Is this retirement plan feasible?

itm2

I am trying to plan an early retirement for myself and my wife based on a part-drawdown, part-annuity strategy, and was wondering if anyone could advise on whether what I’m planning is within current UK pension & tax regulations?
My own pension funds are currently spread 50-50 between a SIPP (with Hargreaves Lansdown) and a bunch of occupational & personal pension plans. I also have a decent sized ISA investment portfiolio. The first part of the plan commences at age 55 (i.e. in 2 years time), and is intended to last 15 years until age 70. It involves joint drawdown from both my ISA savings and the SIPP fund (and does not take into account my wife’s assets, which include a property as well as savings and a small pension pot).
I would like to draw a monthly amount from the SIPP which does not exceed my personal tax allowance, and hence would hopefully be untaxed. I would supplement this income ONLY with drawdown from my ISA (and would have no income from any other sources).
At age 70 I would use the remaining funds in the SIPP and cash in the other pension funds to purchase an annuity. I estimate that these funds would collectively be worth about £350k by then. If necessary I may also look at equity release at that time – our main property is worth approx £800k, and our second property is worth about £200k (we have no mortgages and no children). I also haven’t factored in any inheritance from our parents, who are thankfully still alive. Is there anything in current tax or pension regulations which would scupper this plan? Obviously it’s based on a number of assumptions about annual spend, inflation, return on investments etc over the next 15 years, but I wanted to check the legal feasibility as a first step.

jamesd

The general plan seems OK. Some fine points:

1. You can take more from the pension, if within the GAD limit still, and pay that into a personal pension, up to £3600 gross, getting the tax relief even if you're not a tax payer. You can then later take a 25% tax free lump sum from this new pension you're accumulating.
2. Taking money from the ISA instead of the pension is betting that tax rates will be the same or lower in the future. I wouldn't want to make that bet. I'd rather take the maximum income from the pension, at least at basic rate tax, minimising the drawing on the tax free ISA pot.

gadgetmind

What type of pension is the occupation plan?
Where does state pension figure into your plans?
I assume you're going to take maximum tax free cash from all relevant pots?

gadgetmind

Oh, and how small is your wife's small pension pot?

itm2

Thanks for the feedback - I'm glad I'm not completely barking up the wrong tree. To answer the various questions:
- The occupational pensions are mostly money-purchase schemes
- You're right I forgot to mention the state pension - I plan to starting drawing this at age 70 or later, depending on how the investments fare.
- I would definitely look to take the maximum tax-free sum from each pension - perhaps re-investing in a pension as suggested
- My wife's pension pot is something like £50k, with about the same again in savings. I'm regarding all of my wife's assets apart from the property as a bonus - rainy day money.

Interesting idea re. drawing more heavily on the SIPP and perhaps re-investing in another pension. I would never have thought of that - I just love the imagination of some of the people on here!

I have no idea how much £350k will feel like as a pension fund for a 70 year old in 15 years' time, and hence how much I'll need to dip into the equity in our properties. The whole plan is exciting but more than a little scary!

atush

I would sell one or both properties before I would ever consider equity release.

gadgetmind

itm2 wrote: »

:
- The occupational pensions are mostly money-purchase schemes
- You're right I forgot to mention the state pension - I plan to starting drawing this at age 70 or later, depending on how the investments fare.

OK, here's another trick. If your non-MP occupational pensions won't exceed your personal allowance (after reducing your SIPP drawdown), then you can get the backlog of state pension at age 70 tax free! Taking these lump sums built up by deferring state pension is taxed at your marginal rate but does *NOT* push you into higher tax brackets. (Of course, the rules might have changed by then.)

I would definitely look to take the maximum tax-free sum from each pension - perhaps re-investing in a pension as suggested

Re-investing into pensions makes sense. You'll typically only get the benefit of the 25% PCLS but that's worthwhile.

With lump sums cash, 1) ISA it up, 2) spend it instead of drawing your ISAs. This is because your tax position is usually better before state pension age so you might as well reduce your unwrapped holdings and maintain/build your ISAs for afterwards. This sounds counter-intuitive, but money is fungible so protect ISA-wrapped money by spending unwrapped money.

You really need to start work on a spreadsheet to see what post-tax income you can get pre state pension and what afterwards.

Oh, another tax efficiency! Income in the form of dividends isn't subject to any more tax for a basic rate tax payer. This is a good way to get income from unwrapped cash from lump sums.

(But note that dividends could push you up a tax bracket if doing the deferred SP trick.)

My wife's pension pot is something like £50k, with about the same again in savings. I'm regarding all of my wife's assets apart from the property as a bonus - rainy day money.

Again, get what you can wrapped in ISAs and look at her tax situation in retirement.

For instance, we have all of our cash savings and unwrapped share holdings in my wife's name as her tax situation makes this beneficial both now and in retirement.

BTW, you need to think carefully about if/when/how to dispose of property because capital gains tax can get messy.

itm2

Thanks for the excellent feedback and suggestions. I have a question re. the drawdown limit/GAD calculation: Is the drawdown entitlement applied to each pension fund separately - e.g. if the GAD rate is 2% per £1,000 does this mean I can draw down 2% per each £1,000 of each pension fund, or can I draw down the whole entitlement from a single pension fund?
For example, if I have half of my pension funds in a SIPP, and half in a collection of occupational schemes, can I calculate my total drawdown entitlement based on the total value of all of my funds, but take the drawdown exclusively from the SIPP?

gadgetmind

itm2 wrote: »

if the GAD rate is 2% per £1,000 does this mean I can draw down 2% per each £1,000 of each pension fund

It's my understanding that it's per fund, BUT come drawdown time you probably want to move everything to a single provider as otherwise fees can eat you alive.

jamesd

The GAD limit is calculated by each pension provider based on the amount you have with that provider. The GAD limit under current rules won't go lower than 4.1% at age 55 for a male, which is where it would be if the 15 year gilt yield is at 2% or lower.

The best remedy for the GAD limit is to take money out of a pension at the earliest possible age and as fast as the limit allows, to accumulate a reserve invested outside the pension. Subject to considering things like tax bracket of course.

itm2

Probably a silly question, but if I want to start drawdown at 55 and re-invest the proceeds in a pension, is there any way of re-investing it in the same pension? e.g. I can see the Hargreaves Lansdown SIPP being my main pension vehicle as it's the easiest to manage online. If I drew down from this, to re-invest in a pension, would I need to set up a new pension fund for this purpose, or is there any way that I could actually recycle it back into the same fund?