Thomas,
Be careful. Any benefit paid by the state (taxable or non taxable) is not treated as ‘Relevant earnings’ for the purposes of further Pension Tax Relief. My advice would be to change your name, deactivate your PPRuNe account immediately, alter your appearance and leave the country - HMRC got massive new powers yesterday!
Recycling or churning is a particularly fine line to walk. HMRC doesn’t want to stop people growing pension benefits and using tax relief, and it offers a lot of latitude. But you have to play by its rules and observe what it wants. If you plan it right, if you document it right, if you demonstrate that your circumstances legally and fairly, fall into the spirit of the guidance, you’ll be ok. Doing that isn't too hard.
If though, you simply take your pcls and chuck it into a pension, then wait for a letter from HMRC to land on your doormat. I have done a number of sizeable contributions for clients this past month and the documentation is squared away and the justification is all there for if HMRC ever raises an inquisitive eyebrow.
Chuggers,
If Mrs C has three pots, they may be collectively large enough to allow her to take the money as she sees fit, or, possibly more likely (?), if they are modest sums, she still has a new ability to draw the money in an incredibly tax efficient way.
The Finance Act 2014 (FA14) makes reference to orphan pots that may be drawn down in one go if they are small enough (now, under FA14, the pot can be as large/small - whichever way you look at it - as £10,000). The issue which still isn’t clear is whether or not those small separate pots (up to a maximum of three) can be used irrespective of other pension wealth (ie; Mrs Chuggers may have £500,000 in one pension and 3 x £9,999 pots). The technical departments of the pension providers have all been posting slightly conflicting opinion today and npo one really knows. There isn't really a consensus opinion yet that has got any validity, so I’m waiting for the dust to settle.
There is also the new revised guidance surrounding Triviality which, under FA14, now allows clients to draw far more flexibly from a pot of up to £30,000. The question about which the jury is still out, is, if someone has £29,999 and also 3 x £9,999 would they have the option of drawing the 3 x £9,999s before turning to Triviality?
The battlelines into which tax wrapper you use are much more blurred now. A year or so ago, the conundrum may have been something as simple as ‘ISA or pension’. And whilst they both have uniquely beneficial features still, the difference is not as great. The ability to take your personal pension fund as you like and taxed at your marginal rate, if you have income as low as £12,000 is a complete game changer.
Previously, this flexible way of drawing income applied to anyone who had £20,000 guaranteed annual income and with some clients, the extraction of wealth in retirement revolved around getting that figure. But even then, the taxation was punitive. Now though, the ability to take income in retirement almost as you would take income from an investment, is open to those with (AFPS) annual income as low as £12,000.
It means that a SNCO/WO or Flt Lt or Sqn Ldr who had the choice of pension Vs ISA, and who chose ISA because although it didn’t give the tax relief, it offered unfettered access, now has to ask him/herself – why wouldn’t I want a pension which can be drawn from 55 (going up to 57 in 15 years time or so) AND get the 40% help AND possibly get my child benefit back.
Pensions just became hugely more attractive for high rate taxpayers now, who will be basic rate taxpayers in retirement. A year or so ago, we were talking about pensions as if they were dead. Now, it looks as if GAD, Drawdown as we knew it, trivial commutation etc will be abolished next year.
So assuming that you take your tax free cash, the remainder of a crystalised pot then acts broadly similarly to an investment. Look on a pension fund a little like you would an ISA, but with slightly different tax treatment.. maybe even a VCT. Withdrawals are taxed at your marginal rate but but with no tax deferred and there will be a further tax assessment on death - but it looks like no IHT attached.
Growth is nearly tax free and as I said yesterday, I would guess in pension companies all over the land, new product designers are rushing to get something ready quickly for those who are currently in capped drawdown who qualify for flex drawdown in a few days time.
Ed Milliband could divert an earthbound meteor, cure AIDS, solve global warming, consign famine to history, create a Middle Eastern love in and go paddling off Beachy Head and stub his toe on the wing of MH370.. and he'd still be treated like an idiot. What happened yesterday was unprecedented - a revolution in how we should be regarding retirement - it is not too strong to describe it in those terms. Most people reading this messageboard will be impacted because they'll have at least £12,000 from AFPS and should be beating a path to their banker, broker or adviser.
Finally.. you gotta smile. We have been told for the best part of a year that pension liberation predators are stalking our pensions – now we know why they were clamped down on – hey, George was the biggest liberator of all. To what end, and to what effect though? Hmm.