PENSION FUND RECYCLING-
SHOULD I TAKE AN INCOME?
Since the change in pension rules, The rules only allow tax-free cash 4. There is no element of pre-
Defer now and
clients taking income withdrawal sum recycling provided that:-
as an unsecured pension can elect
to take no income from their pen-
sion fund. We have seen some of
1. The tax-free lump sum does
not exceed 1% of the life
Due to these rules there has been a
move to keep things simple and
time allowance (currently avoid recycling tax-free lump
our clients choosing to do this. Is
£1,650,000); sums. Whilst this approach is John S Eames - Managing Director
taking zero income the right
prudent, we have to remember that
thing to do, even when there is 2. Cumulative new contribu- these rules only apply to tax-free
no need for additional income? tions do not exceed 30% The value of your pension For how long can you afford Over the same period, from
cash sums and the same
of the cash sum taken; restrictions do not apply to fund may have fallen in the to forego your annuity December 1999 to June
We have covered the restrictions past few months, making it income? 2007, annuity rates
recycling pension income. There
on the recycling of tax-free lump 3. Contributions are not “signif- tempting to leave the fund for single males declined by
can be major inheritance tax and
sums in a previous newsletter. icantly greater” i.e. over invested. almost 20%. Annuity rates
tax-free lump sum advantages
30% greater than the previ- How certain are you that can fall because of increasing
available as shown in the example.
ous contribution level. Yet, with continued market your alternative sources of life expectancy over the
Example:- uncertainty and clearly no income can continue for as long-term. In the last 3
guarantee of the market long as is required? Are you decades, life expectancy for
Mr and Mrs Ferguson have just reached age 60 and decide to take the tax-free lump sum from Mr Ferguson’s pension fund, but making a quick return to at risk of being forced to a male at age 65 has risen by
take no income as they have ample income from other sources. This leaves a residual fund of £350,000 which is fully invested. 2007 levels, appreciating all draw income at an even 3 years per decade. Annuity
At age 75 the fund is worth £911,000, when the decision has to be made to take an Alternatively Secured Pension or an annuity.
the facts before delaying the worse time? rates can also fall because
purchase of an annuity is interest rates are falling.
If at age 60, he had chosen to take £7,200 each year as income from the pension fund and paid £3,600 each year into new critical.
plans for himself and his wife – what difference would this make? How certain are you that the Defer now and pay later?
Deferral could be the right markets will recover within
At age 75, the pension fund value of the existing plan is now only £724,000, but there is an additional £178,000 in the two new decision, but you should The example overleaf shows
plans. The total value is £9,000 less, but they can take another £44,500 as tax-free lump sums from the new plans and we have consider the following ques- the effect of deferring
significantly improved the death benefits position. tions: annuity purchase by 1 year,
In December 1999, the FTSE
from age 65 to 66. It
If Mr Ferguson dies just before age 75, a 35% tax charge would be raised against the whole fund. But if they choose to Can you afford to forego 100 peaked at 6930. The assumes that the fund is
establish new plans at age 60 the fund value of the new plans would normally be paid out tax-free on the death of either Mr or your annuity? latest peak was at 6752 in
£50,000 at age 65 and, if left
Mrs Ferguson before age 75, providing a potential tax saving of over £60,000 if they both die just before age 75. June 2007 – more than 7 invested, will grow by 7%
If you can continue to work years later. per year before charges and
If either partner continues to work, contributions over £3,600 each year up to their annual earnings can be made which will or live off your assets, you that you buy a standard
improve the situation even further. may be able to live without annuity.
your pension for some time, How certain are you that
These examples are based on Winterthur Life’s product charges and are based upon 7% annual growth and investment in a fund with a 0.35% annual management charge. annuity rates will improve
but do you wish to continue
within this period?
working? Continued overleaf
It should be noted that the value of the underlying investments and the income from them can fall as well as rise and you may get back less than you invested, especially in the early years. The
past is not necessarily a guide to future performance. Levels and bases of, and reliefs from, taxation are subject to change. The tax reliefs referred to are those currently applying and their
value depends on individual circumstances. These investments are intended for the medium to long term. Investments in Venture Capital Trusts carry a greater risk than some other invest-
SEE OUR NEW WEBSITE
ments and the investment is classified as “not readily realisable”. All information contained in this issue is based on our understanding of current legislation. We have taken reasonable care
to ensure statements of fact and opinion contained in this newsletter are fair and accurate in all material respects but cannot guarantee such accuracy.
John Eames Limited
19 Britton Street London EC1M 5NZ
John Eames www.jeames.co.uk
Telephone: 020-7608-1455 Facsimile: 020-7608-1450 Limited visit our website to access information about our services
email@example.com www.jeames.co.uk July 2008
Authorised and regulated by the Financial Services Authority. Registered in England and Wales No. 3014273 Issue No.19 For further details please email us at firstname.lastname@example.org or call on 020 7608 1455
. . . . . Defer now and pay later ? A GUIDE
Annuity purchase at age 65
Annual Total income Annual
Annuity purchase at age 66
Total income Difference in total
75 £3,683.04 £40,513.44 £3,981.48 £39,814.80 -£698.64
78 £3,683.04 £51,562.56 £3,981.48 £51,759.24 £196.68
Fro m 6 t h A p r i l t h e r e w e r e s i g n i f i c a n t c h a n g e s t o h o w I S A s w o r k .
80 £3,683.04 £58,928.64 £3,981.48 £59,722.20 £793.56
Individual Savings Accounts saved in cash with one provider. You will need to select the
Annuity rates could get better if, (ISAs) are a simple way to The remainder of the £7,200 Stocks & Shares ISA provider
So if you defer now, at age 65, for Again if interest rates were to fall by
interest rates, or bond yields rise, minimise the tax payable on can be invested in stocks and with whom you want to have
just one year, it could be 13 years 1% over the period, the income
investments. shares with either the same or your ISA. This can be your
before you get your money back. from the annuity purchased at 66 overall life expectancy decreases or
could fall to £3,460 per annum. In your health deteriorates and you another provider. existing provider if it offers a
From 6 April there were
If interest rates were to fall by 1% this case you would never get your qualify for an enhanced annuity. Stocks & Shares ISA, or you
significant changes to how
over the period, the income from money back. Strong fund performances could For example, you can choose to can appoint a new provider.
ISAs work. Below we aim to
the annuity purchased at 66 could improve the value of the fund, save £1,000 in a Cash ISA with Please contact us for advice.
outline the general changes.
fall to £3,703 per annum. In this If you are in a With Profits fund, you increase the tax-free cash sum that one provider and £6,200 in a
case you would only get your should remember it may be subject can be taken, with more money Stocks & Shares ISA with a You must not withdraw the
PEPs became Stocks &
money back if you lived 184 years to a Market Value Adjustment (MVA) being available to buy an annuity. If different provider. money and invest it in a
after age 65! if benefits are not taken at the
you die before taking benefits, the
Stocks & Shares ISA yourself,
selected retirement age. Even if you Existing PEP accounts auto- Can Cash ISAs be transferred as it will count against your
whole of the fund may be available
The table below shows what would switch to a cash fund, sufficient matically became Stocks & annual ISA investment
as cash to your heirs. Additionally, to Stocks & Shares ISAs?
happen if the fund didn’t rise at all. growth may not be achieved to Shares ISAs on 6 April 2008. allowance.
any guarantee period under an Yes. Under the new rules you
In this case, you would have to wait make up for the loss of income. No action is required by you.
annuity would finish later as a result will be able to transfer some or
100 years until you were age 165 to
of the later purchase. New ISA structure and all the value of the renamed Can I save money in a Cash
get your money back. What benefits are there in
deferring? Figures provided by Just Retirement investment limits Cash ISAs from previous tax ISA and transfer it into a
years into Stocks & Shares Stocks & Shares ISA in the
Mini and Maxi ISAs no longer same year?
ISAs without affecting your
exist. They have been replaced
annual ISA investment Yes. Such transfers must be the
Annuity purchase at age 65 Annuity purchase at age 66 under the new rules by Cash
allowance. whole amount saved in that tax
Age Annual Total income Annual Total income Difference in total
ISAs and Stocks & Shares ISAs.
Mini Cash ISAs and the cash year in that Cash ISA up to the
income received income received income
components of Maxi ISAs have How do I transfer the money day of the transfer. Once the
65 £3,683.04 £3,683.04 £0.00 £0.00 -£3,683.04 money saved in that tax year is
automatically become Cash in my Cash ISA to a Stocks &
70 £3,683.04 £22,098.24 £3,720.24 £18,601.20 -£3,497.04 ISAs. Shares ISA? transferred from a Cash ISA to a
75 £3,683.04 £40,513.44 £3,720.24 £37,202.40 -£3,311.04 Stocks & Shares ISA, it is treat-
Exactly the same way as you
80 £3,683.04 £51,562.56 £3,720.24 £55,803.60 -£3,125.04 The annual ISA investment ed as if it had been invested
would transfer your ISA to
90 £3,683.04 £58,928.64 £3,720.24 £93,006.00 -£2,753.04 allowance is now £7,200. Up to directly into a Stocks & Shares
165 £3,683.04 £371,987.04 £3,720.24 £372,024.00 £39.96 £3,600 of this allowance can be ISA in that tax year.
For further details please email us at email@example.com or call on 020 7608 1455 www.jeames.co.uk For further details please email us at firstname.lastname@example.org or call on 020 7608 1455 www.jeames.co.uk