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  • FIRST POST
    • Frobisher2
    • By Frobisher2 29th Sep 17, 11:05 AM
    • 3Posts
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    Frobisher2
    Getting it back out....
    • #1
    • 29th Sep 17, 11:05 AM
    Getting it back out.... 29th Sep 17 at 11:05 AM
    Although I was aware, one issue has caught me as I did not face up to it.

    Since retiring early, I had been taking out money from my SIPP under the capped drawdown rules. Partly to avoid unnecessary tax, and partly just in case I wanted to use the old contribution rules in the future.

    It is now clear to me that I would not be able to withdraw all my SIPPs (and move into ISAs when possible) in any reasonable timeframe without going into higher tax levels. Although I could delay my state pension, I have a couple of (small) DB pensions that will use up most of my personal allowance.

    I guess I should have been taking the maximum out I could, up to the basic rate threshold.

    Anyway, my wife has an almost unused personal allowance. I think, if we divorced, she would share the pensions, and we would be able to use her allowance. However, that has other drawbacks… It does show, however, that a personal pension is considered a joint asset, and a joint potential income, in some circumstances.

    Am I missing something, or is there any other way to reduce my tax liability? I don’t mind basic rate tax, but higher rate is not so palatable.

    F
Page 1
    • missile
    • By missile 29th Sep 17, 11:19 AM
    • 8,948 Posts
    • 4,336 Thanks
    missile
    • #2
    • 29th Sep 17, 11:19 AM
    • #2
    • 29th Sep 17, 11:19 AM
    I have a similar issue.

    We are all aware that putting money into pension has tax advantage. With hindsight it seems obvious that one should also consider tax liability on drawdown.

    Getting divorced seems a very extreme option :-(
    "A nation's greatness is measured by how it treats its weakest members." ~ Mahatma Gandhi
    Ride hard or stay home
    • Dazed and confused
    • By Dazed and confused 29th Sep 17, 11:35 AM
    • 1,767 Posts
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    Dazed and confused
    • #3
    • 29th Sep 17, 11:35 AM
    • #3
    • 29th Sep 17, 11:35 AM
    If you are an elderly pensioner make sure you have claimed the Married Couples Allowance as this will save you between £326 and £800+ in tax year per year (assuming you should be paying at least £326 in the first place).

    If still a youngster you could try and persuade your wife to apply for the Marriage Allowance. She will lose 10% of her personal allowance (which shouldn't make her start paying tax in this tax year according to your op) and in return you can get a reduction in whatever your tax bill is (upto a maximum of £230 this tax year).

    She could apply for the past two tax years as well but obviously her income in those years may mean there is no benefit in doing so.

    She will probably find this more palatable than divorce
    • Frobisher2
    • By Frobisher2 29th Sep 17, 11:44 AM
    • 3 Posts
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    Frobisher2
    • #4
    • 29th Sep 17, 11:44 AM
    • #4
    • 29th Sep 17, 11:44 AM
    D and C: Marriage allowance, yes done that, thanks.

    I am beginning to think, what with ISA allowance at £20K per year, capital gains tax for non-Isa investments having a £11k+ allowance and a 10% tax rate after that, and dividends £5k/7,5% allowance/tax (and that is EACH for a couple), it may not make sense to save into DC fund beyond a certain, fairly low, level.
    • bigadaj
    • By bigadaj 29th Sep 17, 12:37 PM
    • 10,323 Posts
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    bigadaj
    • #5
    • 29th Sep 17, 12:37 PM
    • #5
    • 29th Sep 17, 12:37 PM
    D and C: Marriage allowance, yes done that, thanks.

    I am beginning to think, what with ISA allowance at £20K per year, capital gains tax for non-Isa investments having a £11k+ allowance and a 10% tax rate after that, and dividends £5k/7,5% allowance/tax (and that is EACH for a couple), it may not make sense to save into DC fund beyond a certain, fairly low, level.
    Originally posted by Frobisher2
    Certainly does if you are a higher rate taxpayer whilst earning and a standard rate taxpayer when retired, if that isn't the case then there are arguments both ways.
    • noh
    • By noh 29th Sep 17, 12:51 PM
    • 5,118 Posts
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    noh
    • #6
    • 29th Sep 17, 12:51 PM
    • #6
    • 29th Sep 17, 12:51 PM
    Dividends will be taxed at 0% on the first £2000 from next tax year.
    Last edited by noh; 29-09-2017 at 12:53 PM.
    • Linton
    • By Linton 29th Sep 17, 1:48 PM
    • 8,332 Posts
    • 8,225 Thanks
    Linton
    • #7
    • 29th Sep 17, 1:48 PM
    • #7
    • 29th Sep 17, 1:48 PM
    D and C: Marriage allowance, yes done that, thanks.

    I am beginning to think, what with ISA allowance at £20K per year, capital gains tax for non-Isa investments having a £11k+ allowance and a 10% tax rate after that, and dividends £5k/7,5% allowance/tax (and that is EACH for a couple), it may not make sense to save into DC fund beyond a certain, fairly low, level.
    Originally posted by Frobisher2
    Trying to get below the tax band under which you made your contributions is certainly a factor in DC/drawdown pension planning. If you pay higher rate tax in work then contributing to a pension is almost a no-brainer.

    If you are a basic rate contributor it turns out that an ISA isnt as good a replacement as it may seem. Lets compare a DC pot of £240K with the equivalent ISA of £192K drawn down at 4% assuming no employer pension contribution...

    DC pension
    - Drawdown at 4% of initial pot gives £9600 of which £2400 is tax free leaving £7200.
    - Added to the current SP of around £8300 gives £15500
    - tax on £15500 is £4000 at 20% = £800
    - net income=£9600-£800=£8800
    ISA drawdown
    - Drawdown at 4% of initial pot gives a net income of £7680
    Last edited by Linton; 29-09-2017 at 1:50 PM.
    • GunJack
    • By GunJack 29th Sep 17, 2:36 PM
    • 9,794 Posts
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    GunJack
    • #8
    • 29th Sep 17, 2:36 PM
    • #8
    • 29th Sep 17, 2:36 PM
    maybe defer state or DB pensions for a while??
    ......Gettin' There, Wherever There is......
    • Linton
    • By Linton 29th Sep 17, 3:08 PM
    • 8,332 Posts
    • 8,225 Thanks
    Linton
    • #9
    • 29th Sep 17, 3:08 PM
    • #9
    • 29th Sep 17, 3:08 PM
    maybe defer state or DB pensions for a while??
    Originally posted by GunJack
    If the SPA is post April 2016 the benefit of 5.8% per year SP deferred makes it unattractive to defer beyond a small number of years so an extra £8300 drawn down/year isnt going to make a lot of difference for a reasonably sized pot. But I havent worked out the maths.
    • Malthusian
    • By Malthusian 29th Sep 17, 3:52 PM
    • 3,077 Posts
    • 4,465 Thanks
    Malthusian
    Anyway, my wife has an almost unused personal allowance. I think, if we divorced, she would share the pensions, and we would be able to use her allowance. However, that has other drawbacks…
    Originally posted by Frobisher2
    Many - you would have to live apart for several years for a judge to grant you a divorce, and given that we're talking about the personal allowance, the extra cost of maintaining two houses would probably wipe out any tax savings.

    This is of course a fairly minor problem next to the pain of being apart if you love each other, and if you don't love each other, the possibility that your ex-wife may decide she'd rather remain an independent lady and keep your pension. In which case you've lost a lot more than the taxman would have had.

    Tax relief is not supposed to be free money, in theory it should be matched by tax at the other end, although only after you've had many years of no tax on income and gains, and 25% of it actually is free money. In reality of course we all know pensions are at their most attractive when you can get higher rate tax relief at one end and pay basic rate tax or less at the other, and maybe get an NI saving into the bargain. But if you can't, you're still almost certainly better off than if you hadn't made the pension contribution, unless you've really screwed up.

    If you could have made your pension even more tax-efficient but missed the chance, there's no use crying over spilt allowances.
    • Frobisher2
    • By Frobisher2 2nd Oct 17, 11:46 AM
    • 3 Posts
    • 0 Thanks
    Frobisher2
    Tax relief is not supposed to be free money, in theory it should be matched by tax at the other end, although only after you've had many years of no tax on income and gains, and 25% of it actually is free money. In reality of course we all know pensions are at their most attractive when you can get higher rate tax relief at one end and pay basic rate tax or less at the other, and maybe get an NI saving into the bargain.
    .
    Originally posted by Malthusian
    Having no tax on gains or income while in the SIPP is of no benefit if your are taxed at the same rate when taking it out. Granted the TFLS is a saving (OK, apart from the TFLS, what have the romans ever done for us?).

    However, given 30+ years of investment growth, you could find yourself not paying BR tax on the way IN but having to pay HR tax on the way OUT, if you want to take it out in a reasonable timeframe.
    • bigadaj
    • By bigadaj 2nd Oct 17, 2:58 PM
    • 10,323 Posts
    • 6,620 Thanks
    bigadaj
    Having no tax on gains or income while in the SIPP is of no benefit if your are taxed at the same rate when taking it out. Granted the TFLS is a saving (OK, apart from the TFLS, what have the romans ever done for us?).

    However, given 30+ years of investment growth, you could find yourself not paying BR tax on the way IN but having to pay HR tax on the way OUT, if you want to take it out in a reasonable timeframe.
    Originally posted by Frobisher2
    It's a risk which is why many consider pension contributions a no brainer for HR taxpayers, but marginal for basic rate taxpayers.

    The other point to consider is whether these tax rates will remain the same, looking over many decades then tax rates within these bands can vary dramatically, and currently are at relative lows. We have supposedly been through a period of austerity but whilst the deficit may have reduced the debt certainly hasn't, only way to manage an economy is to borrow, tax or make cuts.
    • Triumph13
    • By Triumph13 2nd Oct 17, 3:44 PM
    • 1,073 Posts
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    Triumph13
    "having to pay HR tax on the way OUT, if you want to take it out in a reasonable timeframe."
    Originally posted by Frobisher2
    I'm not sure you've grasped the basic premise of pensions if you are wanting to take the money out "in a reasonable timeframe". The whole idea is that you are supposed to take it out slowly over decades, living on the proceeds.
    Last edited by Triumph13; 02-10-2017 at 11:27 PM.
    • Malthusian
    • By Malthusian 3rd Oct 17, 9:30 AM
    • 3,077 Posts
    • 4,465 Thanks
    Malthusian
    Having no tax on gains or income while in the SIPP is of no benefit if your are taxed at the same rate when taking it out.
    Originally posted by Frobisher2
    It is of some benefit if the alternative is to invest it in your own name and pay income and capital gains tax.

    However, with ISA allowances, dividend allowances, capital gains allowances etc, for many people there is not a great deal of benefit in the "tax free growth" part of the equation, and by far the best thing about pensions is tax relief on the way in.

    However, given 30+ years of investment growth, you could find yourself not paying BR tax on the way IN but having to pay HR tax on the way OUT, if you want to take it out in a reasonable timeframe.
    Paying higher rate tax on pension income falls squarely into the category of "nice problems to have". In my experience it tends to happen mostly when you have a massive final salary pension that in itself takes you into the higher rate bracket. Most people, even those of high net worth, can manage their affairs to stay under the higher rate threshold once employment income is out of the way.
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