Pension drawdown strategy

digannio

I have two private pension pots worth a combined total of £48,000 and intend to access this cash over the next few years through flexible drawdown. I am a non-taxpayer in receipt of a final salary pension and will remain a non-taxpayer for the next seven years until my full (checked) state pension also kicks in.

What I plan to do is take cash out each year in the region of £4,000 which will be tax free and take me up to my personal allowance each year. This will be used as a tax-free income booster during these interim years before I become a tax-payer when the state pension kicks in.

I won't go into all the finer details but my wife has a generous final salary civil service pension and we have no mortgage plus we have a fairly large amount in savings and investments.

My plan to access this cash tax-free involves moving into an HL SIPP and then drawing it down. I am considering putting about two years worth (£8,000) into the cash fund and the rest into the Legal and General Multi-Index 4 Fund. The plan is to draw down the cash element first over the next two years while leaving the rest untouched in the L & G fund to bed in. I would then start to draw down from the invested part. But in the event of a major fall in the markets I am content (and able) to suspend the drawdown to allow time for recovery. I'm fairly flexible on that.

Any comments (good or bad) would be welcome on the strategy. I've got thick skin;)

coyrls

Remember you can take 25% (£12,000) tax free up front if you want. So if it made sense you could get £16,000 tax free in year one (your 25% + the £4,000 to take you to the personal allowance). One option for that money would be to invest in an ISA and any subsequent withdrawal from the ISA would be tax free (regardless of your income).

digannio

Thanks for the input coyris. I'll be keeping all options open.

TH1878

coyrls wrote: »

Remember you can take 25% (£12,000) tax free up front if you want. So if it made sense you could get £16,000 tax free in year one (your 25% + the £4,000 to take you to the personal allowance). One option for that money would be to invest in an ISA and any subsequent withdrawal from the ISA would be tax free (regardless of your income).

I don't see any point in this; you may as well keep it within the pension and draw down on the tax free cash as required.

The OP could just withdraw £5,333 each year from the pension - £1,333 would be TFC and the remaining £4,000 would be income that would fall within the personal allowance.

If the OP needed access to a lump sum from the scheme, it could just be drawn down from the remaining pension when required.

kidmugsy

TH1878 wrote: »

I don't see any point in this

To get it out before the rules change for the worse.

TH1878

kidmugsy wrote: »

To get it out before the rules change for the worse.

So many people are going to make huge financial mistakes because they think the sky is going to fall upon their head.

Which Government is going to be brave enough to remove these new freedoms?

kidmugsy

TH1878 wrote: »

Which Government is going to be brave enough to remove these new freedoms?

What a hysterical question. Who said anything about removing the new freedoms? But a government in a great financial panic might reduce the permitted lump sum (though I'd be surprised if they limited below £12k, I admit). Or a government that says that it's going to increase the tax relief for most savers from 20% to 30% or even 33%, but reduce the TFLS to 20% at the same time. Anyway, why risk it? Hell's bells, I can remember Labour governments in the sixties and seventies imposing retrospective taxation.


Moreover, he could, up to the recycling limit, contribute £2880 net (£3600 gross) p.a. into a pension and so get the advantage of the £720 p.a. which he could draw out again before his state pension begins. Or he could leave it there for older age, or as a potential bequest. He might even use that money to let him defer his state pension for a year or two when the time comes.

In his shoes, I might wait to see whether the tax relief on contributions does go up to 30%/33% and consider contributing to a pension then. But more likely I'd bung in the £2880 net for 2014-15 right away. Even if most of the money comes out again taxed at 20%, there's a 6.25% advantage doing that rather than putting the cash into an ISA.

kangoora

TH1878 wrote: »

So many people are going to make huge financial mistakes because they think the sky is going to fall upon their head.

Which Government is going to be brave enough to remove these new freedoms?

I'm planning on drawing out the TFLS and [STRIKE]recycling it[/STRIKE] oops, I mean my wife will contribute 100% of her salary into her pension for quite a few more years until we retire.

digannio

Sorry I haven't come back quicker... been busy ordering the Lamborghini:D

I must admit I like the flexibility as outlined by kidmugsy. I have already bunged in this year's £2880 and it is something I may well look at in future years to take advantage of the free £720 if and when circumstances allow. It's a great starting point return, aside from how the investment fares.

This flexible drawdown way forward looks ideal over the next few years with my tax situation but as a check I looked into what an annuity may offer me with this pot were I to take it now. The best ballpark figure I could find on an initial look is around £1,500 per year, with a 3% annual rise, single life cover and five year guarantee.

kidmugsy

digannio wrote: »

This flexible drawdown way forward looks ideal over the next few years with my tax situation but as a check I looked into what an annuity may offer me with this pot were I to take it now. The best ballpark figure I could find on an initial look is around £1,500 per year, with a 3% annual rise, single life cover and five year guarantee.

The risk of drawdown is ameliorated by "my wife has a generous final salary civil service pension". The tax efficiency of using drawdown is something I'd find irresistible. Just be careful not to end up on a Labour election poster accused of tax evasion.

jamesd

You can probably do way better than that income level by deferring the state pension when you get there.