Optimum Pension Pot

Dithering_Dad

Hi guys,

Sorry if this question has been asked before, but after a quick search I couldn't find anything...

The current value of my pension pot is about £76k and I'm currently investing £300 per month into it. I'm getting about a 45% tax rebate on my pension contributions because I am a high-rate tax payer and the majority of my income is via dividends. I also intend using my S&S ISA allowance to fund my retirement.

I intend getting the best return I can from my retirement planning, so want to use a combination of ISAs and Pension to reduce my tax bill during retirement.

So my question is what is the optimum level my (traditional) pension pot should be before the pension payment I receive from it is over the basic rate tax threshold and I start having to pay higher rate tax on it? (and so lose much of the benefit of having the tax rebates on my payments into the pension).

I intend taking out the full 25% tax free sum from the pension pot.

I appreciate that tax thresholds and tax percentages change over time, and the pension return is dependant on whether I use a drawdown/annuity and how much annuities are paying at the time I retire, etc. but does anyone have a "ball park figure" (or "ball park figures for different retirement scenarios)?

EdInvestor

There are three basic thresholds that you should try not to breach if your likely pension (incl state) income is in the ball park.

1.10k p.a

Income below this will be tax free from around 2011-12 when age allowance rises

2.20k p.a

Income of between 20 and 25k results in your age allowance being clawed back and is equivalent to paying 33% tax.

3.c34k p.a

Above this level you are into the higher rate band.

Income from ISAs does not count nor does interest from N&SI index linked certificates or premium bond winnings.

While basic rate taxpayers do not pay tax on equity dividends (it is covered by the tax credit), divis do count as part of your income for age allowance clawback purposes, so you need to watch that if investing direct.

Dithering_Dad

I think I'm already going to be above the 10k mark with my current pension pot as it has further 27 years to go (if I retire at state pension age).

To realise a 20k or 34k per annum annuity (at current rates) does anyone know what the pension pot will need to be - remembering the 25% tax free sum I'll be removing?

My ideal retirement scenario will be for myself and Mrs Dither to take out our 25% tax free sums from our traditional pensions and invest the remainder in a nice, safe, hassle free annuity. This will be taxed as income, so needs to be below the 20k or 34k thresholds.

To max out our S&S ISAs (£14k) over the next 27 years and then use the returns to fund our retirement, while leaving much of the capital alone.

Any flaws or things to consider in doing this plan?

EdInvestor

Annuities, like all guaranteed products, are expensive.

To get the equivalent of the basic state pension of 87 quid a week, index-linked to RPI, joint life, would cost between 140-160k depending on gender.

Annuity rates here:
https://www.fsa.gov.uk/tables

You don't have to save up that much if you are willing to take a bit of risk with some of your money.If you both have 10k's worth of guaranteed index linked pension income plus another 10k's worth of income from ISAs (assuming a pot worth 200k of which half invested in low-medium risk assets to cover inflation long term) that would total 40k tax free.

Along with equity in a house as a back up, would that not be adequate?

Darkstar

Sorry, posted in wrong thread.