Funding Early Retirement Before Taking Final Salary Benefits

jonbo300

Hi all, I’m a first time poster and I’d be grateful for any constructive comments and advice. I am aged 58 and I have suddenly had to take medical retirement from work.

I have a defined contribution company pension fund of £400,000 with AVIVA and I also have a final salary scheme from which I plan to take a yearly sum of £20,000 in 5 years time at the normal retirement date of the scheme, when I am aged 63.

From a financial settlement, I have £50000 saved mainly in 2 Santandar 123 current accounts paying 3% interest, and I am mortgage and debt free.

I am wondering how to fund the period of 5 years from now until aged 63, when I will start taking benefits from the final salary scheme. I reckon I would need about £20000 net per year.

I originally had been thinking that I should live off the £50000 Santandar savings for 2 years and then enter income drawdown from the defined contribution scheme and take £20000 per year (25% tax free of £4000 and 75% taxable of £16000).

However, I suddenly thought that it might be better to take £10000 per year from the Santandar savings accounts now, and from April 2015, under the new pension freedoms, take a further annual sum of £10000 from the defined contribution scheme through phased income drawdown. I believe that the £10000 sum taken from the defined contribution scheme would be effectively tax free as this amount would be within the personal allowance. I will have no further earned income, so I reckon that I would not be liable for income tax as I should be below the threshold.

I’d welcome any comments as there are probably areas I haven’t considered, or realised the implications of.

Thanks


jonbo300

green_man

Firstly - Have you inquired as to whether you can take your final Salary pension early, especially if you retired due to ill health this is usually an option.

If we discount this option then you should be able to draw down £13330 per year from your pot (25% tax fee and the rest within your personal allowance) without paying tax, and then just fund the gap with your savings. This seems like the best option but you may need to wait until next year to see what options your pension provider gives you in this respect.

AlwaysLearnin

Sounds good in principle, however you're going to have to pay tax on some of the £400k (unless you plan to keep a lot of it in the pension to pass on outside of inheritance tax...?), therefore it might be better to spread it out over a longer period rather than risking paying HR tax at some point.

jonbo300

Thanks very much for the replies. I appreciate your points, and that of inheritance tax implications. I will look into the idea of taking the final salary early due ill health and check if that would be beneficial and whether there would be any penalties for taking it earlier.

Thanks again

jonbo300

jamesd

jonbo300 wrote: »

I have a defined contribution company pension fund of £400,000 with AVIVA and I also have a final salary scheme from which I plan to take a yearly sum of £20,000 in 5 years time at the normal retirement date of the scheme, when I am aged 63. ... From a financial settlement, I have £50000 saved mainly in 2 Santandar 123 current accounts paying 3% interest, and I am mortgage and debt free. ... I am wondering how to fund the period of 5 years from now until aged 63, when I will start taking benefits from the final salary scheme. I reckon I would need about £20000 net per year.

I originally had been thinking that I should live off the £50000 Santandar savings for 2 years and then enter income drawdown from the defined contribution scheme and take £20000 per year (25% tax free of £4000 and 75% taxable of £16000). However, I suddenly thought that it might be better to take £10000 per year from the Santandar savings accounts now, and from April 2015, under the new pension freedoms, take a further annual sum of £10000 from the defined contribution scheme through phased income drawdown. I believe that the £10000 sum taken from the defined contribution scheme would be effectively tax free as this amount would be within the personal allowance.

Why wait until April 2015? You can take a 25% tax free lump sum and enter capped income drawdown now. The GAD limit calculation for you will allow taking of more than your proposed £10,000 a year from the pot in drawdown, which requires just 3.3% of the £300,0000 pot remaining after taking a £100,000 tax free lump sum from the pot.

GAD limit calculation for capped drawdown for you this year is 7.05% of the pot at 58 using the 2.50% December gilt yield, so £21,150 from the £300,000 pot remaining after taking 25% tax free lump sum.

I suggest that you do not touch the Santander savings at all but instead look to move money as rapidly as possible into S&S ISA investments, including the £100,000 available from the potential drawdown pot.

I assume that your state pension will be £8,000. If that is not what your forecast says, adjust accordingly.

Assuming 4% available from income drawdown and the savings plus the work pension and state pension it appears that your taxable income could be at least 0.04 * £300000 + 0.04 % £100000 + 0.04 * 50000 + £20000 + £8000 = £44,000. I'm assuming that none of this comes tax free from a S&S ISA though you should look to move £15,000 a year into that each year until the whole of your cash and lump sum is in one. That would probably take you below the higher rate tax threshold by the time you get to this income level.

I also suggest that you take the maximum income permitted by the GAD limit out of the pension pot this year since it will all be tax free or taxed at basic rate, and from next year take the maximum amount under flexi-income drawdown that would leave you at basic rate. This is because your achievable income could take you into the higher rate tax band if you wait until both the defined benefit pension and state pensions are available. so there is significant income tax saving to be had by taking out as much as possible at basic rate now and using that as your primary source of money to live on.

You also appear to have ample resources to start at a higher income level now if you wish. If you did that you would probably drain the DC pension pot enough to avoid higher rate income tax later, particularly when combined with moving lump sums into the S&S ISA.

Without running the numbers fully I expect that you could take around £35,000 gross a year as stable income for life starting now, with £28,000 of that being completely reliable defined benefit and state pension income. About £30,000 net, ignoring the benefit from moving money into the S&S ISA tax wrapper. So if you have use for the money I suggest that you do that.

jonbo300

Hi James,

Thank you so much for your most comprehensive and considered response. I apologise for not replying sooner, but I have just returned from being abroad.

You have made me really think, and I welcome your excellent ideas . I am now reconsidering my retirement options and I am looking at the possibility of taking the 25% tax free sum now and enter capped drawdown. It would make sense to move the £100000 into Stocks and Shares ISA investments as soon as possible.

Thanks also for providing the GAD figures and also for your calculations. I take your point in taking the maximum income permitted by the GAD limit out of the pension pot this year since it will all be tax free or taxed at basic rate.

I really appreciate the time you have spent on my query. You have given valuable suggestions.

Best Wishes,

jonbo300

atush

Yes, after seeing your post, James' idea is the one I was going to suggest.

Take the 100K tax free, and DD 10K per year, 10.6K going forwards when the PA rises. Leaving your savings intact. Moving the LS into S&SD isas so income is tax free as and when you can.

kidmugsy

Hold your horses! If you have only just retired, you are presumably a payer of income tax for this tax year. So it's probably best to take only some TFLS from your AVIVA pension this year, and to start drawing income from it next tax year, when it will be tax-free. Indeed, if you are already a higher rate taxpayer this year, you might want to make a pension contribution to let you avoid this year's higher rate tax.

Note that if AVIVA don't allow you to use all the new flexibility that you want to use, you can transfer to providers who will.

Also note that next tax year you will be able to use the £5000 p.a. of interest-on-savings 0% tax band, as long as you are drawing only £10,600 p.a. in taxable pension income. That £10,600 might naturally be accompanied by £3530 as tax-free lump sum, but you'd also have more TFLS to withdraw if you wanted to. On the other hand, why not keep it in the pension tax shelter a bit longer, especially if the IHT implications of the new pension rules are attractive to you?

On the third hand would you like to take out all your TFLS pronto in case that nice Mr Balls, or someone like him, puts restrictions on the size of TFLS? The national finances are in the soup, as Mr Balls has particularly good reason to know, so taxes will be going up. For his purposes you may be one of the "rich" for whom he will want to make pips squeak.