Confused, you bet

Jake'sGran

santamed wrote:

to age 65. On todays prices the selling price for my ISAs unit trusts is just under 70,000 (plus depreciating interest over 3 years) plus my forces pension of £3500pa. Should give me at least 28000 per annum for next 3 years.

So, you are going to sell them to hold in cash? Seems a shame to lose the ISA wrapper when you must be a tax payer. We all have different life styles but we manage on half the sum you mention for each of the next three years
- ours is a quiet life though. Try to make best use of your money by transferring to better unit trusts/OEICS which can pay out an income if you choose that type. And, with the sums involved please make sure you have up to date wills drawn up in such a way so as not to be giving the exchequer large amounts in IHT. Seems like you have had too many advisers offering poor advice.

jamesd

Using the ISA money to live on looks like a bad idea that would lose you 2100 a year in after-tax income in retirement without making you better off now.

Assume that you achieve 28000 target income in retirement. At 6% drawdown from the ISA money it can produce 4200 of that income, not taxable and not counting for age allowance reduction. That reduces the taxable part to 23800 and that saves you some of the age allowance. Ideally you want to get below 20100-24590 in income range where age allowance reduction happens. If you achieve that you save 477 a year in tax.

Instead it appears that you should be trying to increase the portion in ISAs by 7-14,000 a year so that ever increasing portions of your pension don't count against age allowance and tax.

To achieve that you can use the following general approach, staggering pension start dates. I'll assume income drawdown at 6% of fund value, not taking an income from ISA yet. I also assume that you're after 28000 after tax income each year.

[HTML] 0.06 Drawdown income %
year pens takn lump sum drawdn fnd drawdn inc total inc ISA cont Final inc tax on
1 119,000 29750 89250 5355 35105 7000 28105 320
2 104,000 26000 167250 10035 36035 7000 29035 5000
3 91,000 22750 235500 14130 36880 7000 29880 9095[/HTML]

End result is starting 314000 of the pension which has an ongoing fund of 235500 producing 14130 taxable income each year at 6%. The ISA value has gone up from 70,000 to 91,000 and at 6% produces tax and age allowance effect free 5460 a year. Add in 3500 taxable forces pension and you're at 17630 taxable plus 5460 non-taxed per year and still 2500 away from losing money due to tax due to age allowance reduction. 36000 in untaken pension at 6% adds another 2160 taxable, still below the age allowance reduction threshold. After tax you're at more than 22750 a year in income.

Your plan: use the 70000 ISA now, then ongoing you are at 6% of 350000 = 21000 + 3500 = 24500 taxable and have lost effectively all of your age allowance. Using the same rough 20% tax calculation you're down to around 20600 after tax (for simplicity I ignored the 10% tax range in all the calculations).

What I outlined saves that 500 a year in tax on reduced age allowance, plus tax on the 5460 income from the ISA. You also have a larger very flexible ISA fund you can draw on in emergencies, while the inflexible pension portion is reduced.

Your wife could adopt a similar approach to increasing the ISA component of her income, starting 28000 of pension each year to get 7000 tax-free lump sum to invest in ISA so her income is also shielded from tax and age allowance effects.

Beyond this period, taking the maximum drawdown and putting the excess above income requirement into ISA investments would gradually shift the income from taxable to untaxed (and also readily inheritable by any children if that matters to you).

You can buy annuities instead of using drawdown but you have a large fund and the drawdown approach would deliver more income and ongoing growth in fund value if you take modest risk. Your option, though.

A little bit of fiddling around but taking your current income more efficiently is worth doing. You have AVCs, phased retirement plan, SERPS with no lump sum and possibly other things so this is a bit too simple for your actual situation but it shows the sort of thing a good IFA should be able to work out for you. I've also ignored possible basic state pension and additional state pension, which may make it desirable to shield more income somehow.

EdInvestor

santamed wrote:

Having been sold (and misold) a collection of Phased Retirement plan, personal pensions, FSAVC, stakeholder and SERPS my wife and I should have I value of around £500,000 between us. (Split approx £150000 wife and 350000 me) This is in addition to a £3500 pa forces pension I am currently receiving.

The simple answer is to "take benefits" from these pensions now, instead of waiting to 65.This will give you tax free cash of 87,500 without touching your ISAs (leave them alone). The rest would go into into drawdown in a SIPP - but you do not need to take an income yet if you don't want to.It may be best to spend the tax free cash ( also using it to top up your ISAs every year) and wait till you get the higher age allowance at 65 before drawing the (taxable) pension income.

Subject to checks that the pensions don't contain valuable guarantees.You might need 2 drawdown arrangements - one at a lifeco to include the PR money and one at a low cost SIPP for the rest.

santamed

between the phased retirement plan (which is with Scott Equit) and a SIPP drawdown plan? Im have been trying to read through the pile of paperwork that IFA dumped on me (I know you are busy so just read through that when you have time). From what I can see the fund is split into a thousand or so funds that I can take a 25% tax free sum plus (I presume) an annuity on request every year between 65 and 75 when I then have to put the balance into an annuity. Am I reading this right or is there a simple explanation. I also notice with this fund there is a hefty reduction for trasferring. Just in passing I notice the split on the investments included hefty % into Tech and Japan right at the top of the boom in 2000. Expert?

dunstonh

From what I can see the fund is split into a thousand or so funds that I can take a 25% tax free sum plus

Even I dont use that many funds!!! (i think you mean policies)

Am I reading this right

I dont think so but not that far off.

Just in passing I notice the split on the investments included hefty % into Tech and Japan right at the top of the boom in 2000. Expert?

Japan is one sector, technology is global specialist sector and has been doing quite well of late. You wouldnt expect to be heavy in those but you would expect some coverage (although global specialist is always best spread far and wide). How much you invest in those sectors depends on your risk profile.

Im have been trying to read through the pile of paperwork that IFA dumped on me (I know you are busy so just read through that when you have time)

The communication between you and your adviser is rubbish. I dont know which one of you is at fault there. Perhaps both of you but unless you can communicate with each other, then there is no point you wasting your time using him and he wasting his time with you.

EdInvestor

dunstonh wrote:

Even I dont use that many funds!!!

LOL

The communication between you and your adviser is rubbish.

Spot on. A phased retirement plan is one in which you put your fund in drawdown and then convert a bit of it every year into an annuity ( hence the 1000 policies) With some plans you may take a proportionate small bit of the tax free cash at the same time, which means you pay less tax on that slice of your income.

It may be helpful for the OP to list all the pensions (including state pensions) and other products he has acquired so comments can be made and he can get to understand his finances a bit better.

IN the past year the rules have changed regarding income drawdown, annuities and SIPPs which can help quite a bit.But it's difficult to make suggestions without having a more specific idea of what assets are already held and their value - and what can (or can't) be done with them - some pensions are still restricted..

In particular getting the tax situation right could be quite tricky.

santamed

Thanks for the replies todate from everyone, a steep learning curve.

My largest holding is in the Phased Retirement with the rest in a FSAVC, a Stakeholder, a SERPS and a Personal Pension. My wifes is all in a Personal Pension.

I note there is a 10% difference between the stated value and transfer value/available for annuity on the Phased Retirement plan which somewhat inflates the value because there is no way that I would be able to go to age 75 without taking some of the value. So I presume the 10% is split amongst the 1000 policies and I will be penalised each time I take a lump of it.

It would be nice to think that it was possible to go to a number of IFAs and ask them to come up with a plan and a cost and then choose which ever you considered to offer the best solution at the right price. Sorry makes it sound like buying a holiday, but you know what I mean.

I know on this site there seems to be a few qualified IFAs offering advice and giving their time at no gain to themselves. It must be galling for them at times to be part of an organisation where so many of their 'collegues' have created such an atmosphere of mistrust in the advising and selling of financial products.