Final Salary Pension - Tax Free Lump Sum

gadgetmind

bigfreddiel wrote: »

why are dividends more tax efficient than interest?

It's complicated, and you do need to look at your personal tax situation, but for a basic rate tax payer, there is no more tax on dividends whereas interest is subject to basic rate tax.

The best approach is to use income (earned, pension or interest) to use your personal alllowance, and use dividend income for the rest of your basic rate band (remember 10% tax credit!). Capital Gains stacks "on top of" all of this, but does have its own allowance,

Balancing earned income, interest income, dividend income, and capital gains, between two partners, while also ensuring that both/one retain their age related personal allowance, is one of those ninja tricks regards retirement.

I'm not sure I'd trust either an IFA or my accountant to get this right. It all has to come from my own spreadsheets with (maybe!) one of said professions to sanity check it.

My spreadsheets that model this extend out for the next 22 years. The rules might change in this time. Oh well, I guess it will keep my brain young.

bigfreddiel

gadgetmind wrote: »

It's complicated, and you do need to look at your personal tax situation, but for a basic rate tax payer, there is no more tax on dividends whereas interest is subject to basic rate tax.

The best approach is to use income (earned, pension or interest) to use your personal alllowance, and use dividend income for the rest of your basic rate band (remember 10% tax credit!). Capital Gains stacks "on top of" all of this, but does have its own allowance,

well we all know that there is no more tax on dividends for basic rate tax payers and all my savings are in tax free pots earning on avg 5% I'm not sure divis would beat that considering the wild fluctuations on the market and the effect it would have on any portfolio of shares/funds.

so i'm happy with my returns and thanks for your comprehensive answer.

fj

Party_Animal

I've looked into this as several of us are in a similar position. I'm not as clued up as a lot of the financial experts on here but I'm fairly sure that no one knows which is the best option. You're basically gambling on how long you're going to live when you retire. If you live to be a hundred you'd have been better off taking the minimum lump sum and vice versa. I'm opting for the maximum lump sum. I figure I'll need more in the early years to carry on my world tour while I still can. If I end up in a home withe someone wiping my a*se I won't need much spending money.

gadgetmind

bigfreddiel wrote: »

all my savings are in tax free pots

Mine would be if it wasn't for the restrictions on annual ISA subscriptions and the (ever shrinking!) cap on what you can pay into pensions.

I'm not sure divis would beat that considering the wild fluctuations on the market and the effect it would have on any portfolio of shares/funds.

My dividend portfolio is currently showing a capital profit and is set to return 5.7% on original investment this year, tax free. My holdings (OK, my wife's!) are in companies with a history of increasing dividends year-on-year, so I expect this 5.7%, and the capital value, to increase over the decades, albeit with the odd dip and isolated failure. This is not our only planned retirement income and we hold a multi-year cash buffer to cover the dips.

Yorkie1

Has she double checked whether it will continue to be uprated by the RPI? Some final salary schemes are changing to CPI.

bigfreddiel

gadgetmind wrote: »

Mine would be if it wasn't for the restrictions on annual ISA subscriptions and the (ever shrinking!) cap on what you can pay into pensions.



My dividend portfolio is currently showing a capital profit and is set to return 5.7% on original investment this year, tax free. My holdings (OK, my wife's!) are in companies with a history of increasing dividends year-on-year, so I expect this 5.7%, and the capital value, to increase over the decades, albeit with the odd dip and isolated failure. This is not our only planned retirement income and we hold a multi-year cash buffer to cover the dips.

Not that impressive - i'm getting 7+% tax free with no worries about market dips at all on half of my pot and 5% tax free on the rest - this is on approx £200k

fj

gadgetmind

bigfreddiel wrote: »

Not that impressive - i'm getting 7+% tax free with no worries about market dips at all on half of my pot and 5% tax free on the rest - this is on approx £200k

1) This is all an individual risk/reward play rather than who can !!!! highest up the wall.
2) Sadly, only a fraction, way less than half, of my current portfolio is tax free due to the restrictive ISA/pension limits.

However, if you know the numbers, you're in bonds, fixed or index linked. Zero equities? Really?

Loughton_Monkey

dunstonh wrote: »

.....Howver, you have the personal circumstances to consider. Poor health and reduced spouse pension benefits (especially if spouse has little or no provision for self) may make it better to take the lump sum....

Although this probably doesn't apply to the person in question here [no spouse], this is an interesting one.

I can't speak for all schemes, but my 'main' final salary scheme gives a spouse pension of 50% of my 'full' pension. I took my lump sum and reduced pension, but that means my wife will receive roughly 67% of that on my death i.e. the same as had I chosen the full pension.

Lokolo

Going away from the maths of things....

You only live once, take out the lump sum, take a very long holiday, splash the cash and enjoy life whilst she can..... assuming the regular income will be enough to live off.

WaxiesDargle

take the lump sum everytime....I had a similar scenario with my final salary pension...it would take a few years to make up your 34 grand from a full pension payment without commutation

there's no pockets in a shroud and no-one knows how long they will live for....take the money and use it at your leisure