Lump sum and tax

Worried_of_wakefield

Evening everyone, I'm starting to plan for retirement, I'm 60 and intend to retire at 63. I am working on a retirement plan of 2/3 my present nett salary which will give me circa £26K nett per Year.

I have a deferred final salary pension of (£15K) plus a lump sum (£100k) which I don't intend to release until I'm 65. So, I need to live for two years on a private pension ( forecast £60k pot at 63) which I'm currently contributing to plus any savings I can muster.

To minimise my tax liability do I have this right?

year 1 - Take £15k of £60K pot as a tax free lump, plus reduced pension of say £4k plus draw down savings to provide £26k - assume pay no tax

Year 2 - Take say £15k lump + reduced pension of say £2k ( pay tax on £17k minus £10k allowance) plus draw down of savings to provide £26k.

year 3 - could I continue drawing down if needed.

Many thanks in anticipation.

Triumph13

You're not using your full personal allowance in year 1. Make sure you take the full £10.5k or whatever the PA is at that time each year, not counting the tax free lump sum.

kidmugsy

Triumph13 wrote: »

You're not using your full personal allowance in year 1. Make sure you take the full £10.5k or whatever the PA is at that time each year, not counting the tax free lump sum.

I agree. The point, OP, is to take as much as possible out of the pension tax-free, and then (for instance) keep it tax-free by putting it into an ISA. Or spend it, while reducing the amount you need to withdraw from your current ISAs.

jamesd

As the others wrote, you should use flexi-access drawdown from 6 April 2015 to draw out more of the 75% part of the pension pot so that you use your full personal allowance. You can stick the excess into a stocks and shares ISA with the same investments as the pension so you stay invested.

You're not planning efficiently in other ways, though. You're still working, so why not include use of 0% for purchases and/or 0% balance transfer credit card deals? You can put your normal spending on those and increase the amount going into the pension. Then you can clear with the lump sum and possibly some of the 75%. This increase the amount of pension tax relief that you can get.

You can time the deals so that they end after 63 but there's no strict need to do that because you can take pension money at any time after age 55.

What is the current value of the pension pot? Why not take a lump sum and income from that after 6 April 2015 and recycle the money into more pension contributions? No problem to recycle income and given the value you won't hit the lump sum recycling limit either because you wont' be recycling more than 1% of the lifetime allowance, £12,500. Major catch: if you will be paying in more than £10,000 a year you must not take out more than the 25% tax free lump sum or you will trigger a reduction in the annual contribution allowance from £40k to £10k, foiling your contribution plans.

If that drop from 40k to 10k is a factor you can enter capped income drawdown before or on 5 April 2015 and draw out the 25% tax free lump sum plus the GAD limit income amount each year and recycle all of this. Don't go over the GAD limit or you'll trigger the drop from £40k to £10k.

If you have savings it'd be a good move to pay them in before using capped drawdown, to maximise the amount you can recycle.

Remember that the annual contribution limit is the smaller of your earned income or £40k, though carry-forward from past three years is available for the £40k if you were in a pensions scheme.

If you're overpaying on a mortgage stop that and put the money into the pension, so you can help that along later after getting pension tax relief.