My plan at 55. Is my thinking correct?

jamesd

With £405k in savings I'd expect to make at least £40k a year from peer to peer lending at 12% or so with a couple of percent allowed for bad debt on secured loans. So I wonder whether you might want to spend more instead of just accumulating money until you die.

You'd have two ISA allowances so I'd want to use both by taking money from the pension up to the higher rate threshold. To avoid the income tax on that I would do VCT buying. This gives tax relief of 30% of the amount purchased, capped at tax actually due. The remainder can be recovered by selling no sooner than five years after purchase, less perhaps 10% in costs and buy/sell margins, though since the VCT I suggest most, Albion, pays around 7% of amount invested as tax exempt dividends you might not want to sell but keep the ongoing income instead.

I intend to withdraw all pension money as fast as I can in that way. I expect ISAs to have nil or low tax treatment longer than I expect basic rate income tax to be at 20% or lower. So I think that moving money from pension to ISA as fast as possible is likely to be a good move.

Even withdrawing money from your pension pot as fast as you can at basic rate you won't make much progress on cutting it's value because £525k growing at average UK stock market return of 5% plus inflation implies £26,250 a year of returns. You'll probably be dead before you get it all out if you stick to just the basic rate band.

You seem to have the savings to afford it so you might investigate doing what I'm doing: pension contributions and VCT buying combined to eliminate almost all of my income tax bill while still working. It's well worth making the time to learn about VCTs.

Pension drawdown income is taxable income paid through the PAYE scheme, though not subject to NI at any age, whether you're still working or not.

What happens to income from funds during a stock market downturn depends on the fund. Funds in UK equities might see a dividend drop of ten to twenty percent. Fixed interest like corporate bonds might drop 10% or so. This will make no difference at all to you if you plan sensibly since sensible planning means having about a year of planned investment income in cash or fixed interest investments that are very liquid. Your day to day income could be taken from that and all that would happen is a bit of a drop in balance pending a recovery.

You need to start the work of becoming familiar with the material in Drawdown: safe withdrawal rates. There's a lot to read when you start to follow the links, as you should, just work through it gradually. By the time you're done you should understand the reasons for the recommendations in the first post and be able to decide for yourself whether to follow them or not, and why you're making that decision.

The biggest threat isn't a one year big drop and recovery, it's a decade or more of poor but not horrible returns early in retirement. That's OK, the safe return calculations allow for it and of course that timescale gives you plenty of time to tweak spending if needed.

You appear to expect to have to drain savings until the state pension kicks in. Pointless. Since you're going to struggle to get the money out of the pension before you die if you do it at maximum basic rate withdrawing you should be getting started on that as soon as you can. Assuming the savings are in ISAs that's where they should remain, though of course not much in cash ISAs.

It is worth taking the pension tax free lump sum as early as you can. First, it's that much less growing in the pension. Second, you can just invest it for growth outside any tax wrapper and pay no tax on it anyway. You can avoid accumulating any CGT liability by selling enough to take gains up to your annual CGT allowance then reinvesting on something different, like a similar but not the same fund. Different class or if a tracker a different brand will do the job without really changing the underlying investment much. Use income units outside a tax wrapper even for growth funds. It's a tax paperwork pain to track the reinvesting inside accumulation units.

But you don't need to stick to growth outside a tax wrapper. Say your wife has no pension income. That means she has:

£11,500 personal allowance
£1,000 personal savings allowance
£5,000 starting rate for savings

... all tax free, £17,500 a year of it.

Those allowances include interest from bond funds and from P2P lending. That's all of the interest from my anticipated ten percent a year after bad debt from £175,000 in P2P. Your tax free lump sum is expected to be £175,000 so she can take tax free interest from it all without even having to use her ISA allowance, which can be dedicated to getting more of the taxable pension money into it instead.

It is sensible to make £2880 of net pension contributions a year until age 75 since that's £3,600 after basic rate relief is added. She could take that out in full each year and the £2,700 taxable portion will be within her personal allowance, so she'd still have the full starter rate for savings available.

The biggest things you're missing are spending and more years in retirement. More spending, more years in retirement or both seem to be readily doable if desired.

leahcim17

jamesd wrote: »

With £405k in savings I'd expect to make at least £40k a year from peer to peer lending at 12% or so with a couple of percent allowed for bad debt on secured loans. So I wonder whether you might want to spend more instead of just accumulating money until you die.

You'd have two ISA allowances so I'd want to use both by taking money from the pension up to the higher rate threshold. To avoid the income tax on that I would do VCT buying. This gives tax relief of 30% of the amount purchased, capped at tax actually due. The remainder can be recovered by selling no sooner than five years after purchase, less perhaps 10% in costs and buy/sell margins, though since the VCT I suggest most, Albion, pays around 7% of amount invested as tax exempt dividends you might not want to sell but keep the ongoing income instead.

I intend to withdraw all pension money as fast as I can in that way. I expect ISAs to have nil or low tax treatment longer than I expect basic rate income tax to be at 20% or lower. So I think that moving money from pension to ISA as fast as possible is likely to be a good move.

Even withdrawing money from your pension pot as fast as you can at basic rate you won't make much progress on cutting it's value because £525k growing at average UK stock market return of 5% plus inflation implies £26,250 a year of returns. You'll probably be dead before you get it all out if you stick to just the basic rate band.

You seem to have the savings to afford it so you might investigate doing what I'm doing: pension contributions and VCT buying combined to eliminate almost all of my income tax bill while still working. It's well worth making the time to learn about VCTs.

Pension drawdown income is taxable income paid through the PAYE scheme, though not subject to NI at any age, whether you're still working or not.

Thanks. Interesting comments. I have just started researching P2P lending and the various companies that offer this. I certainly haven't considered VCT's.

I am of the mind set that we should spend and enjoy ourselves and don't intend to scrimp just to leave an inheritance. I do however want things as simple as possible for my wife should I go first!!

It's interesting the differing views on the pension pot. Take it out as quickly and as tax efficiently as possible v only draw on it when needed and go the UFPLS route.

jamesd

Hopefully my edits explained why UFPLS is pointless. Done editing for now, plenty for you to read and think about.

Staged drawdown, which is what UFPLS was really being used for, can make sense but you don't really have enough money for that because you can still invest the amounts you have tax efficiently outside the pension. Your problem is different: getting the money out of the pension fast enough so you're not left with having to do it with higher rate tax being due because you left it too long.

One thing that can be done to help with that is for a few years drawing out the basic rate band plus half as much again at higher rate. For simplicity pretend it's 30k and 15k, 45k total. 20% income tax on the 30 and 40% on the 15 is 30% overall. Buy £45k of VCT and get 30% of that back from HMRC, £13,500. The £45k might generate tax exempt 7% a year so £3,150 a year. And after five years you could sell the £45k with my presumed 10% loss if desired.

The tax free lump sum can be handy for funding that, though I suspect that the kind folk over at HM Treasury didn't really intend for people to use VCTs to make all of their income effectively tax free for life, something I and you appear able to achieve.

Inheritance tax planning is also a factor to consider but it doesn't look as though your estate will be big enough, though we don't know the value of your home. Sometimes this can make it more efficient to leave money that is destined for inheritance inside a pension. Then at death before age 75 it's inherited tax free while from 75 it's taxable when drawn at the tax rate of the recipient, 25% tax free if you didn't first take a tax free lump sum. A grandchild, say, might have a parent able to use the child's personal allowance to take money out tax free to use for the needs of the child, as trustee of the amount left to the child. That being more efficient than leaving it all to the parent who would have some income tax to pay.

leahcim17

Thanks Jamesd for taking the time to reply with such a detailed reply. Plenty for me to understand and investigate further. Luckily I have another 5 years to refine my plan

And a general thanks to all that take time to read, understand and reply. I'm shamed to say that I tend to read a lot on here rather than post (pension and savings/investment mainly) but it's helped my knowledge more than any other site :T

michaels

I don't think p2p should come without a health warning. If it always outperformed, the market would arbitrage this excess return away. In reality the higher returns available must demonstrate greater risk.

I don't know if the same is true of vct.

westv

Presumably it doesn't always outperform the market but perhaps P2P is currently an alternative asset if you think other classes might be over valued?

LarjWej

But you don't need to stick to growth outside a tax wrapper. Say your wife has no pension income. That means she has:

£11,500 personal allowance
£1,000 personal savings allowance
£5,000 starting rate for savings

... all tax free, £17,500 a year of it.

hi jamesd - does the starting rate for savings of £5000 apply only if "earned" income is low or does it apply to a pensioner who has low "pension" income also?

jamesd

michaels wrote: »

I don't think p2p should come without a health warning. If it always outperformed, the market would arbitrage this excess return away. In reality the higher returns available must demonstrate greater risk.

I don't know if the same is true of vct.

I don't know whether P2P will always outperform. Too soon to tell. Though I do think that there are some parts of P2P that are unlikely to outperform or not do so by much and I avoid those. I could get say 1-2% in P2P mortgage lending but I don't think it's worth doing.

I do think that returns from lending at Zopa have been significantly reduced by them accepting institutional and more recently bank money for lending. Taking such money can be a hot-button topic for consumer lenders who are aware of the risk.

Even with that effect, P2P lenders seem to be more efficient than banks and able to return to consumer lenders a higher proportion of the money paid by borrowers. There's also some regulatory cost arbitrage in favour of P2P.

Markets don't always arbitrage away excess returns, though, as demonstrated by say small cap equities vs large cap, summer-winter or first term of presidency effects. The trend may even be moving away from arbitrage excess return removal as cap-weighted trackers become increasingly dominant and completely ignore such things.

Doesn't much matter at present. The outperformance is there today and if it goes away I'll just do something else instead.

VCTs vary a lot. If we confine the discussion to just the late stage and/or asset backed ones that I'm likely to mention here there pretty clearly is fee arbitrage that removes a significant portion of the micro-cap returns from investors. A striking practical example of this is the way many will compare their returns to the FTSE All Share Index instead of a small or micro-cap index. They don't do it because the fees have taken much of the difference. The remaining returns and tax arbitrage still make them interesting.

jamesd

LarjWej wrote: »

hi jamesd - does the starting rate for savings of £5000 apply only if "earned" income is low or does it apply to a pensioner who has low "pension" income also?

From £11,500 upwards each extra pound of non-interest taxable income reduces the starting rate for savings amount by a pound until at £16,500 and up none is left. The £1,000 personal savings allowance remains.

If work income was £5,000 and pension income £8,000 that would reduce the starting rate for savings band by £13,000 - £11,500 = £1,500. That would leave £1,000 personal savings allowance and £3,500 starting rate for savings still available.

LarjWej

You'd have two ISA allowances so I'd want to use both by taking money from the pension up to the higher rate threshold. To avoid the income tax on that I would do VCT buying. This gives tax relief of 30% of the amount purchased, capped at tax actually due. The remainder can be recovered by selling no sooner than five years after purchase

hi jamesd - can elaborate on what you mean by "the remainder can be recovered" - i don't think i fully understand this paragraph

thanks

L