tax/savings strategies for AFTER retirement

fizio

So, having spend lost of time and effort over the past few years on how to build up a good pension, I suddenly realised that I haven't really given any thought to what i do with all the money after I retire.
I'm around 5 years to early retirement around 55 and expect my pot to reach the £1.25M mark by then. Plus I have other ISA type investments as well.
I don't expect to cash in my pension immediatley and may well defer it for a couple of years if that is advantageous in terms of subsequently getting a better pension.
Simililarly i've no idea what to do with the 300k lump sum other than invest it as i have no debts.
Also I have a deferred DB pension which will yield over £20k so I'm thinking I need to look at flexible drawdown for my DC pension?
In amongst all this my OH has a very small pension so I need to find a way to get her an income so she at least gets to the 10k tax limit
I have read stuff about 'recycling' but not sure how that would work in my situation?
I'm assuming that once I take my pension then i can't start another pension for tax reasons?
I like to think I am very clued up on the investment side of things (have been doing max salary sacrifice, ISA, VCT etc) so I'm pretty sure I'll be in good shape to take early retirement but at some point soon I wll need to seriously work out what I do after retirement - particularly around minimising tax so any pointers appreciated

atush

Do you need more income? So do you need to recycle? With 300K, a nearly 1M pension pot., and 20K secure income it seems to me you don't. your biggest problem will be 40% tax. And Flexible DD you will qualify for, but will be taxed at 40% from what I can see?

So, do you have a spouse? Dependants? Outside savings (you say you have ISAs but not sure how much)? Inheritance tax will be a problem for you/your heirs possibly?

It will take yo a number of years to wrap that 300K, so if you have a spouse to double ISA allowances good. Even put some of the 300K into a pension for them if they don't have one. Basically, you need to use their PA if you can so unwrapped investments could go in their name.

There are VCTs and the like to save on tax. And you may want to start a programe of gifting to family to save on IT.

You may need a tax accountant here.

fizio

Thanks atush, and to answer your questions we don't have any kids and the wifes pension is currently worth £5k per annum at 60 so I am in the process of opening a sipp for her (she no longer works)

Our joint ISA's are currently around 100k

The goal for me is to avoid HRT on retirement so need to structure things in a way that I earn upto the 40% limit and the wife stays at tax free limit of 10k as joint 50k per annum is plenty.

I found a really good article on moneymotivator that has a few good ideas as well - though i can't get my head around recyling the lump sum into another pension?

quote
E.g. if you have £400,000 in your pension pot, you earn £60,000 and you’re 53 years old. You’re looking forward to a £100,000 lump sum but only need half of it to pay off your mortgage. Up your contributions to £40,000 and live off the other £20,000 or your partner’s salary for 2 years. You hit 55 and take the lump sum. Recycle £51,960 back into your pension and you haven’t made a “significant increase” to your contributions, as they’ve only increased by 29.99% over the “set period of time” set out here (which is an HMRC link contained in the notice that you’ve linked to in your article):

jamesd

Are you sure that you are not already over the lifetime allowance? A potential pot size of £1.25 million plus £20,000 of DB pension implies that you are likely to be either already over the current £1.5 million limit or will be over next years' £1.25 million and should urgently act to determine your current position and seek protection of the current £1.5 million limit by electing to use Fixed Protection 2014 or, with more relaxed timeline Individual Protection 2014 if appropriate.

You anticipate a defined benefit pension of £20,000 a year. For lifetime allowance the value is multiplied by 20 so this potentially uses £400,000 of your lifetime allowance already. So you're potentially above the current £1.5 million limit if your personal pension pot is worth £1.1 million or more. Potentially because I'm not sure how its current lifetime allowance value is worked out.

The Individual Protection 2014 option, if the value is over £1.25 million today, would allow you to continue making more pension contributions, though with the prospect of investment growth its unclear that doing more than it takes to get employer matching would be worthwhile.

So first thing is, are you already over either £1.25 or £1.5 million and above the lifetime allowance?

jamesd

haf63 wrote: »

I don't expect to cash in my pension immediatley and may well defer it for a couple of years if that is advantageous in terms of subsequently getting a better pension.

There's no usual reason why deferring for a couple of years would produce a better pension. It would also increase your risk of exceeding the lifetime allowance.

An annuity would pay more at an older age, if everything else remained the same, but that's not a reason to delay starting drawdown and taking out the appropriate amount of income until any annuities are bought.

For the lifetime allowance, in general, the sooner you start taking benefits the better, because values have fewer years to grow and you get a percentage of the lifetime allowance a the time benefits are taken, not a possibly lower future allowance. Market timing might make some delay worthwhile, though, if you have reason to expect a drop in value that would use less of the allowance and want to remain invested through the possible drop.

haf63 wrote: »

Simililarly i've no idea what to do with the 300k lump sum other than invest it as i have no debts.

Investing it is fine. You can over time move it into the S&S ISA and perhaps VCT tax wrappers and generate tax free income that way from it.

Given your proximity to the lifetime allowance and talk of possibly reducing it to £1 million in the next parliament, if Liberal Democrat policies are enacted, it may be prudent to switch to VCT investing now for new money, other than any it takes to get employer pension matching.

haf63 wrote: »

Also I have a deferred DB pension which will yield over £20k so I'm thinking I need to look at flexible drawdown for my DC pension?

You're eligible for flexible drawdown once the total value of guaranteed pensions that are being paid to you reaches £20,000. Until they are in payment you can use capped drawdown instead. You should probably take at least enough income under capped drawdown to get to the higher rate tax threshold.

Say you're at the current lifetime allowance limit of £1.5 million with £400,000 of that used in a DB pension. You take 25% tax free lump sum from the DC pot leaving £825,000 of the £1.1 million. GAD limit for capped drawdown is about 6% at 55, so that's potentially £49,500 of income. Higher rate income tax doesn't seem avoidable except by not taking income you can usefully take or by trying to avoid getting to a pot size of that level by using other tax wrappers.

It also doesn't really seem worth avoiding higher rate tax when you can then use VCT investing to get 30% tax relief, capped at the income tax paid in the year.

haf63 wrote: »

I have read stuff about 'recycling' but not sure how that would work in my situation?

Recycling really applies only if it's money from your pensions going into more pension contributions for you. there is no limit on the amount of that recycling you can do from pension income, other than the annual allowance and PAYE income levels. There are limits on recycling of the lump sum and you'd need to manage that with care if you did it. But in your case the lifetime allowance and your likely higher rate tax situation in retirement probably makes recycling inappropriate for you compared to alternatives.

haf63 wrote: »

I'm assuming that once I take my pension then i can't start another pension for tax reasons?

There is no prohibition on that and a person is entitled to income tax relief on the higher of £3600 gross or their earned income each year, both subject to the annual contribution cap as well.

Does your wife have any taxable income? I'm wondering whether she'd be eligible for VCT tax relief or not.

Given your own proximity to the lifetime allowance it seems sensible to make pension contributions for her rather than any basic rate contributions for yourself. Possibly also for higher rate if you look to be as close to the lifetime allowance as it initially appears you may be.

Key pointer at the moment is determining your lifetime allowance situation.

jamesd

haf63 wrote: »

E.g. if you have £400,000 in your pension pot, you earn £60,000 and you’re 53 years old. You’re looking forward to a £100,000 lump sum but only need half of it to pay off your mortgage. Up your contributions to £40,000 and live off the other £20,000 or your partner’s salary for 2 years. You hit 55 and take the lump sum. Recycle £51,960 back into your pension and you haven’t made a “significant increase” to your contributions, as they’ve only increased by 29.99% over the “set period of time”

51960 / 40000 = 1.299 so not 30% more.

One of the ways of staying within the recycling rule limits is to avoid increasing your pension contributions by more than 30% in the two years before or after taking the lump sum on cumulative basis. This example explains that you can raise your contribution before that window begins so that the contributions don't increase by more than 30% within the window.

The annual contribution limit will be £40,000 from next year so the example suggests:

year 0: £40,000 contribution
test year 1: £40,000 contribution
test year 2: £40,000 contribution
lump sum taken, no increase in contribution because it's already at the limit.

Year 0 is the year before the two previous years in the cumulative test, year 1 the first of the two before years, year 2 the second.

However, I think that the example predates the £40,000 limit because it's impossible to put £51,960 into the pension pot because that exceeds the annual allowance and there is no carry-forward available from the previous three years because the whole allowance was used. I assume it was written when the allowance was £50,000 or higher so there would be some carry-forward available to allow the increase.

A more current example might use £37,200 a year for years 0, 1 and 2. That allows 1.3 * £37,200 = £48,360 in year 4. That requires £8,360 of carry-forward and £8,400 is available.

Then the contributions in following years have to drop back to £37,200 for two years to avoid going over the 30% in those two years. After that the contributions can be increased again freely to use the new accumulated carry-forward outside the window.

Personally, I think that the much reduced annual allowances have eliminated the reason for the recycling rules existing, by capping how much can be recycled more cleanly.

jackyann

You sound as if you already quite comfortably off so my usual advice may not apply.
I think it is worthwhile assessing your home and making sure that it is as efficient as possible & as future-friendly as possible.
Although it would not suit me personally, some people invest in a holiday home. It seems worthwhile if your family / friends can make good use of it and if you can rent it out. Consider the latter very carefully, it often doesn't bring in much income, although I have friends who do very well out of theirs.

kidmugsy

You persuade your wife to divorce you. The court gives her half of both your pensions. Then you kiss and make up. Prob solved.

Many years later you might remarry to avoid difficulties with inheritance tax.

fizio

lots here for me to digest so will do thats slowly but in answers to jamesd's initial comment about LTA then I can confirm that I am currently below £1m as combined DB+DC pot. My frozen DB is stated as 750k (at age 60) and my DC is circa 400k today as I have been putting in the max salary sacrifice for quite a few years. Obviously I'm my DB will be reduced for early retirement so it makes sense for me to keep maxing the DC contributions.
My plan is to somehow try and coincide my early retirement with the pot being around 1.25M but there are too many variables to be precise.

grey_gym_sock

presumably you will take the DB pension at 60? if that uses £750k of LTA, then that only leaves £500k for DC, assuming your LTA is £1.25m. if you claim fixed protection, giving an LTA of £.15m, then there's £750k room for DC.

surely a £400k pot is likely to grow to more than £500k over 5 years, even without further contributions. perhaps you should consider claiming fixed protection - though that involves not making further pension contributions after this tax year (or you lose the protection again).

i wouldn't worry about recycling rules. because LTA issues will make further pension contributions unattractive quite soon, even if you decide to continue beyond this tax year.

unfortunately, kidmugsy's divorce-and-remarriage plan is the best way to equalize pension provision between a married couple. failing that, your wife can at least put £3600 (inc. tax relief) into a pension each year.

fizio

grey gym sock,
2 comments on LTA
1. I plan to retire well below 60 (55-56) so my 750K will more likely be around 600k. This means I can keep growing my DC pot from current 400k to maybe 600k in 5 years via salary sacrifice - plus fund growth. I may have to reduce salary sacrifice closer to the end to ensure i don't exceed the 1.25 LTA by too much
2. My pot right now is below £1m so the LTA protection doesn't really help as i need a few more years

getting divorced is a bit drastic (currently) and yes I am alredy putting in the £3600 SIPP for OH