My plan at 55. Is my thinking correct?

leahcim17

My wife and I are both 50 and plan to retire together in 5 years time.

Wife is a low earner and has no pension provision but needs a further 3 years of NI contributions to get the full state pension at 67.

I have a DC pension that I hope will be worth around £700k in 5 years and we should have savings of £230k. I also project that our net outgoings which include holidays / car etc. to be £30k per annum.

Assuming everything hangs together my plan is as follows:

1.) Take 25% lump sum to add to savings giving £405k
2.) Use this for 12 years until state pension kicks in.
3.) Withdraw tax free personal allowance amount (currently £11.5k) from pension and put in S&S ISA each year but don't spend it.
4.) At 67 invest pension and S&S ISA in income generating funds and take income. The £525k left in my pension and now split between pension and ISA will hopefully have grown a bit in 12 years. Say £600k at 4% income, so £24k per annum.
5.) At 67 our outgoings will now be roughly £39k allowing for inflation. State pension for both of us will be approx £22k per annum by then. Add to this £24k and we should have £46k less a little tax.

So my questions are:

1.) Does this make sense or am I missing something?
2.) Income from S&S ISA will be tax free, but I assume the income from my pension will be taxed based on the amount above the tax free personal allowance?
3.) And my stupid question is what happens to income if the fund(s) fell by 20% one year. I assume income would stay the same as it's paid based on the dividend per share for the underlying holding?

Thanks in advance

stoozie1

in terms of what you may be missing, I would say it your wife opening a SIPP and making her full salary (gross) of contributions in to it for these last 5 years of working (to maximise her personal allowance when you begin to take the pensions).

Dazed_and_confused

One of the problems with these type of predictions, even just looking five years ahead, is how much can change at a whim.

Who'd have thought State Pension could suddenly just from roughly 6.3k to 8.3k meaning sipp withdrawal would need to be reduced by a corresponding amount if you just wanted to use up the personal tax allowance

Or that George Osborne's tinkering would mean you could now (2017:18 tax year) be getting £45k between you without having to pay a penny in tax if you had the right types of income :eek:

badmemory

As far as I can see the main thing missing is the utilisation of your wife's personal allowance - particularly before receiving state pension. This is £2k per year approx. So as Stoozie says a SIPP for her which can be drawn down using her personal allowance may be more tax & future income efficient than the full 25% untaxed lump sum.

greenglide

Would it not be better to withdraw from your pension as a UFPLS rather than all of the lump sum "just because I can" and the taxable bit "to avoid tax".

You would then have some or all of the TFLS available for later.

When you said "put into savings" do you mean as cash? You would guarantee to lose that way.

CFrog

I wasn't too clear why you say

...The £525k left in my pension and now split between pension and ISA ...

. Why split?

Q1 - Ignoring the above and ignoring the impact of any financial shocks, I think the logic is sort of OK but would question some of the numbers and think you may be being a bit conservative on your financial position at 67.

a - If I read it correctly, your SIPP pension sum (at 55) isn't invested and therefore not growing over the following 12 years. If you assume a 4% growth on the £525k at 55 (income being reinvested), this could be c. £650k at age 67 even if you're taking making an annual withdrawal of £11.5k (adjusted for inflation).
b - I assume the savings 'pot' (of £405k at 55) is in a tax-fee wrapper and this also grows at 4% over the 12 years from 55 to 67 (income being reinvested). (Tax free) income from this and (taxed) income taken out of your SIPP means the savings pot will reduce in overall value over the period 55-67 but could still be c. £320k at 67.

Q2 - Yes if your pension income goes over your tax free personal allowance limit.

Q3 - This touches on the big unknown and comes down to your having your SIPP and ISA funds invested in a balanced portfolio in a range of growth, income and 'protected' funds that can ride out the ups and downs of the market and you don't deplete your SIPP / ISA too quickly. I think the assumption of a 4% growth rate is reasonable but you may want to err on the side of caution and use a slightly lower figure as you'll have good years and (very) bad years. My personal portfolio has grown more than 20% over the last 12 months but who knows how long this will last.

leahcim17

greenglide wrote: »

Would it not be better to withdraw from your pension as a UFPLS rather than all of the lump sum "just because I can" and the taxable bit "to avoid tax".

You would then have some or all of the TFLS available for later.

When you said "put into savings" do you mean as cash? You would guarantee to lose that way.

Yes I did wonder about this. You're correct in that it would have to sit as cash but would invest £40k (£20k each) ISA allowance each year. I also thought it might be better to take it as soon as possible in case the rules change.

leahcim17

CFrog wrote: »

a - If I read it correctly, your SIPP pension sum (at 55) isn't invested and therefore not growing over the following 12 years. If you assume a 4% growth on the £525k at 55 (income being reinvested), this could be c. £650k at age 67 even if you're taking making an annual withdrawal of £11.5k (adjusted for inflation).

Sorry yes my pension would remain invested from 55. I had conservatively calculated it would be worth £600k at 67.

want_to_save

whilst your money sits in pensions it is outside of the estate in regard to IHT. I would not withdraw any money until you need to. If you do not have a need for the TFLS then dont draw it. Let the funds work for you and increase in value. when you require an income drawdown or UFPLS to take your income to the current year's personal allowance.

michaels

When you take the TFLS this money will no longer be in a tax wrapper so any income it generates will be taxable (subject to your and your wife's personal allowance / interest income allowance) which may then mean some of your 11.5k is taxable - is the other 230k savings in ISAs?

There is some talk of the age at which you can take a TFLS being adjusted to state pension age minus 10 years rather than remaining at 55. Obviously you could just live of your other savings for the first 2 years if this happened.

leahcim17

michaels wrote: »

When you take the TFLS this money will no longer be in a tax wrapper so any income it generates will be taxable (subject to your and your wife's personal allowance / interest income allowance) which may then mean some of your 11.5k is taxable - is the other 230k savings in ISAs?

There is some talk of the age at which you can take a TFLS being adjusted to state pension age minus 10 years rather than remaining at 55. Obviously you could just live of your other savings for the first 2 years if this happened.

That's true. £190k of the initial £230k will be in ISA's. I figured when I take £175k as a tax free lump sum I could invest £40k a year in today's money using both our ISA allowances.