How to balance FS and SIPP for pension planning

mark55man

Thanks JamesD

Will think about these and let you know how I get on - but will take a bit of thinking

kidmugsy

ermine wrote: »

if you want to bring retirement forward then do seriously consider ISA savings in your optioneering. The ISA allowance is derisory - at a typical 5% income from capital you can buy just £500 p.a. tax-free income a year, £1000 if you use both your ISA allowances.

The point of ISAs for someone who wants to bridge a gap isn't the income they'll generate; it's that he'll spend the accumulated capital while he awaits his pensions.

ermine

The point of ISAs for someone who wants to bridge a gap isn't the income they'll generate; it's that he'll spend the accumulated capital while he awaits his pensions.

If the OP is in danger of paying HRT on his pension then perhaps this is not necessarily the case if his existing pension saving rate means he is below the HRT threshold now? Even if you're paying HRT on the way in and on the way out then the pension advantage w.r.t. ISA income goes away, barring the 25% PCLS which softens the 40% to 30% on the way out. But he has to wait at least 5 years to get it.

However, I don't understand various pension options such as flexible drawdown and the like because I have no SIPP, so perhaps there are non-ISA options that have the edge in this case. 55 looks like the earliest it might be realistic for the OP to retire here, because the retirement income hit of retiring 15-10 years early is stupendous. When I did the calculations for myself there is a much bigger retirement income difference between retiring at 50 and 55 than there is between retiring at 55 and 60 (NRA in my case).

mark55man

I am well into HRT at the moment and realistically unless we seriously downsize our house 55 is unrealistic - 60 is aggressive.

I am not philosophically opposed to taking a lump sum early (eg even at 55) but would need a good reason, but that would be another part of sacrificing some longer term benefit for shorter term objectives. Eg if I took the lump sum to pay into an ISA I am gaining the tax, but losing a (hopefully) bigger lump sum later

jamesd

Provided you don't go over the £50,000 a year pension contribution limit it can be very useful to take a lump sum and income early. Limit drops to £40,000 from 2014/15 tax year, along with the lifetime allowance also dropping from £1.5 to £1.25 million.

What you can do is use income drawdown and recycle the income into more pension contributions. This gets you a second chunk of tax relief and accumulates another lump sum.

If you take lump sum money and use it to pay into an ISA you're not really losing a lump sum later because the money in the ISA would continue to grow at the same rate as in the pension if you use the same investments. The lump sum just changes location, from available within the pension to available in the ISA. But it gains you protection from future income tax increases as well, because the pension income is taxed at the then-existing rate, while the ISA income doesn't get taxed.

There's some advantage from starting early in the form of the lifetime allowance test. Taking the pension benefits early means the first test happens at the lower capital value when you first do it. So easier to stay well under the lifetime allowance and the percentage of lifetime allowance used is fixed then even if the allowance drops later. That helps to protect future growth from the test. There's a second test at age 75 but that's on the growth in the pot and the income taken reduces the growth, so taking maximum income and recycling it helps to avoid a penalty with this test. Though not perfectly of course because the income is being reinvested. This does tend to reinforce taking maximum possible pension income when you're in early retirement, though, if there's any chance at all that you might go over the lifetime allowance.

You might also investigate some use of VCT investing. The potential attraction here is that the income from these is tax free and CGT free, just like ISAs but with a much higher contribution cap. Risk level varies significantly so some care is needed, along with good diversification and limiting how much of your money is used in this way - pension and ISA are still core, not VCT.

If your wife isn't also a higher rate tax payer and if you can do it within the lifetime allowance and annual allowance it seems likely that you'll collectively end up better off by favouring pension contributions for you and ISA for her, with ISA funded for both of you from pension lump sums as they become available.

You do need to watch out for when or if you might become a higher rate tax payer from pension income, also. Pension contributions for her might end up better once you can expect to go over that point.

Regardless of income need I plan to crystalise pensions at age 55 to do the recycling.