Retirement Preparations

pile-o-stone

I'm currently 50 and I have 3 pensions. One is a final salary scheme that will pay £4000 a year, one is a SIPP containing £176k and the other is my workplace pension that has £50k. The workplace pension is the only one I make contributions into. I will also qualify for a full state pension.

When I retire, the combination of income from my state pension and FS pension, my tax free allowance will be used up. The rest of my income from pensions would be subject to 20% tax.

I was therefore considering taking the 25% tax free amount from the SIPP when I turn 55 (I'd expect this to be at least £50k) and drip feeding this into an ISA. I'd then leave this pension alone and take no further income from it. I believe that this means that I can continue to make contributions to my work-based pension?

When I turn 60, I would like to leave my current job and do some part-time work - perhaps contracting. I could then take the 25% tax free limit from this pension (I'd expect it to also be around £50k) and drip- feed it into the ISA.

On retirement I would be able to use investment returns from the ISA, FS Pension and state pension to provide me with a tax free income.

The questions are whether this is a prudent course or if there is another way forward?

My thinking is that I am not contributing to the SIPP and so it will make the same gains whether its all stored in a SIPP or whether a quarter of it is in an ISA, so why not move it out as soon as possible?

kidmugsy

pile-o-stone wrote: »

I'm currently 50 ...When I retire, the combination of income from my state pension and FS pension, my tax free allowance will be used up. The rest of my income from pensions would be subject to 20% tax.

I was therefore considering taking the 25% tax free amount from the SIPP when I turn 55 (I'd expect this to be at least £50k) and drip feeding this into an ISA. I'd then leave this pension alone and take no further income from it. I believe that this means that I can continue to make contributions to my work-based pension?

Yes.

As for the ISA you should consider whether it might be more efficient to put at least some of the TFLS into your spouse's pension.

pile-o-stone wrote: »

When I turn 60, I would like to leave my current job and do some part-time work - perhaps contracting.

There's another opportunity to run money through, say, a SIPP before finally parking it somewhere else if you fancy.

If you do have a spouse remember that, under current rules, money in a pension can be transferred to her very tax efficiently if you die before age 75. So there's one reason not to hurry to empty your pensions.

squirrelpie

When I retire, the combination of income from my state pension and FS pension, my tax free allowance will be used up.

Do you intend to wait until your state pension age before retiring? And/or what will the effect of your part-time work be? What I mean is you also need to think about the time between retiring and your state pension starting. You may need to take some income from your savings/pensions during this time, and you may have an opportunity to take money from the pensions then via UFPLS whilst paying no tax.

pile-o-stone

kidmugsy wrote: »

Yes.

As for the ISA you should consider whether it might be more efficient to put at least some of the TFLS into your spouse's pension.



There's another opportunity to run money through, say, a SIPP before finally parking it somewhere else if you fancy.

If you do have a spouse remember that, under current rules, money in a pension can be transferred to her very tax efficiently if you die before age 75. So there's one reason not to hurry to empty your pensions.

Thanks for taking the time to respond. I was considering putting the money into my wife's pension as she only has a small amount of pension savings and so the aim would be to fill her pension to the point where the return was similar to my FS pension - £4k so that when it's combined with her state pension, she also maxes out her tax free personal allowance. I thought this was illegal though under the rules against recycling? Or is that only if you recycle the 25% tax free lump sum back into your own pension?

pile-o-stone

squirrelpie wrote: »

Do you intend to wait until your state pension age before retiring? And/or what will the effect of your part-time work be? What I mean is you also need to think about the time between retiring and your state pension starting. You may need to take some income from your savings/pensions during this time, and you may have an opportunity to take money from the pensions then via UFPLS whilst paying no tax.

Thanks for your response. Things may change as I approach retirement, but I was thinking that if I contracted then I could earn enough in a few months to cover my outgoings for the year. I work in IT and could earn anything from £300 to £600 per day on a contract. If this doesn't work out, then I would take an income from the ISA, SIPP and workplace pension until the state pension kicked in.

Linton

pile-o-stone wrote: »

Thanks for taking the time to respond. I was considering putting the money into my wife's pension as she only has a small amount of pension savings and so the aim would be to fill her pension to the point where the return was similar to my FS pension - £4k so that when it's combined with her state pension, she also maxes out her tax free personal allowance. I thought this was illegal though under the rules against recycling?Or is that only if you recycle the 25% tax free lump sum back into your own pension?

Recycling is not illegal (you cant be jailed or fined for it) but does have undesirable tax consequences. These consequences dont apply if you recycle less than £7500. For more info see https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/pension-lump-sum-recycling.


Putting your TFLS into someone elses pension is not considered to be recycling.

Triumph13

I'm a little concerned that you are obsessing with avoiding tax to the point of letting the tail wag the dog. What do you plan to do with the three quarters of your pension that you can't access without paying tax? Just leave it to be inherited by kids? It makes sense to make sure that you use up all of your personal allowance, but deliberately restricting the amount you have to live on just to avoid paying any tax is a bit OTT.

Albermarle

Putting your TFLS into someone elses pension is not considered to be recycling.

I read a very long thread on this forum about this a couple of weeks ago and opinion seemed to be split on this point, of whether transferring a TFLS to your spouse who then invests it in a pension could be deemed recycling by HMRC.
In practical terms though , it is not clear whether HMRC is really taking much direct interest in looking for recycling cases anyway . So if it is through a spouse and the sums are not huge ( or maybe spread out over more than one tax year) then unlikely to cause any issues.
There is a moral case for not abusing a generous pension tax relief system though.

pile-o-stone

Triumph13 wrote: »

I'm a little concerned that you are obsessing with avoiding tax to the point of letting the tail wag the dog. What do you plan to do with the three quarters of your pension that you can't access without paying tax? Just leave it to be inherited by kids? It makes sense to make sure that you use up all of your personal allowance, but deliberately restricting the amount you have to live on just to avoid paying any tax is a bit OTT.

I'm trying to maximise the amount of tax free income available to myself and my wife, rather than have just a tax free income. I'm a higher rate taxpayer so I'm using my pension contributions to reduce my tax exposure, and I want to do as much as I can to reduce tax in retirement.

Apart from withdrawing the 25% tax free lump sum, are there any other ways to get money out of a pension without having a tax hit? Can I transfer it to a VCT or EIS without taking a hit?

Thrugelmir

pile-o-stone wrote: »

Apart from withdrawing the 25% tax free lump sum, are there any other ways to get money out of a pension without having a tax hit? Can I transfer it to a VCT or EIS without taking a hit?

To reiterate what Triumph13 said earlier. "I'm a little concerned that you are obsessing with avoiding tax to the point of letting the tail wag the dog."

Old fashioned solid suggestion.

pile-o-stone

Thrugelmir wrote: »

To reiterate what Triumph13 said earlier. "I'm a little concerned that you are obsessing with avoiding tax to the point of letting the tail wag the dog."

Old fashioned solid suggestion.

I have to say I'm a little confused by your warnings. If I was withdrawing money from the pension and putting it into lesser investments, just to save on tax, then I can understand the 'tail wagging the dog'.

The main reason I posted on here was to avoid exactly this scenario - where taking the 25% tax free lump sum at age 55 was somehow less cost effective than taking it 10 years or more later when I actually retired.

However, no one has said that, so I'm assuming that If I put the 25% into an ISA and invest it into the same funds as my pension, I will have the same growth and suffer no ill effects?

The only warning then was about leaving the 75% in the pensions and not utilising it, which wasn't my intention (I doubt I could afford to). I just wanted to make sure I structured my finances so that every opportunity to take the pension money free of tax was addressed before I then take money out and have it subjected to tax.

I'm not sure I'm explaining myself, but perhaps if you (thrugelmir or Triumph13) could explain what I'm missing with your 'tail wagging the dog' warning? I'm on here to learn and make sure I don't do anything I regret, so any help is very much gratefully received!!