Retirement, tax and perhaps a SIPP

mr_rush

Hello all

I'd be grateful for some advise for a relative who is approaching 60 this year. At this point he plans to take 24 hr retirement and then return to his job part time until the age of 65.

He has a final salary pension scheme that will pay him a pension of approx. £46K/annum from 60. His part-time income will be £79K/annum giving a total income of £125K (clearly a very fortunate place and something that has taken huge effort to achieve).

We have been discussing tax and further pension planning. Clearly every £2 earned above £100K results in £1 loss of personal allowance (PA). Therefore by earning £20K above the £100K limit, the whole personal allowance is lost. In addition the extra £25K earned is taxed at 40% and therefore when combined with loss of PA, you are essentially taxed at 70% of so. Due to the nature of his work, he cannot negotiate earning 'less' to bring total income below £100K.

An alternative I thought was to invest anything above £100K into a SIPP until the age of 65.

If £25K was invested in a SIPP per year, this would bring income to £100K and regain full PA. Furthermore, you would get 40% tax relief on the £25K investment 'costing you' only £15K.

Over 5 years a pot worth £125K could be accumulated (assuming no growth or losses) that would have cost you £75K. Plus you would benefit from PA every year for 5 years.

At 65, you could take £31.25K out as tax-free lump sum leaving £93.75K in the 'pot'. This £93.75K has only 'cost you' £43.75K (£75-31.25).

You could then enter income drawdown on the pot at approx. £5K per year and therefore be 'in profit' after year 9. This does not include the PA benefit gained between age 60-65.

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Now, I know that the situation described is better than the majority of people but I really would value advice on my proposal.

To me it seems like a no brainer to invest in a SIPP, bring your threshold below £100K for PA and then enter drawdown at 65.

I worry about the Lifetime Allowance.

For the final salary pension the value of the pot calculates out to £1,058,000. Well below the £1.5million LTA. However the Govt has announced cuts to LTA and I am unclear how this will affect things if you start contributing to a SIPP.

Is your LTA 'crystalized' when you retire and if so is that age 60 with final salary or at 65 with you take income drawdown?

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Would welcome thoughts and suggestions.

jamesd

You're right to worry about the lifetime allowance. He can reduce the chance of exceeding it by taking income every few years because that triggers the first test against the lifetime allowance, before there's been much investment growth.

Given his final salary pension he can use flexible drawdown whenever he wants to he's able to get at the whole pension pot, limited by not being able to make more pension contributions after starting flexible drawdown and by the income being taxable, other than the 25% tax free lump sum.

As a higher rate tax payer in retirement he'll have some reduction in the possible gain from the pension but still, for income over £100,000 it's useful.

He might also want to look into VCTs for income. Those provide 30% tax relief on the way in and the income is tax free. That will probably provide him a better tax benefit than the pension. But he does need to consider his risk tolerance and not do this with too much of the money.

Crystallisation events happen when you take benefits. That's income or lump sum or both. If in drawdown there's another test at 75.

kidmugsy

Or he could decide that the next five years would be a particularly good time to donate to charity.

It might also be a good time to make gifts out of surplus income, to avoid Inheritance Tax.

Or all three.

mania112

What your suggesting makes good sense (I might suggest a contract which can be converted to Drawdown - the likes of Aviva/Scottish Life/Axa Wealth and many more offer this).

The next Lifetime Allowance limit will be £1.25m (2014/15) - I also think the goverment are allowing the opportunity to protect against the decrease of LTA but there would be no use of this as you aren't allowed to accrue further benefits.

If LTA is breached (and it will be close) the charge will be 25% of excess, if taking a secured income, and 55% if taken as cash.

richone

hi,

the amount of lifetime allowance will be tested when benefits are taken, so if the value of the final salary pension is £1,058,000 and taken next tax year (2013/14) this would use £1,058,000/LTA of £1,500,000 = 70.53%. (if you waited to take these benefits until 2014/15 when lifetime allowance is £1.25m then it would use up 84.64%)

This leaves 29.47% of the prevailing lifetime allowance to use in the future. If the lifetime allowance is £1.25M (2014/15) then benefits of up to £368,375 could be taken.

Other thoughts:
Possible to pay in contributions next tax year then elect for Fixed Protection 2014 and keep a Lifetime Allowance of £1.5m, although no more contributions from 2014/15 if you want to keep higher Lifetime Allowance.

If you breach Lifetime Allowance is it such a bad thing if you had tax relief at 60% and can get money out as a lump sum out of your pension less 55% tax.

Need to keep an eye on remaining Lifetime Allowance, if you want to avoid 55% tax, but is relatively easy to manage by timing of taking benefits and drawing income out.