Higher rate tax in retirement

shinytop

and how not to pay it is my question. As far as I can see I'm in the fortunate position that I'm going to struggle not to pay HR tax when retired. I've looked at using my DC TFLS and that helps. I'm not considering commuting my DB pension at this stage. My wife on the other hand won't pay tax at all when retired (she has a DB pension) until she gets SP. I could just reduce my contributions now but I'm then losing HR tax relief. Probably hard to answer without knowing more but would it be worth setting up an additional pension for her and paying into that instead? She's still earning (not HR).

tacpot12

You could get divorced and split your pension, but you might need to wait for the new divorce rules to come in. Just remember to remarry her...

Aside from that joke, setting up an additional pension for your wife would be sensible, but unless you reduce or stop contributing to your pension, its not easy to see how you will avoid higher rate tax.

I would also say that you are better off with 60% of the amount over the HRT threshold than 0% - you don't always need to let tax efficiency guide your decision; I'm sure the government of the day will find something useful to do with the little bit of extra tax you will pay.

Marcon

kevfm wrote: »

Probably hard to answer without knowing more but would it be worth setting up an additional pension for her and paying into that instead? She's still earning (not HR).

You (or rather she) would only get basic rate tax relief paid into any DC pension set up for her if she's not a HR taxpayer (your tax position would be irrelevant even if you made the contributions on her behalf), but if she will be a BR taxpayer in retirement, there could be merit in the idea.

That said, don't get so carried away with worrying about tax that you lose sight of the bigger picture. If you are 'have' to pay HR tax, it means you have some pleasingly chunky funds coming in during your retirement!

michaels

So the maths is that you will pay 30% on any contributions you make now when you draw them (40% HRT but 25% TFLS). Compared to the 40% you save now - sounds like a good deal.

However worth thinking about that the growth will be taxed whereas if you pay the tax and put it in an isa the income/drawdown is tax free. Finally the isa gives flexibility to mitigate any future McDonnell asset grab.

Linton

I have the same problem of being in danger of paying HRT in retirement. My solution is to defer SP and use all the spare basic rate tax space to drawdown my DC pot putting excess cash into S&S ISAs. Once the DC pot has been cleared SP can be started up, nicely enhanced thanks to having reached 65 under the old rules.

shinytop

Thanks for the replies and I do realise my 'problem' is a nice one to have. I think I'm getting hung up about HR tax and I now understand a bit better the options. Yes of course 60% is better than zero.

So the maths is that you will pay 30% on any contributions you make now when you draw them (40% HRT but 25% TFLS). Compared to the 40% you save now - sounds like a good deal.

when you put it like that I see what you mean.


Having said that when my wife stops work she will have 7 years paying no tax at all let alone HR before she gets her SP so I should probably do something to spread the tax burden a bit.

fizio

Also depends on how close the OP is to LTA - not sure how the maths work out if the tax freee contributions now compare to excess LTA charges when withdrawn - i.e potentially 55% tax on the way out

Anonymous101

Any possibility for retiring earlier?
Maybe not best way to get maximum income but a good way overall in that you'd get the time and possibly prevent the tax man from taking more of your pot overall. Even if it would be a smaller pot you'd keep more of it.

GunJack

tacpot12 wrote: »

I would also say that you are better off with 60% of the amount over the HRT threshold than 0% - you don't always need to let tax efficiency guide your decision; I'm sure the government of the day will find something useful to do with the little bit of extra tax you will pay.

This, surely?? As someone else said, does it matter if you pay a bit of HRT? Still means you've got a good income, and higher than if you were paying BRT....more money in your pocket than if you restricted your income to BRT band

shinytop

This, surely?? As someone else said, does it matter if you pay a bit of HRT? Still means you've got a good income, and higher than if you were paying BRT....more money in your pocket than if you restricted your income to BRT band

yup, noted.

Any possibility for retiring earlier?

thinking about it ...

Spreadsheetman

As GunJack said, paying a bit of HRT is not necessarily a bad thing, you get to feel good about helping keep the ship afloat :A

That said, trying to increase your wife's pension is a good thing to do anyway, especially if a large amount of the household income is coming from your DB pension that will be drastically reduced on death.