Spread the tax free cash from sipp
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I don't know whether the lifetime allowance percentage that he used to crystalise part of it is counted against her. I assume not but if it matters, it should be checked.
This assumes that you're not going to be liable for inheritance tax. If you are, the 55% tax on a pension to a non-spouse can beat the IHT rate. But you can beat that by taking the income at 40% and giving it away now.
Even if you don't need the money, the optimal time to take the pension lump sum and drawdown income is likely to be at the earliest possible time. Assuming you can recycle the income into more pension contributions and other tax wrappers and leave the money invested somewhere. If you have non-spouse dependents you may need to buy additional life assurance to cover the 55% charge that crystalisation will cause to apply on inheritance to a non-spouse. This paragraph doesn't matter to you, it's just a general comment to anyone else reading along. You probably can't recycle 100% of the income but you get the IHT avoiding benefit and that's also worth having if IHT will apply to your estate.
Another advantage of doing it early is that the percentage of the lifetime allowance which is used is calculated at the time of crystalisation. Do it early and there will have been less time to grow, so the percentage used will be lower. If you're fortunate you also end up doing it at a time when markets are down, further reducing the usage. Won't matter to most people but where the lifetime allowance could be a factor it's good to know.
Thanks James,
I was aware that 100% can go to my wife if I die before crystallisation, but confused when you say that my wife and I can both take a TFC sum from the SIPP .... which is mine alone?
Although we are not working now, I do receive some follow on commissions (£7500 pa) but this will stop in the next couple of years.
My State pension is £15, 266 and I get a small occupational pension of £1,031. My wife has state of £7466 and we both have ISA and max premium bonds totaling £100k each. Although a modest IHT liability, we cannot afford to give much away at present, but are managing to balance outgoings including holidays.
We want to have better holidays for the next few years and therefore may need to draw against investments, or take the TFC in parts or in full and use some of that. My thoughts were that it may be better to have more remaining in the pension to grow than to take it out?
Perhaps I should think again about crystallising, but then more charges will follow once the HL SIPP has been crystallised.
Sam
Are you sure?
Are you saying the remaining pot after a widow dies is tax free, even if she is over 75?
So if she had some private pension the first two-and-a-half thousand p.a. or so would be tax-free. That's worth exploiting. Also, until then you might be better off with some savings in her name generating tax-free interest - you'll get about twice the 1.5% p.a. that Premium Bonds pay on average. (If you enjoy the gambling aspect of Premium Bonds, you could instead punt on the Lottery on those occasions that there's a super-duper prize in the offing.)
Wife 1 is first death and has crystallised pot. Husband gets 100% into a pension pot
Husband marries wife 2.
Husband dies. Wife 2 gets 100% of pot.
Wife 2 marries husband 2.
Wife 2 dies, husband 2 gets 100% of the pot.
Husband 2 dies unmarried, 55% tax charge.
All of this unaffected by whether any of them are younger or older than 75. If any of them had wanted any of it outside the pension pot, that portion would have had the 55% tax charge.
However, if the pot had remained uncrystallised and husband 2 was under 75, there would be no 55% tax charge on that uncrystallised portion. This would require all of those in the chain to be under 75 at the time of their death or the age 75 crystallisation would have happened.
Hmm, that's 3703 short of the flexible drawdown limit. Two years of deferring your state pension plus inflation-linked increases and maybe a small annuity purchase would take you over £20,000.
It also grows tax free inside a S&S ISA. And that provides more flexible access, though smaller range of investments. So taking money out of the pension as fast as capped drawdown lets you is likely to be a better move than taking any money out of the ISA.
Just £75 to do the GAD calculation once every three years before age 75, then once a year.
If your investments aren't changing much you could also consider switching some away from HL, where the saved commission - around 0.7-0.8% on many funds at HL - could save you money overall.
Sam
Excluding charges, in drawing 2% per annum and assuming the remaining 'pot' (£225,000) grew at say 3%, or even 2% per annum, (it has been growing better than that so far) is there a way to calculate the remaining value after say 15 years?
Just trying to get a handle on risk and reward?
Sam
No, not really. The best you can do is look at the risk of totally depleting the pot over your chosen period.
There are tables in books such as "Smarter Investing" by Tim Hale that show the risk of running out of pot given various asset allocations, but my copy is at work.
Of course, while these models use the behaviour of equities and bonds over periods of a century in the past, the future is still an unknown.
Like all religions, the Faith of the Invisible Pink Unicorns is based upon both logic and faith. We have faith that they are pink; we logically know that they are invisible because we can't see them.