Spread the tax free cash from sipp

edited 30 November -1 at 1:00AM in Pensions, Annuities & Retirement Planning
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  • SeniorSamSeniorSam Forumite
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    Thanks gadgetmind, I have 'tweaked my last post a little, but thought that there was a way to do this 'roughly'. Perhaps someone else can comment?

    Sam
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
  • edited 29 October 2012 at 8:11PM
    jamesdjamesd Forumite
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    edited 29 October 2012 at 8:11PM
    If you have a mixture of investments including equities and bonds you could probably draw 2% and be very confident that over the long term the real, after inflation, value won't change at all or will increase gradually. 2% income is very low. Between four and six percent is probably sustainable with moderate increase or decrease rate, depending on just what the mixture of investments is and how they do.

    What I'd be inclined to do is take out at least enough to get to the higher income tax rate threshold, to grow the amount in other tax wrappers, like fully using the S&S ISA limit for you both.

    While mentioning investments, if you have a lot of gilt or high quality corporate bond investments, now would be a good time to shift some money out of those, since yields are around record lows, which means values are around record highs. It's a great time to be selling.

    I replied to some earlier posts in a different order from the order in which the posts were made, so my reply to you would be after the one to Clifford_Pope.
  • SeniorSamSeniorSam Forumite
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    Thanks James,

    Please can you clarify the statement you made ....'Since you're still both under 75 you can both take a lump sum and go into capped drawdown now'. I don't understand how my wife can take TFC?

    The 2% growth assumption was very conservative, but hopefully a low figure. I would invest the remaining 'pot' of £225k in very low risk funds, which I have been invested in since moving my SIPP to HL.

    Assuming a low growth would help to ensure 2% was a minimum growth and if I took say £10k per annum rather than the maximum, is there a way to calculate a withdrawal from the pot and basing that on low growth, forecast how long the pot would last or depreciate?

    Sam
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
  • jamesdjamesd Forumite
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    Your wife could take TFC if she had a pension pot in her own name. At the time I wrote that, I didn't know that she didn't have a pension pot of her own. She can't take TFC from your pot, though of course you could and could give the money to her if you wanted to.

    The answer to your question hugely depends on the investments you choose. With bonds (but not gilts or high quality, see previous reply) and commercial property, assuming 2% inflation, 1% charges and 2% income I don't expect the real value to change, or expect it to increase. Add some equity funds like Invesco Perpetual High Income and it'd shift to pretty strong expectation of increasing.
  • SeniorSamSeniorSam Forumite
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    Thanks James,

    The accumulation funds I have been investing in are Invesco Perpetual Corporate Bond, Inv Perp Distribution Fund, Inv Perp High INcome and a small amount in Skandia Global Best Ideas (this one has not been so good).

    I would continue with the first three following crystallisation, as they have performed well, but wanted to get the 'feel' of future expectations.

    The two downsides I see are the fact that once I have crystallised and taken the TFC of £75k, that amount is then within my estate and would add to my IHT liability. Also the remaining 'pot' would be subject to 55% tax if taken as a lump sum, although I have indicated to my long term wife (50 years), that she would be better off with taking a pension.

    Leaving crystallisation a little longer means that the total pension fund could be paid without tax if I die before 75.

    The other option may be to take 50% TFC and use the remaining fund to drawdown and have part of the income tax free.

    Sam
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
  • jamesdjamesd Forumite
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    Other than Skandia those look like quite good choices, though perhaps you might want to add a global tracker and maybe a little in an emerging markets fund. That's to help generate capital growth and have increased non-UK money to increase inflation-beating potential and get a bit more diversification out of the UK.

    Yes, that £75k would be within your estate for IHT so that's an issue to consider. Until you die an issue to consider is the potential for better tax treatment of growth and income if you were to gradually reinvest it within an ISA. Maybe more IHT later but perhaps saving of income tax along the way, later.

    Say you put the whole £75k into S&S ISA investments. No tax taking the 75k out and no income tax to account for on any income you might take from the 75k later. That potentially lets you take more out of the pension pot at basic rate tax and potentially eliminate from your estate by giving it away (grandchildren buying first homes maybe, a use I like for such money?). If you don't give away the money, the increased proportion of tax free income from the ISA means you'll be paying less income tax and you could potentially meet all of your income needs using less of the pension money. And that saves you money while you're alive, to the eventual benefit of whoever inherits as well as you now.

    That reasoning is why I tend to favour taking money out of pensions and shifting it into ISA-wrapped investments.

    Have you liked into the cost of term life insurance? It tends not to be very expensive to buy it and it can be an inexpensive way to handle the potential increased tax cost if someone other than your wife ends up inheriting.

    Is there much reason to expect you to die before you reach 75? The normal mortality rates (percentage dying each year) are still fairly low at 71 and if in normal good health half of men can expect to make it to their late 80s, the rest longer. So I tend to think of you having a planning horizon of at least until you're 90-95.

    For IHT it is probably better to have the money in a pension pot because IHT is probably more expensive than the 55% tax charge. But you can still potentially save more money overall by getting it out now and saving income tax until you die.
  • edited 30 October 2012 at 4:36PM
    SeniorSamSeniorSam Forumite
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    edited 30 October 2012 at 4:36PM
    Thanks James,

    I appreciate you taking time with your answers, although I'm still not sure which way to go. The insurance side may be a consideration, although other than some Asthma problem, health is reasonable.

    I have always been a little wary of stocks and shares and all but one of my wife's ISA's are in cash, which we look to move each year if rates warrant it. Moving to S & S Isa's would still bring it into the estate, although we plan to have some expensive holidays in the next few years on the basis that ' you can't take it with you' and whilst health is reasonable, enjoy the retirement more.

    Another investment consideration could be another Trust, with the option for Trustees to loan sums to whoever they wish, A decreasing term assurance (intervivos) for £30k over 7 years would cover the IHT liability.

    It's a little like a juggler ........... so many balls to throw up in the air, but I am trying not to drop any!

    Sam
    I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, so my comments are just meant to be helpful.
  • jamesdjamesd Forumite
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    I can guarantee that you'll drop some balls, that's inevitable. :) But you're already in a very strong position and can afford some of that dropping. :)

    I suppose I should write a bit more about the 55% tax charge. It's on all the money in the pension pot at the time. What happens if you take the 25% lump sum out of the pension pot? You pay the 55% on only the remaining 75%. Inheritance tax on the 25%. That could well be a better deal than 55% on it all.
  • kidmugsykidmugsy Forumite
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    SeniorSam wrote: »
    ...

    The two downsides I see are the fact that once I have crystallised and taken the TFC of £75k, that amount is then within my estate and would add to my IHT liability. Also the remaining 'pot' would be subject to 55% tax if taken as a lump sum, although I have indicated to my long term wife (50 years), that she would be better off with taking a pension.

    Leaving crystallisation a little longer means that the total pension fund could be paid without tax if I die before 75.

    ...
    Sam

    It was not long ago that I read that HMRC are challenging cases where people have tried to avoid IHT by deferring crystallising their pensions. Be warned; delay might not save your estate a penny in IHT. (I am no expert: is there one around?)
    Free the dunston one next time too.
  • kidmugsykidmugsy Forumite
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    I'm still no expert but googling turned up this.
    http://www.hmrc.gov.uk/manuals/ihtmanual/IHTM17092.htm
    Free the dunston one next time too.
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