The Lemon Fool

I have a DC pension to take. Still not sure which route to take. I’m already drawing a DB pension and get my old age government one in app year & half’s time.looked at drawdown / annuity/ fixed annuity but still not decided. Big decision.

Alan24 wrote:I have a DC pension to take. Still not sure which route to take. I’m already drawing a DB pension and get my old age government one in app year & half’s time.looked at drawdown / annuity/ fixed annuity but still not decided. Big decision.

Is it?

Seriously if you NEED the money, then it's obvious. An annuity wins hands down.
Need it less? Well draw down allows you to take some and benefit from capital growth upon the rest.
Don't need it? Well why draw it? You can pass it on providing huge benefit to your beneficiaries. No kid's? Well there are far better charities than the government.

For what it's worth, I gave up work and am living upon my ISA. I could draw from my DC pension, and in some time my DB pension will kick in. Then comes the state pension. I see no point in drawing upon my DC without a good reason. It might be different if I felt that I wanted to spend more than I am doing.

It really rather depends wether at this moment in your life you want to start handling an investment portfolio ie drawdown
Perhaps at this late stage it might be a step too far and an annuity of whatever type would let you have a reasonable income and yet sleep at night!
xxd09

Ah different perspectives!

xxd09 thinks that you are going to have to start managing investments, while I assumed that you had been doing so for some time!

I need to recognize that not everyone on TLF, even if they have £100's of thousands, have actually managed the money. To me it's more like DIY. Can't find a plumber. Well you need to know the basics.

Since "pension freedoms" it has very much become a requirement to either learn DIY, or learn that you need to pay a tradesman to do it for you. And in this field the tradesmen don't come cheap.

Seriously, while I don't pay a FA much, they do provide a service worth their, not so small, fee.

The answer to this depends, to some extent, on what the purpose of the DC element was, and whether or not that has changed.
Did you save to pay for your retirement or is that adequately covered by the state and DB, or did you contribute to the DC to time shift some 40% tax to 20%.
The scale and history are a key factor here.

W.

Urbandreamer wrote:For what it's worth, I gave up work and am living upon my ISA. I could draw from my DC pension, and in some time my DB pension will kick in. Then comes the state pension. I see no point in drawing upon my DC without a good reason.

What about to make use of your Personal Allowance? You could take out £12,570 tax free, and keep that amount tax-sheltered in your ISA.

Scott.

swill453 wrote:

Urbandreamer wrote:For what it's worth, I gave up work and am living upon my ISA. I could draw from my DC pension, and in some time my DB pension will kick in. Then comes the state pension. I see no point in drawing upon my DC without a good reason.

What about to make use of your Personal Allowance? You could take out £12,570 tax free, and keep that amount tax-sheltered in your ISA.

Scott.

You are both right and wrong.

It would be "tax sheltered", until I die. Not that it currently isn't in the pension. However the ISA would currently be taxed at 40% upon my death.
Left in the pension it can be passed on tax free if I die before 75 and taxed at my children's marginal tax rate if I live longer.

While I wont be around to feel the pain of paying that 40%, I see no reason to chose to increase the bill.
Indeed I will be taking £2800 out of my ISA to add to my DC this year for this reason.

Urbandreamer wrote:Left in the pension it can be passed on tax free if I die before 75 and taxed at my children's marginal tax rate if I live longer.

While I wont be around to feel the pain of paying that 40%, I see no reason to chose to increase the bill.
Indeed I will be taking £2800 out of my ISA to add to my DC this year for this reason.

You sound well set to be the richest person in your local graveyard...

moorfield wrote:

Urbandreamer wrote:Left in the pension it can be passed on tax free if I die before 75 and taxed at my children's marginal tax rate if I live longer.

While I wont be around to feel the pain of paying that 40%, I see no reason to chose to increase the bill.
Indeed I will be taking £2800 out of my ISA to add to my DC this year for this reason.

You sound well set to be the richest person in your local graveyard...

Taking money out of an ISA to put in a pension knowing that withdrawals then will be taxed at your highest marginal rate rather than at 0% seems odd to me as well.

There are easier ways to avoid IHT.

But to the question I have deferred all my pensions and when I can defer no longer (if that ever happens) then I will treat it as a lump sum and withdraw 100% in one go, and just pay the tax. I am not interested in "income".

Since you already have a DB pension and the government one coming soon, you might want to consider drawdown for flexibility. It lets you control your money and adjust withdrawals as needed. Annuities can be good for steady income, but they’re pretty rigid.

kltrader wrote: Since you already have a DB pension and the government one coming soon, you might want to consider drawdown for flexibility. It lets you control your money and adjust withdrawals as needed. Annuities can be good for steady income, but they’re pretty rigid.

Also drawdown doesn't need to be a permanent choice. With a flexible drawdown you can change your mind later on and take out an annuity with the remainder of the pot. As well as change or pause the amount of money you're taking out of it. An annuity however, is a permanent contract and your pot is handed over for ever.

I seriously don't get the obsession with the IHT perk of drawdown - you're dead, what does it matter? And if you are taking a great pride in passing a lifechanging amount onto your kids then you've done something wrong already and should probably have probably provided more for support for them along the way - believe me, your kids will appreciate financial support far more when they are young than when they're already built their own lives and ready to retire themselves.

Yes, its a nice perk, but people should always be very clear that pensions are supposed to be to fund your retirement, not your kids'. Seriously, IHT is a terrible criteria to decide how to manage your retirement pot.

vand wrote:I seriously don't get the obsession with the IHT perk of drawdown - you're dead, what does it matter? And if you are taking a great pride in passing a lifechanging amount onto your kids then you've done something wrong already and should probably have probably provided more for support for them along the way - believe me, your kids will appreciate financial support far more when they are young than when they're already built their own lives and ready to retire themselves.

Yes, its a nice perk, but people should always be very clear that pensions are supposed to be to fund your retirement, not your kids'. Seriously, IHT is a terrible criteria to decide how to manage your retirement pot.

Possibly you don't get the "obsession", because you think that everyone with the obsession is concerned with the money.

While I totally agree that your retirement pot is there for your retirement, the nature of things is that many will die with money. If the average life expectancy for a man is 85, then half will die before and half will live longer. Do you plan your finances with the intention of being in the first half or guess that you may be in either?

Given that there is a strong likelihood that you will die with money, then should you not consider "Swedish death cleaning" your finances? You know, things like make a will and keep an updated list of your assets and where they are. IHT can be part of that.

Of course that is not the only reason that some may indulge in IHT planning. Personally I strongly object to government waste and how such waste is funded. I see it as my duty to pay a little tax as it is legal for me to do. It is NOT about the money saved.

Cheers for advice. Although I’m drawn to the drawdown route I have a feeling future economic circumstances might change thus increasing the risk factor ?

Alan24 wrote:Cheers for advice. Although I’m drawn to the drawdown route I have a feeling future economic circumstances might change thus increasing the risk factor ?

Yes the future is always an unknown risk factor, but that's been the case ever since we start paying into DC schemes. You do have the 'safety blanket' of your DB and state pensions to dilute that risk, so one approach could be to decide overall how much risk you're willing to shoulder and then look at how much proportion of your income will be from DB/SP vs drawdown and find a mixture that will feel comfortable for you. Depending on the scheme rules, you don't usually have to put your whole DC pot into drawdown, you can do a mix of TFLS, drawdown and annuity.

Fortunately I don’t need the tax free element at the moment but should I still take it as a means of saving tax ?

Alan24 wrote: Fortunately I don’t need the tax free element at the moment but should I still take it as a means of saving tax ?

Hmm, I don't think it's a case of should, but of looking at the pros and cons in your circumstances.

It's tax free at the point of taking it from a pension pot, but then if you're unable to put it all into an ISA in the same tax year and so invest outside it, then any further gain will be like any other money for CGT or other taxes. We still have £3k of CGT allowance left but depending on the amount it may take a while to get it inside your ISA. That's what I decided to do when I put my whole DC pot into drawdown (I also have some DB pension coming in).

I don't think there's any hurry - do check your scheme rules for deadlines - but if you haven't yet decided about an annuity vs drawdown I'd suggest making that decision first (and how much annuity) before taking any lump sum out.

Alan24 wrote:Fortunately I don’t need the tax free element at the moment but should I still take it as a means of saving tax ?

There are pro and cons either way.

The main advantage if you leave it in there is that it will be outside your estate for IHT if/when the time comes that you are passing on a sizeable inheritance. If that's important to you then you should only crystalize on an as-needed basis.

The advantage to taking it out sooner is that you can re-bed into ISAs and out of the clutches of income tax and TFLS rules.. The TFLS is currently 25% of your pot up to £268,250 however unless this moves up at least in line with inflation each year, it's effectively being shrunk by fiscal drag - therefore better to get it out sooner rather than later as it will likely only shrink in real terms over time.