My Pension strategy - please blow holes in it!

foreversummer

kidmugsy wrote: »

New tack: suppose that unless something radical changes then you will each in retirement depend largely on your State Retirement Pension. For the sake of argument let's assume that that will be £9k and that the Personal Allowance will be £13k. So you might have £4k of unused PA each. So each of you takes £2880 from your cash savings and contributes it to a pension. After some weeks to allow HMRC to pay the tax rebate to your provider you withdraw it all again. All the £3600 come out tax-free, £900 because it is TFLS and the £2,700 because it is less than the unused PA. So you each get £720 p.a. profit. Observe that £720 x 2 = £1440 which is near as damnit to your required £1500 p.a. So there's your problem solved, potentially.

This means that we can now concentrate on the point raised by others: what about building up a reserve to help cope after first death? I have a cunning plan and will recount it this evening if time permits.

It would help if you told me the approximate size of your husband's annual earnings.

Oh Kidmugsy, I would love to hear your cunning plan. I like a cunning plan!

Yes the recycling of the pensions is a no-brainer (if the Government hasn't got wise to it by then ). I never thought of it like that though - that's the £1500 per annum sorted.

His annual earnings at present, I would say approx £18500 net.

Foreversummer

Audaxer

foreversummer wrote: »

Oh Kidmugsy, I would love to hear your cunning plan. I like a cunning plan!

Yes the recycling of the pensions is a no-brainer (if the Government hasn't got wise to it by then ). I never thought of it like that though - that's the £1500 per annum sorted.

His annual earnings at present, I would say approx £18500 net.

Foreversummer

If you want to keep the SIPP open I don't think you can take out the whole £3,600 each year. You may have to leave at least £100 or maybe more in the SIPP to keep it open.

kidmugsy

Audaxer wrote: »

If you want to keep the SIPP open I don't think you can take out the whole £3,600 each year. You may have to leave at least £100 or maybe more in the SIPP to keep it open.

True, but it would be the same £100 or £1,000 year after year. And it would probably be a £100 or £1,000 that's already there.

kidmugsy

IN SUMMARY: Him 60 - State Retirement Pension at 66. Current earnings about £18500 net. Ex-Allied Dunbar pension plan current value £24500.

Her: age 54, SRP at 67. A SIPP current value £3200. Currently adding £150 a month net to it but also making lump sum payments as and when possible. Also, Nest pension to take advantage of free money, minimum contribution by employer.

Him: I'll treat his earnings as about £20k gross. I'll assume that he transfers his pension to (say) HL. Leaving £1k behind at HL he takes out his TFLS £6125 and a taxable drawdown of £17,375. (Do check my arithmetic). On the latter he pays £3475 income tax (after undoing the effect of too much being deducted to begin with). So he's left with £20,025 capital (£6125 +£17375 - £3475). We note that his TFLS is less than £7,500 so he should be free of constraint under the recycling rules. (WOULD ANYONE CARE TO COMMENT ON THAT POINT, PLEASE?) Now he works out how much he's allowed to contribute to a pension in this tax year. Earnings = £20k gross therefore he can contribute £20k gross = £16k net. He does so leaving a buckshee £4025 capital in his hands. New capital sum in SIPP = £1k + £20k = £21,000. In other words his SIPP has shrunk by £3,500 but he has £4025 in his hands. So he's made a profit of £525. Hurray! What is to become of the £4025? Why, he hands it to her and she contributes it to her pension where it accepts a tax rebate and becomes £5031. So between them their pensions have grown in total by £5031 - £3,500 = £1531.

They are so excited by this success that she then does a similar withdrawal and recontribution to her pension, using up as much of her contribution entitlement as she can.

They carry on like this until he stops working. Then she alone will play the withdrawal + contribution game based on earnings and he will do it based on £3,600 p.a. gross.

Naturally the contributions to his pension would be made late in the tax year when he's confident of his annual earnings. The contribution to her pension would also be delayed until her earnings exceed the amount (gross) that she wants to contribute. I'm sure lots of details could be adjusted. In particular, since she has many more years of earnings ahead of her, it might be wise to contribute as much as possible to his pension while he's still earning. After the first year of this game it will be possible to stop his pension shrinking any further because his pension = £21k and his earnings = £20k. Note that investment policy might have to be that he keeps his pension invested in cash - which is OK if retirement is only six years away. She might like to ponder on how to invest her money. Maybe if both keep their investments in the pensions on deposit they can turn some of their emergency cash fund into an S&S ISA. Or maybe they will keep their pension money largely in S&S and just accept having brief spells of sell/repurchase.

UPDATE: see the next two comments.

Triumph13

kidmugsy, doesn't DH immediately have his pension contributions limited to £4k pa once he takes any drawdown beyond the TFLS? Or do you have a cunning plan to deal with that too?

kidmugsy

Triumph13 wrote: »

kidmugsy, doesn't DH immediately have his pension contributions limited to £4k pa once he takes any drawdown beyond the TFLS? Or do you have a cunning plan to deal with that too?

Aw sod it, you are right. So they take money from savings, or a cheap loan, in March 17/18 and make a max pension contribution for him. In 18/19 they take a £7,500 TFLS from his pension and use it for contributing to her pension. Late in 18/19 they decide whether to take taxable income from his pension (limiting his future contributions to £4k p.a.) or leave the taxable part untouched. Since they had apparently planned to make no future contributions to his pension perhaps a limit of £4k p.a. gross is not too calamitous though it certainly detracts from the profits in later years that I'd hoped for. In 19/20 they again take what will be a remaining bit of TFLS from his pension and bung it into hers. Hm. Six years of contributing £4k p.a. to his pension, added to the £1k that he will have left behind, gets the pension back up to roughly where it was at the start of this saga, and the manoeuvres still let her get much more into her pension. Towards the end of her working life she pulls the same stunt: big pension contribution in one tax year and then big drawdown in the next to repay a loan or top up their cash fund. Once they are both retired the £4k p.a. limit on each doesn't matter since they have no earnings and are anyway limited to £3,600.

So cunning plan Mark II is less exciting but still usefully profitable.

foreversummer

kidmugsy wrote: »

Aw sod it, you are right. So they take money from savings, or a cheap loan, in March 17/18 and make a max pension contribution for him. In 18/19 they take a £7,500 TFLS from his pension and use it for contributing to her pension. Late in 18/19 they decide whether to take taxable income from his pension (limiting his future contributions to £4k p.a.) or leave the taxable part untouched. Since they had apparently planned to make no future contributions to his pension perhaps a limit of £4k p.a. gross is not too calamitous though it certainly detracts from the profits in later years that I'd hoped for. In 19/20 they again take what will be a remaining bit of TFLS from his pension and bung it into hers. Hm. Six years of contributing £4k p.a. to his pension, added to the £1k that he will have left behind, gets the pension back up to roughly where it was at the start of this saga, and the manoeuvres still let her get much more into her pension. Towards the end of her working life she pulls the same stunt: big pension contribution in one tax year and then big drawdown in the next to repay a loan or top up their cash fund. Once they are both retired the £4k p.a. limit on each doesn't matter since they have no earnings and are anyway limited to £3,600.

So cunning plan Mark II is less exciting but still usefully profitable.

Wow Kidmugsy. I can't begin to get my tiny brain round this yet, let alone in my old age!

I will have to read this quite a few times to get it straight in my head and come back if I have questions. Much appreciate the time you have given me.

Foreversummer

Triumph13

Basically the plan is to run as much as possible through your pensions in the remaining years when you are working in order to benefit from tax relief. kidmugsy has concentrated on doing it via recycling (but not within the meaning of the act) existing pension funds. Other sources of funding for this that you should look at are your mortgage - can you extend it or remortgage then pay it off with TFLS? - the £18k savings you say you'll have when mortgage paid off (is this an endowment pehaps?), or interest free credit cards.

kidmugsy

One way to begin is to ask yourselves "are we happy with a manoeuvre that limits his annual contribution to his pension as £4k gross i.e. £3,200 net?" If so there's no problem with starting to drawdown taxable money from his pension. All you have to do is to ensure that (a) you never take out more than £7,500 Tax-Free Lump Sum in any one tax year, and (b) he doesn't expose himself to Higher Rate Income Tax (threshold in 18/19 £46,350, something less in Scotland). For example, if his gross earnings in 18/19 really were to be £20k then he shouldn't drawdown taxable income in excess of £26,350 in 18/19 (in England, Wales, or Northern Ireland).

Then ask "are we happy to exploit his current earnings to let us make a big contribution to his pension in 17/18 or 18/19?" If you hate to feel rushed into decisions you could wait until 18/19. The point of the big contribution is to be able to maximise the advantage of the tax efficiency of pensions, taking out TFLS for several years. The taxable income would be used to repay any loan you've used or to restore your emergency cash fund.

OK, suppose you decide to pounce and make a big pension contribution for him in 17/18, and then to take advantage of that in 18/19, 19/20, ... Here's a sample calculation.

First, how much should he contribute? If his earnings really turn out to be £20k gross then he can contribute £16k net. Borrow that from your cash savings or from some cheap lender. (Comment #33 on this thread may be relevant to borrowing but if you don't want to borrow that's perfectly reasonable.
http://forums.moneysavingexpert.com/showthread.php?t=5796919&page=2)

Is that too much to rustle up? Then borrow less and contribute what you can. Anyway, suppose you can find only £6k rather than £16k. You make the contribution and wait a few weeks until the provider receives the tax rebate. So you've now added £7.5k gross to £24500 making a total of £32k gross in his pot. That means he's entitled to withdraw up to £8k TFLS but to avoid any possibility of a problem with the Recycling Rules that govern recycling of TFLSs he takes only £7.5k TFLS, leaving the remaining £500 for another tax year. That £7.5k is used to repay the £6k used as net contribution, leaving a surplus of £1.5k that will be used to contribute to either his or your pension. Or it could be used to build up your cash emergency fund if that lets you sleep more easily. What's left in his pot at this time? £32k - £7.5k = £24.5k. Heh, heh, apparently back where he started but with the difference that only £500 can be withdrawn as TFLS in a later tax year. (Check calculation: he contributed £7.5k gross and withdrew £7.5k TFLS so he jolly well should be back where he started.)

The new move is probably that at some point he will drawdown tax-exposed income, in a tax year that you two will select. Once he does that he can contribute max £4k gross per tax year, but that is presumably justified if you can now make a big contribution to your pension. So here you have to work out how much you can contribute. Look at your gross annual earnings (as long as they are less than £40k), subtract the gross amount that you contribute to other pensions already (e.g. Nest) and that gives you the gross amount you can contribute to your SIPP. Multiply by 0.8 to get the net amount.

So presumably late in a tax year you'll be confident of that year's max net contribution you'll be able to make and you ask him to drawdown from the tax-exposed part of his pension. Remember that it'll be subject to 20% tax (worse, it'll be subject to an emergency tax code and you'll have to claim back the excess tax), and remember to stay below his higher rate tax threshold. Use the money to make your unusually large contribution.

What other tactics might be used?

(i) One possibility is to use the money you are currently contributing to your SIPP; instead use it to contribute to his so that advantage is taken of a bigger total TFLS that will be taken from his pension and eventually directed into yours. You could imagine doing that pretty much until he gives up work. That effectively means that eventually the annual contributions to your SIPP will be about 6% bigger than they would otherwise have been just by having passed through his pension once. (That's in addition to the new, big, one-off contributions of course.)

(ii) Eventually you could pull the same stunt in the other direction. For instance you could take TFLS from your pension and use it as a contribution to his (remember he'll still be allowed an annual gross contribution of £4k even after he's drawndown tax-exposed pension money). However you would NOT take tax-exposed income from yours unless you were happy to accept the limit of £4k annual gross contribution, which you presumably wouldn't be, at least to begin with.

Am I really suggesting that you could both keep bouncing money to and fro between your pensions, making a useful profit each time? Oh yes I am. It would be up to you whether you want to put up with the hassle. The hassle doesn't look too bad to me. The only bit that might try your patience is reclaiming any excess tax taken from your husband when tax-exposed money is drawndown from his pension. That's going to happen only once per year, maximum, I suspect. Indeed, there's a way round that. Suppose you estimate that you'd like him to drawdown £12k gross taxable in one particular tax year. He sets it up as a drawdown of £1k (gross) per month. That way there will be no complication caused by excess income tax.

One thing that will stop you pursuing the last penny of advantage will be the charges at your pension providers. My memory is that HL's charges for getting money out aren't steep as long as you always ensure that there's £1k left behind (in each pension pot). That should be no problem at all, especially for yours where you are not going to drawdown tax exposed income until many years from now.

kidmugsy

Request to other readers: have I got the Recycling Rules right? Is it OK to withdraw a £7,500 Tax-Free Lump Sum each tax year without any constraint thereby being put onto pension contributions?