under the BBC
plan, which is based on career-average pay, even when claiming a pension and
salary in tandem.
Laith Khalaf at Hargreaves Lansdown, the adviser, said those whose schemes
allowed them to draw benefits while still at work should make sure they
could afford to do so.
“Drawing your pension early may provide you with enough income while you’re
still working, but at some stage your earnings are going to have dropped out
of this equation, and by taking your pension early you could have
permanently reduced the income you will get from it,” he said.
“Receiving both earnings and pension income is also going to mean you pay more
tax on that pension income.”
Some schemes might also bar any accrual of pension benefits if it is drawn on
at 50 (rising to 55 next April). Taking benefits before the scheme’s normal
retirement age of, say, 65, could mean losing 15 years’ employer
contributions. There is also the possibility of missing out on making
personal contributions — and netting tax relief and investment returns on
these.
2 TAKE 25% A YEAR
You can take up to 25% of your pension at any age as an “unauthorised
payment”, provided the scheme allows it, but it will be hit with a tax
charge of 55%. This can be done every year.
Talbot & Muir, which provides self-invested personal pensions (Sipp) and
small self-administered schemes (Ssas), said it had seen demand double this
year.
Nathan Bridgeman, a director, said: “The 55% tax charge does not look that
unattractive when put in the context of the 82% tax hit that your
beneficiaries will be charged if you have money left in your pension and die
after the age of 75.
“Equally, some younger pension savers are viewing the 55% tax charge in the
context of the forthcoming 50% income tax rate for high earners.
“For some, having access to the money in their pension pot is just the
lifeline they need in the current economic climate.”
Any payments above 25% of your fund will be hit with 70% tax and the scheme
may be deregistered by HM Revenue & Customs. Talbot & Muir is
believed to be the first pension provider that allows “unauthorised”
payments.
3 STAY INVESTED
You can take up to 25% as a tax-free lump sum, then vary the income taken from
the pension by leaving the fund invested and going into “income drawdown”.
This can be done with a personal pension — such as a Sipp or Ssas — or an
occupational scheme, although few of these allow it. It is possible to take
between nil and 120% of rates set by the Government Actuary’s Department
(Gad). This is reviewed every five years. Income levels can be changed
within these boundaries or an annuity bought at any stage.
Funds can be passed on to beneficiaries when you die, subject to a 35% tax
charge before the age of 75. After 75 you move into an alternatively secured
pension (Asp). Income limits are narrower — 55%-90% of Gad rates for a
75-year-old.
Financial dependants will be hit with an 82% tax charge on the residual fund.
If you have none, the money goes to charity. Remember, though, that your
fund could plummet in value, as those who were heavily invested in the stock
market during the recent bear market have found.
4 BOOST THE AMOUNT YOU CAN TAKE
Gad rates are tied to gilt yields, which are near all-time lows due to the
Bank of England’s programme of buying up gilts (yields fall as prices rise).
However, with a “scheme pension”, available via a Sipp or Ssas, it is possible
to take more money out of a pension fund.
Rates are calculated by an actuary rather than Gad, taking into account
assumptions of how long you are likely to live — the poorer your health, the
higher the rate. A 75-year-old man with a £200,000 pension pot could take an
annual income of £23,400 or 11.7% with a scheme pension — but only £17,100
or 8.6% with an Asp, according to Rowanmoor Pensions, the pension provider.
5 BORROW FROM YOUR PENSION
If you have a Ssas, your business (sole trader, partnership, limited company
or limited liability partnership) can borrow money from your pension fund at
unbeatable rates — a minimum of 1% over the rates offered by the six main
clearing banks, which is the same as Bank rate at present.
This means your business could borrow money at 1.5%. This rate can be fixed
for up to five years.
In this way, directors and business owners can access vital funding they might
not be able to get from their bank.
You can also generate a higher return for your pension than could be achieved
by holding money on deposit — by setting a higher interest rate than the
1.5%. Talbot & Muir recently set up a loan-back for a business that set
the interest rate at 7.75%.
This easily beat the 2% the pension fund would have achieved by holding cash
on deposit. This also beat the minimum loan rate offered by the firm’s bank
of 12%.
6 BORROW WITH YOUR PENSION Your pension fund can borrow up to 50% of
its net scheme assets from anyone — a bank, individual or yourself — so a
£200,000 pension fund could borrow £100,000 to, for example, buy a
commercial property.
You can also pool your resources with others, so 10 people with pension funds
worth £100,000 each could potentially buy an asset worth £1.5m.
7 INVEST IN RESIDENTIAL PROPERTY
Although the government performed a U-turn on allowing savers to put single
residential properties, such as their second homes, into their pension funds
in 2006, you can tap into the residential property market if you have a Sipp
or Ssas through a “genuinely diversified commercial vehicle”.
Propertybourse’s German Capital Cities fund, which invests in apartment
blocks, yields 7% at present and has returned more than 20% in the past
year.
8 GET TAX RELIEF — TWICE
You can use existing investments to make a pension contribution — by selling
them and buying them back in your Sipp, in what is known as “bed and Sipp”.
Say you had venture capital trust (VCT) investments. These funds, which invest
in unquoted and AIM-listed firms, attract tax relief at 30% on investments
of up to £200,000 a year, as long as you hold them for five years. Income
and capital gains are tax-free.
Say you invested £50,000. You would get back £15,000 from the taxman. You
could invest this money into your Sipp — netting 20% tax relief, or £3,750,
meaning £18,750 is invested in your Sipp immediately. If you are a
higher-rate taxpayer, you can claim a further 20% via your tax return,
helping to reduce your tax bill.
After five years you could sell the VCT and re-invest it in your pension fund.
It would then be worth £63,874 with modest annual returns of 5%. With
another 20% tax relief, this would be worth £79,768.
The further 20% that you can claim through your tax return can again be used
to reduce your tax bill. Overall, you would have spent an initial £50,000
but would have added £98,518 to your pension fund.
9 GET 60% TAX RELIEF
From the start of the new tax year on April 6, 2010, the withdrawal of the
personal allowance by £1 for each £2 earned over £100,000 means that those
earning between this amount and £112,950 will effectively get 60% tax relief
on pension contributions.
That is because they will not only get 40% tax relief on contributions, but
also some or all of their personal allowance back depending on how much they
contribute. Khalaf at Hargreaves said it was a “no brainer” to put £10,000
into your pension rather than £6,000 into the taxman’s coffers.
10 WRITE YOUR ASSETS IN TRUST
If you die before taking any benefits from your personal or occupational
pension scheme, the entire fund will pass tax-free to your chosen
beneficiaries.
These will, however, be added to your beneficiaries’ estates for inheritance
tax purposes. This is levied at 40%, so a £200,000 pension fund will
potentially incur tax charges of £80,000, if this is over and above other
assets worth over the nil-rate band of £325,000.
You can get round this by setting up a “bypass trust”.
“Your beneficiaries, usually a spouse or partner, will be a trustee and have
full access to income and capital from the trust as required,” said
Bridgeman at Talbot & Muir.
Annuity decline makes timing crucial
WITH stock markets up about 50% since March and annuity rates starting to
slide, pensions experts are warning that delaying retirement could prove
costly.
A total of 10 annuity providers have cut their rates in the past month alone —
after two of the biggest players, Prudential and Aegon, slashed their
benchmark rates by 4 and 3 percentage points respectively.
Overall, the rate for a 65-year-old man has dropped to 6.9% from 7.7% since
last summer, wiping £800 a year off the pension income that could be bought
with £100,000 of savings.
Hargreaves Lansdown, the adviser, expects further rate cuts by the end of the
year. “There’s a strong case that investors who retire today may enjoy great
timing, benefiting from much bigger pension funds following the market surge
and locking into better annuity rates than those available in the coming
months,” said Nigel Callaghan at Hargreaves.
That is particularly true if you are in your early 50s and could get caught
out by the increase in the minimum retirement age to 55 from 50 in April.
Also, Burrows & Cummins, the annuity broker, has said that middle England
is being hit by the rise of “postcode” annuities. The difference between
Aviva’s best and worse rates, based on postcode, is now 4.2%.
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