Starting Pension drawdown, tax-efficiently

[gmaz]

While my FA is on holiday I'd like some advice on how to start taking my pensions drawdown in the most tax-efficient way so I have some talking points with the FA when she returns.

I'm just turned 60, am semi retired with a part time job that brings in about £16K pa (£3.5K to pension/dividends, £12.5K to salary)

Using the 4% drawdown guideline, I can easily afford £2K per month from one SIPP pension, and £1K pm from another SIPP. I've already had a £40K tax-free lump sum from the larger SIPP.

My wife is 61 and not working, so I've asked her to drawdown £1K pm from her pension as she can do this without paying tax? We have no mortgage and an adequate amount of savings in ISAs

What the most tax-efficient way for us to get a steady monthly income?

Thanks

[mikeiow]

gmaz said:

While my FA is on holiday I'd like some advice on how to start taking my pensions drawdown in the most tax-efficient way so I have some talking points with the FA when she returns.

I'm just turned 60, am semi retired with a part time job that brings in about £16K pa (£3.5K to pension/dividends, £12.5K to salary)

Using the 4% drawdown guideline, I can easily afford £2K per month from one SIPP pension, and £1K pm from another SIPP. I've already had a £40K tax-free lump sum from the larger SIPP.

My wife is 61 and not working, so I've asked her to drawdown £1K pm from her pension as she can do this without paying tax? We have no mortgage and an adequate amount of savings in ISAs

What the most tax-efficient way for us to get a steady monthly income?

Thanks

Tsk tsk. Imagine paying a FA, then letting them go on holiday & instad asking a bunch of forum folk for advice

Well…yes, your wife should certainly take her £12.5k zero tax allowance from somewhere, so her pensions sounds the right place.

If you plan to continue your part time job, then that is (roughly) your zero tax allowance done, so anything else is at 20%….unless you take from your ISAs.

So yes, you can take 3k from your pensions, if you accept that will be taxed at 20%. And/or take money from the ISAs with no tax due.

Are you hoping for other ways to turn those into a lower tax?
I imagine you could invest something into Venture Capital Funds to then counter the tax paid, but how complicated would you like your finances to be?


Maybe some smarter than me will pop up with ideas!

[gmaz]

mikeiow said:

Tsk tsk. Imagine paying a FA, then letting them go on holiday & instad asking a bunch of forum folk for advice

Well…yes, your wife should certainly take her £12.5k zero tax allowance from somewhere, so her pensions sounds the right place.

If you plan to continue your part time job, then that is (roughly) your zero tax allowance done, so anything else is at 20%….unless you take from your ISAs.

So yes, you can take 3k from your pensions, if you accept that will be taxed at 20%. And/or take money from the ISAs with no tax due.

Are you hoping for other ways to turn those into a lower tax?
I imagine you could invest something into Venture Capital Funds to then counter the tax paid, but how complicated would you like your finances to be?


Maybe some smarter than me will pop up with ideas!

I was wondering about taking more tax-free lump sums from the pensions and using that to avoid the 20%. That would amount to about £130K which I could invest somewhere and take a regular (tax-free?) income from there?

[dxg]

My understanding was that it was best to keep the tax free portion in the fund, then claim back tax against that for the next however many years until such time as it is used up.

If you're lucky enough to have a pension that brings you over the threshold, of course.

I wait to be corrected...

[Phil.]

mikeiow said:

gmaz said:

While my FA is on holiday I'd like some advice on how to start taking my pensions drawdown in the most tax-efficient way so I have some talking points with the FA when she returns.

I'm just turned 60, am semi retired with a part time job that brings in about £16K pa (£3.5K to pension/dividends, £12.5K to salary)

Using the 4% drawdown guideline, I can easily afford £2K per month from one SIPP pension, and £1K pm from another SIPP. I've already had a £40K tax-free lump sum from the larger SIPP.

My wife is 61 and not working, so I've asked her to drawdown £1K pm from her pension as she can do this without paying tax? We have no mortgage and an adequate amount of savings in ISAs

What the most tax-efficient way for us to get a steady monthly income?

Thanks

Tsk tsk. Imagine paying a FA, then letting them go on holiday & instad asking a bunch of forum folk for advice

Well…yes, your wife should certainly take her £12.5k zero tax allowance from somewhere, so her pensions sounds the right place.

If you plan to continue your part time job, then that is (roughly) your zero tax allowance done, so anything else is at 20%….unless you take from your ISAs.

So yes, you can take 3k from your pensions, if you accept that will be taxed at 20%. And/or take money from the ISAs with no tax due.

Are you hoping for other ways to turn those into a lower tax?
I imagine you could invest something into Venture Capital Funds to then counter the tax paid, but how complicated would you like your finances to be?


Maybe some smarter than me will pop up with ideas!

With a £16k income already, adding £36k annually (total £52k) would just push you into the higher rate band. I’d take a bit less from your pension and stay within the lower band.

[Phil.]

gmaz said:

I was wondering about taking more tax-free lump sums from the pensions and using that to avoid the 20%. That would amount to about £130K which I could invest somewhere and take a regular (tax-free?) income from there?

You can take the tax free amount anytime you want and do what you want with it. Your FA will advise you not to because (1) it reduces their fees and (2) being in a SIPP future growth is not taxed. However, if you have already reached the max tax free sum then future growth will be taxed.

Also consider that Ms. Reeves may reduce the max tax free lump sum you can take, so you need to make a decision soon about withdrawing it before the October budget. I withdrew my max tax free sum last year.

[SunsetZed]

Phil. said:

gmaz said:

I was wondering about taking more tax-free lump sums from the pensions and using that to avoid the 20%. That would amount to about £130K which I could invest somewhere and take a regular (tax-free?) income from there?

You can take the tax free amount anytime you want and do what you want with it. Your FA will advise you not to because (1) it reduces their fees and (2) being in a SIPP future growth is not taxed. However, if you have already reached the max tax free sum then future growth will be taxed.

Also consider that Ms. Reeves may reduce the max tax free lump sum you can take, so you need to make a decision soon about withdrawing it before the October budget. I withdrew my max tax free sum last year.

I agree with this, if I was at the max limit for tax free lump sum I'd be looking to take it and move it into ISA's so that the growth on it is tax free. I appreciate you only have a 20k limit for your ISA each year but you may have a partner and / or children who's limits you could utilise as well. Even if you aren't utilising an ISA the capital gains rates of 18% (basic rate tax payer) and 24% (higher rate) both give you better tax rates on gains than income tax and that's without including the annual 3k CGT allowance.

[alscar]

Phil. said:

Also consider that Ms. Reeves may reduce the max tax free lump sum you can take, so you need to make a decision soon about withdrawing it before the October budget. I withdrew my max tax free sum last year.

I also took 100% of mine for different reasons ( early inheritances for children’s house purchase funds ) and at the time said if you don’t want to take the risk of it reducing best to probably take it.
Fwiw I think it’s probably a 50/50 bet she will in October and the average suggested she may cut to is £100k.

[xeny]

Depending on how much you have in pensions, given your current pension contributions are under the MPAA, so I'd be tempted to draw from the taxed part of the pension right up to the threshold at which you start paying 40% tax. Depending on your wife's finances, you've then got 2 x £20K ISA allowances to reinvest it.

I don't see tax thresholds moving up any time soon (so with inflation they are effectively falling), money left in a pension will shortly be within the estate for IHT purposes, the sooner it is out the better, with the caveat that I'd want space in another tax shelter to reinvest it.

[gmaz]

Phil. said:

With a £16k income already, adding £36k annually (total £52k) would just push you into the higher rate band. I’d take a bit less from your pension and stay within the lower band.

Taxable Income is £12.5K, the rest goes into ad-hoc pension contribs, Employer NI, Dividends. So, £36K + 12.5K is under the higher rate.

[alscar]

mikeiow said:

Are you hoping for other ways to turn those into a lower tax?
I imagine you could invest something into Venture Capital Funds to then counter the tax paid, but how complicated would you like your finances to be?

Maybe some smarter than me will pop up with ideas!

Probably no smarter but just to add that VCT / EIS investments aren’t that complicated but should never really be invested in just for the tax relief ie they need to make sense in their own right.

[miller1899]

Phil. said:

You can take the tax free amount anytime you want and do what you want with it. Your FA will advise you not to because (1) it reduces their fees and (2) being in a SIPP future growth is not taxed. However, if you have already reached the max tax free sum then future growth will be taxed.

Also consider that Ms. Reeves may reduce the max tax free lump sum you can take, so you need to make a decision soon about withdrawing it before the October budget. I withdrew my max tax free sum last year.

I may not be ‘quoting’ correctly so sorry about that. Please can you explain the second sentence of para (2) about the max tax free sum in a bit more detail? Is this tax on withdrawal or tax for reaching a certain amount still in the SIPP? It looks like the latter.

[Phil.]

miller1899 said:

Phil. said:

You can take the tax free amount anytime you want and do what you want with it. Your FA will advise you not to because (1) it reduces their fees and (2) being in a SIPP future growth is not taxed. However, if you have already reached the max tax free sum then future growth will be taxed.

Also consider that Ms. Reeves may reduce the max tax free lump sum you can take, so you need to make a decision soon about withdrawing it before the October budget. I withdrew my max tax free sum last year.

I may not be ‘quoting’ correctly so sorry about that. Please can you explain the second sentence of para (2) about the max tax free sum in a bit more detail? Is this tax on withdrawal or tax for reaching a certain amount still in the SIPP? It looks like the latter.

The max tax free sum is 25% of your pension(s) value presently capped at £268,275. Apparently Reeves is considering reducing the cap to £100k.

[miller1899]

Thanks. What happens to the rest of it? I didn’t follow the point about further growth being taxable. Is that only when it’s withdrawn ie income tax?

[Phil.]

miller1899 said:

Thanks. What happens to the rest of it? I didn’t follow the point about further growth being taxable. Is that only when it’s withdrawn ie income tax?

Yep, the non-taxable part of your pension when draw down is taxed at the appropriate tax rate. Having said that, if you have no other income then you can draw down £12570 each year tax free as this is your personal allowance. Between £12570 and just over £50k you pay 20% and 40% above £50k.

Edited to add, that growth in your pension fund is not taxed whereas your savings/investment growth (unless in an ISA) will be taxed.

Edited by Phil. on Thursday 28th August 17:00

[miller1899]

Brill, thanks very much indeed. I am at the bottom of a steep learning curve and this is very helpful.

Well, not brill as far as Rachel’s efforts are concerned. Every time I hear the phrase ‘unearned income’ it makes me grind my teeth. No, I didn’t earn the interest in my savings account. The money generating the interest just appeared there by magic. Nothing to do with working hard and trying to save some salary. If she cuts the tax free lump sum as well it gets nearer to the point where trying to be a responsible citizen feels like the wrong thing to be doing.

[trickywoo]

gmaz said:

Taxable Income is £12.5K, the rest goes into ad-hoc pension contribs, Employer NI, Dividends. So, £36K + 12.5K is under the higher rate.

Be aware of the pension recycling rules. Not saying you’ve done anything wrong but the tax can be a nasty surprise if you stray into it.

[Phil.]

miller1899 said:

Brill, thanks very much indeed. I am at the bottom of a steep learning curve and this is very helpful.

Well, not brill as far as Rachel’s efforts are concerned. Every time I hear the phrase ‘unearned income’ it makes me grind my teeth. No, I didn’t earn the interest in my savings account. The money generating the interest just appeared there by magic. Nothing to do with working hard and trying to save some salary. If she cuts the tax free lump sum as well it gets nearer to the point where trying to be a responsible citizen feels like the wrong thing to be doing.

I’m doing my best to pay as little tax as possible under the present government as they are spaffing on all sorts of unnecessary stuff. I could take more from my pension or take some investment gains, but I resent paying tax presently. I’ve never been like this before and have paid out enormous sums in tax throughout my working life. Tax too far and tax income reduces! They need to spend less. What a novel idea.

[gmaz]

gmaz said:

I was wondering about taking more tax-free lump sums from the pensions and using that to avoid the 20%. That would amount to about £130K which I could invest somewhere and take a regular (tax-free?) income from there?

The more I'm looking into this, it appears that about £130K is "crystallized" so can be taken as drawdown tax-free(?). I'm still learning the terminology but the crystallised portion occurred when I took a £40K tax free lump sum last year. So that will keep me going until full retirement and getting the state pension in 5 years time.

[Phil.]

Your FA will clarify things for you.