Funding early retirement

Mirador

As we move from the saving phase of our life to the spending phase, one of the key decisions that I need to make is the order in which to liquidate my assets.

My current thinking is that I should spend in the following order,

Sell second property.
Take TFLS from pension.
Spend ISA funds
Start Pension drawdown

My thinking behind this is that any money left in the pension fund at death could then be passed down to my children without being taxed.

I know from reading other comments on this site that the general advice is to take the TFLS when available, but if recycle it into ISA's anything remaining on death would then attract Inheritance Tax, whereas if its left in the pension fund, it won't. Is that correct?

atush

I think you need tax advice. You could be one group where leaving money in DC pensions and not touching it will help, as even the TFLS once withdrawn is part of your estate. If not drawn before age 75, it is not part of your estate.

i think you need to start thinking about, and transferring wealth now. As you seem to have more than you need from your other post, while you still have 7 years+ til death and while you will not have problems with any deperivation of assetds problems.

IHT wise, you will lose 50% or all of your DB pensions when you die. so use them uo as you can. DC oensions can now be passed on free, and are only taxed when drawn so if your hier wait until they retire there will be lower tax to pay. And no tax to pay on gifts now from income, plus 3K capital per year, plus gists on marriage, oplus 7+ potentially exampt transfers.

So work out your income needs and class your pots of money as to how they will be taxed when you die.

Remember all assets can transfer from one spouse to the other on death or before with no tax. Incl Isas now which is new. Isas used to stop being isas on being inherited from a spouse but that is no longer the case.

jamesd

Drawing enough from personal pension pots to use your personal allowance is likely to be the best for you first choice, since it's a use it or lose it allowance. For personal pots it's almost always best to take the 25% tax free lump sum. You might investigate some P2P investing, perhaps with Ablrate.

The BTL gain will probably mostly be capital gains tax and not highly taxed due to your annual allowance. Even less tax if it was your PPR at some point so you qualify for some PPR relief and also lettings relief. Optimal time to sell this might well be the year before your income goes up, so you're still basic rate tax payers. You can also investigate transferring property value between you and any spouse, exploiting that tax free transfer to get two CGT allowances.

You do not need to wait until you die to give money away. You can instead give it away when you're still alive and able to see those you give it to enjoying the benefits. You could say do things like offering a discounted mortgage to children, if you have the assets to do that. The mortgage approach won't help IHT in the end but it gives them something of value now and you could do things like writing off a portion of the mortgage as a gift each year. What could those you want to leave money to usefully do with more money now? Any grandchildren, a particularly attractive target for some forms of giving because that skips a generation of IHT risk, that of your children.

If your DB pensions will provide you a comfortable living, not waiting to give things away is an effective way of avoiding IHT. If you want to do this you can even use flexi-access drawdown to withdraw money from DB pots at as high a rate as your basic rate band will allow.

Two allowances are available for CGT so your main residence will be inheritable at the moment free of IHT if it's not worth more than that combined limit.

You can also check the actuarial reduction for taking your DB pots early. that and/or taking some lump sum from them might be an efficient way to keep you out of higher rate income tax. Though you might instead prefer to make use of VCT investing since that pays 30% income tax relief that doesn't have to be repaid if you hold for at least five years. VCTs tend to pay tax free income of 5+% a year and that would be helpful for your income situation. Perhaps think of VCT buys as a way to defer income for five years to avoid paying tax on it. The 30% rate can make them convenient also for drawing more than the basic rate tax band from pensions. The VCT relief is limited to the actual tax payable in the tax year. You have to repay the tax relief if you sell within five years. Such VCT activity might be a way to fund giving away parts of a mortgage balance to children, say.

You could also consider something like setting up a discretionary trust with a view to doing things like funding property deposits for grandchildren.

Mirador

Thank you JamesD and Atush for your detailed and insightful replies. We will take financial advice, but I want to get as much understanding as I can gain beforehand. You have confirmed some of my thoughts and given me some excellent new ideas to explore.

atush

certainly investing for any grandchildren would be a wonderful thing to do. who knows what Uni will cost when they get around to going, and what rate loans will be- they are charging over 6% now.

Jisas, investment trust savings plans.