Can I achieve 4k per month post tax?

siegfried

Anybody want to run with this?

Married male born June 1951 (therefore 61 now) hoping to retire May 2015 (age 63). 2 non dependent (well, semi independent) children.
Assets:
SIPP currently £75k and funded at £1600 pcm (so expected to be £113k + any capital growth at expected retirement date)
S&S ISA currently £120k, potentially £140k at ERD, before capital growth (or loss)
£285k crystallised pension fund with MetLife matures March 2015
£1k pa level annuity clawed out of Eq Life
Approx £300k realised at ERD by sale of my share of my business. Exact amount will depend on the taxman and valuation on the day.
£100k rental property, the rent yield matches the mortgage payments which end Nov 2019. Approx £30k will be outstanding at ERD
Family home worth about £650k free of mortgage, we'll probably think about downsizing in about 2025 or thereabouts (when it gets too much for us to handle)
Some other savings, premium bonds and a small FTSE investment portfolio total £30k max.
Additional state pension, according to a 2011 forecast, will be £26 per week. SRP date is June 2016.

Liabilities: The Wife

My question is, should any of you megastar whizz kids wish to tackle it, whether I can achieve £4000 pcm (or more, preferably !) net of tax at ERD and how could this be achieved ?
I do have an IFA but I'm sure that there is more than one way to produce an income and still leave something for the kids.

Happy Easter!

Siegfried

mania112

I don't think it's too tricky to value this (Goal = £48k pa net):

£113k (SIPP)
£140k (ISA)
£285k (MetLife)
£300k (business)
£70k (equity in property)
£30k (others)

£938k TOTAL

Estimate an annuity rate of 4% (could be more or less...)

£35,183.76 (annual annuity)
£ 1,000.00 (existing annuity)
£36,183.76 Gross at ERD

Plus state pension(s) within a couple of years after, let's say:

£6,000

Then you have the ability to downsize and perhaps convert a further £350,000 to annuity:

£14,000

£56,183.76 Gross Final tally

When all is done, you'll pay tax which will be more or less what you want to be left with.... i think!

mania112

Should also mention that you can't combine Pension and other cash in an Annuity, will be a couple of Annuities (purchased life annuity + lifetime annuity)

kidmugsy

mania112 wrote: »

Should also mention that you can't combine Pension and other cash in an Annuity, will be a couple of Annuities (purchased life annuity + lifetime annuity)

Personally I'd be loathe to go for both a pension annuity and a Purchased Life Annuity - eggs & baskets. But I have no argument with the thrust of the arithmetic.

siegfried

Thanks for the thoughts. I think that you demonstrate that this can't be done with conventional pension products. I'm obviously committed to an annuity of some sort with the crystallised pension but I wonder whether a better, or more tax efficient at least, income can be generated by using a phased approach? I'm not looking to release equity on my home for many years but when I do so it will no doubt bolster any income stream diminished by capital erosion and / or the effects of inflation. Capital preservation is useful only if it passes to my kids rather than to Mr Taxman.

kidmugsy

siegfried wrote: »

I'm obviously committed to an annuity of some sort with the crystallised pension

You do know about Income Withdrawal, do you?

jamesd

How does the tax situation of your wife compare to yours? Lots of margin before higher rate tax for her? Transfer of substantial assets to her could greatly help the tax situation.

If you were to purchase a level single life annuity and add the income from that to the state pensions and existing annuity to produce total guaranteed income of at least £20,000 you could use flexible drawdown on the remaining money in a pension pot at any rate you like. This can make large pension contributions now very tax effective for you, without the capital lock up that normally comes with pensions. Though you'd want to try to split income between you and wife so neither of you gets into higher rate tax, which would imply keeping much of the non-pension investment money in her name. Can use capped drawdown until state pensions start.

Income drawdown pension pots, either capped or flexible drawdown, are 100% inheritable by a spouse, so that'll take care of her income needs assuming you die first and makes it desirable to use income drawdown for the parts of the pots not required to get you to the flexible drawdown minimum.

A singe life level annuity for a 63 year old man pays around 5.5% of the capital. Assuming £140 a week of state pension entitlement (basic + additional plus 5% total for inflation) that's the first £7,280 of the £20,000 target. To get to £20,000 with a level annuity would take about £230,000 of a pension pot. Comfortably within what the MetLife one contains.

Moving on to the rest:

£85k (SIPP after lump sum)
£55k (MetLife after spending £230k on annuity)
£300k (business)
£28k (SIPP lump sum)
£30k (others)
£498k total
Can produce around 3% of completely sustainable income so taxable income:

£14.9k from above
£20k from level annuity plus state pensions
=> £34.9k taxable income
=> £29.9k after tax income (10k allowance and 20% basic rate tax)

£140k (ISA)
=> £4.2k tax free income at 3%

Total after tax income of £29.9k + 4.2k = £34.1k

So using a very cautious 3% income rate that would probably have no capital loss or even growth as you age you can't get to £48k net yet.

Revise the assumed income rate to 4%, still middling cautious gets you to:

£19.9k (from 498k) + £20k taxable => £39.9k taxable => £33.9k after tax
plus 4% of £140k => £5.6k
Total now £39.5k after tax.

Still short of £48k. Now I'll pretend that you have wife's ISA allowance, a few years to get money shifted into it and transfer your share of the business to her before selling, as a CGT-free transfer. I'll also assume you move the £28k SIPP lump sum into S&S ISA.

Income then looks like
£5.6k (£140k taxable pot for you, income at 4% (300k business and 28k SIPP lump sum and 30k other removed)
£20k (annuities and state pensions for you)
=> £25.6k taxable income
=> £22.5k after tax income

£198 tax free pot (4% from £198k = 140k ISA + 28k SIPP lump sum + 39kother moved to ISA)
=> £7.9k tax free income

Total income in your own name now £22.5k + £7.9k = 30.4k

With the £300k business in wife's name I'll pretend it's all now moved to S&S ISA and tax free so produces £12k of tax free income. It'll take ten years to get there.

Now at £30.4k + 12k = £42.4k after tax income. Still a bit short of £48k after tax income target.

But to get to the target you need only around £133k of capital if you can generate income at 4% tax free from it. Downsizing will deliver that and perhaps more.

To cover you until you get there I'll start assuming you take 7% income from pension pots in capped drawdown and will assume no capital loss while doing it for simplicity (I'm using roughly age 65 GAD calculation, assuming gilt yield of 3% and 120% income factor to get to about 7%). The taxable income split now looks like this:

£120k (85k SIPP after lump sum + 35k Met Life)
Take 7% from this part => £8.4k
Take 4% from the remaining £30k => £1.2k
Annuities and your own state pensions £20k
Total of £29.6k taxable -> £25.7k after tax
Plus the £7.9k tax free now totals £33.6k for you
Add £12k from the wife's £300k business part gets you to £45.6k

You can get this to 48k easily enough form money outside the pension pot or can go into flexible drawdown to extract money from the pension pot at any rate needed.

I'm assuming flexible drawdown use here because it's desirable for flexibility and because it'll let you put as much as you can into the pension initially, then take it out again at any rate needed. That gains you £1k of tax relief for every £20k of gross pension contributions you can put in (assuming basic rate tax relief, so 16k put in, 4k added, 25% taken out as lump sum is £1k tax gain, remaining taxed at 20% so no tax gain).

This is also part of why I'm assuming transferring the business share to your wife, some scenarios here could push you into higher rate tax if you don't do at least some of that and it's nice not to pay higher rate tax.

You don't strictly need to use flexible drawdown, though.

£70k (equity in property), ignored, not liquid or producing income yet. But it'd take you over £48k eventually.

If you're willing to accept loss of capital over time and reduced inheritance you should be able to take a considerably higher income, in the £55-60k after tax income range. Or a fair bit more than that with more careful calculations of income flows.

So my general approach would be:

1. Shift £300k from business to wife to reduce your taxable income so you can increase pension drawings without higher rate tax.
2. Maximise pension contributions, sacrificing ISA if needed.
3. Maximum permitted income from pension pots in capped drawdown.
4. Annuity to get to flexible drawdown once state pensions start.
5. Flexible drawdown to higher rate limit to extract money from pension into other tax wrappers.
6. top up capital and adjust income when downsizing, or adjust income sooner if there's unacceptable capital depletion.

mania112

^ blimey.

You've put me to shame (although sort arrived at more or less the same figure, no?)

jamesd

Yes, similar result though I didn't make much use of the property downsizing option in income calculations.

siegfried

That's brilliant, thanks jamesd. A lot to digest. You have proved that it is theoretically do-able, with only moderate risk.
It is often said (and sometimes on here) that early 60s is at the lower end of the age at which one should be positioning one's finances against IHT. But actually it would appear that any retirement strategy does have to take account of this factor (can't see the politicians keeping any manifesto promises in this respect, any time soon!). I know that the tax tail shouldn't wag the investment dog but if there are two ways of achieving the same result one should always choose the less-tax option.
Thanks again
Siegfried

kidmugsy

If you then find yourselves with surplus income in your late sixties and seventies, you can gift it to the children (or to a Trust for them and their sprogs) free of Inheritance Tax. At that age you have to view capital as potentially exposed to IHT but income as free from same.