After many years in the build phase, I decided to convert my SIPP to income drawdown in June 2012. Here’s my first anniversary review
I must say I was pleasantly surprised at the changes introduced by the Chancellor in his budget last week and I have been very busy over the past few days revising and updating my ebook “DIY Pensions”
. This process has resulted in me reflecting on my longer term pension drawdown plans.
Luckily, I did not purchase an annuity in 2012 and I feel sorry for those who have done this in recent years as there is nothing that can be done to reverse the situation.
From April 2015, George Osborne says "pensioners will have complete freedom to drawdown as much or as little of their private pension pot as they wish. Let me be clear, no one will have to buy an annuity"
Currently, anything withdrawn over and above the 25% tax free lump sum is taxed at 55% so most pensioners opt for some form of annuity or income/flexible drawdown.
As far as I can determine, both income (or capped) drawdown and flexible drawdown will become redundant from next year as they will be replaced by the new, more generous 'take as much or as little as you want' pension. The amounts taken over and above the tax free lump sum will be taxed at marginal rates - for most people this will be 20%.
In addition, from tomorrow, 27th March there are some significant changes coming into play :-
The GAD rate on income drawdown plans will be increased from 120% to 150%;
The flexible drawdown limit will be reduced from £20,000 to £12,000;
Pensioners can access their entire pension pot as cash where the total of all their pensions does not exceed £30,000 (previously £18,000) under the rules for trivial commutation. Those with larger pension pots will be able to access up to 3 small pots not exceeding £10,000 in total (previously 2 pots and £2,000)
The Starting Plan
I regard my drawdown sipp as a sort of index-linked annuity substitute. The 60% equity portion is invested in a number of income generating investment trusts, all of which have a good track record of raising dividends each year in line with or a little ahead of inflation. The yield combined with the fixed income part of my portfolio is around 5% per annum.
The original plan was to allow this portfolio to run for the next 20 to 25 years and take a gradually rising income each year. However, the budget announcement has created a new playing field providing more options to consider.
. Carry on as if nothing has changed. The plan is working exactly as planned and there’s the old saying ‘if it aint broke, don’t try to fix it
However, the rising income taken out will always be taxable and although no tax is paid currently, in a few years time, the new flat rate state pension will be due - around £8,000 per annum.
The admin fees on the sipp drawdown with Youinvest (formerly Sippdeal) have recently been increased from £90 to £120 p.a.
. From April next year, sell the investments, close the SIPP and withdraw the entire amount. This would be treated as income for the 2015/16 tax year and the sum would (mostly) be taxed at 20%.The proceeds could be reinvested in my ISA over the coming 3 or 4 years and, of course, the income taken from the ISAs is not taxable and does not need to be declared for tax.
. My current taxable income is quite small and within the £10,000 nil tax threshold as, apart from my sipp drawdown income, most of my remaining income is generated by my ISA. I could therefore significantly increase the current level of drawdown and take larger amounts from my sipp to bring me up to the nil rate limit for income tax - £10,500 from April 2015 - and invest, as before, in my ISA.
Advantages of Transfer of Funds to ISA
Any monies moved from my drawdown sipp to ISA would be reinvested in exactly the same investment trusts producing exactly the same income as before. So, apart from the sale (sipp) and repurchase (ISA) costs, I believe it would be far more advantageous to have a rising tax-free income over the coming 20 or 25 years rather than a taxable income.
Furthermore, the new flexibility for ISAs announced in the budget would permit a transfer between stocks & shares ISA to a cash ISA should circumstances make such a move attractive.
The final advantage would be the possibility of passing capital to children or grandchildren in a more tax efficient way. Currently funds in a pension drawdown are taxed at 55% on death but that may change over the coming year and there is now a consultation process underway to review this rate.
Nothing is likely to change for the coming year unless I increase the level of drawdown to take advantage of the new 150% GAD rate which means I could take an extra 25% or so income from my sipp.
The decision can therefore take shape over the next 12 months but my present thoughts are to go with option 3.
I would be pleased to hear the opinions of others on this situation - feel free to leave a comment.
I wonder what Homer would do?!