Retirement Preparations

kidmugsy

pile-o-stone wrote: »

Or is that only if you recycle the 25% tax free lump sum back into your own pension?

That's what the rules are aimed at, and for modest sums (i.e. for thee and me) they are quite forgiving.
https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/pension-lump-sum-recycling

Note that if you take your tax-free lump sum initially at a "drip" size of £7,500, and with a gap of more than 12 months between each "drip", you can recycle as much as you like of it into your own pensions.

Nor is there any "recycling" obstacle to your bunging money into your wife's pension. Her max total gross contribution per tax year equals her earnings (not her income), or £3,600 if that is larger.

Is she earning at the moment?


P.S. Also:
https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

You'll see that if you did take a £50k TFLS that you could use up to 30% of it (£15k) as pre-planned extra gross pension contributions for yourself and still not violate the rules.

Thrugelmir

pile-o-stone wrote: »

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!!

While it's prudent to invest in a tax efficient manner. Don't base investment decisions purely on tax considerations. As a very wealthy person once said to me. Worry about tax once you've made the money.

pile-o-stone

kidmugsy wrote: »

Nor is there any "recycling" obstacle to your bunging money into your wife's pension. Her max total gross contribution per tax year equals her earnings (not her income), or £3,600 if that is larger.

Is she earning at the moment?

I'd be more inclined to put the money into my wife's pension rather than mine as I'd be back to square 1 as far as my tax free status is concerned, albeit £10k better off due to the tax uplift from depositing the £50k back into pension.

My wife does work, but isn't earning a huge amount (I think about £20k), so I could max out her contributions for three years and the whole £50k would be taken care of.

She could also take a 25% lump sum at 55 and recycle this into another pension, further increasing her pension pot.

I think I now understand what Thrugelmir was saying about tail waggign the dog? It's better to recycle into my wife's pension and receive the 20% tax rebate than to put it into an ISA. This means that we could both use the maximum of our tax free earnings threshold (£25k at current levels), which is a reasonable tax free retirement income. Plus if we want we can release more money from the pensions (though pay basic rate tax on it).

tony4147

I think the OP is asking a very sensible question, we all want to reduce our tax burden in retirement, just not sure of the best way to do it.
I'm now 55 and I've been wondering about taking the 25% TFLS and opening a S&S ISA and putting the money in there, I can probably invest in the same funds as my pension. Therefore any growth the 25% TFLS makes in the S&S ISA wont be subject to tax when with withdrawn, but if it were left in my pension then 75% of the growth would be subject to tax when withdrawn.
Not sure if I'm correct with my thoughts, I will let my IFA advise me.

kidmugsy

pile-o-stone wrote: »

My wife does work, but isn't earning a huge amount (I think about £20k), so I could max out her contributions for three years and the whole £50k would be taken care of.

Excellent - it might be worth thinking about the best way to do this. For instance, can she contribute more to her work pension? Can she use salary sacrifice?

With some work pensions it would make no sense for her to drive her earnings down below the Personal Allowance. In that case she'd want to make at least part of her contribution to a personal pension of some sort.

pile-o-stone

Thrugelmir wrote: »

While it's prudent to invest in a tax efficient manner. Don't base investment decisions purely on tax considerations. As a very wealthy person once said to me. Worry about tax once you've made the money.

I agree with the sentiment, but I don't really understand which tax efficient investment decisions I've discussed would be imprudent?

Sorry if I'm being dense, I'm new to this sort of planning, so what you're hinting at is likely obvious to the regulars in the section, but I'm really struggling to understand what you're advising here?

Are you saying I should not take the 25% TFLS from the pension at age 55, age 65 or not take it at all?

Or that I should take the 25% but not put it into an ISA but put it into my wife's pension?

Or something else entirely?

pile-o-stone

kidmugsy wrote: »

Excellent - it might be worth thinking about the best way to do this. For instance, can she contribute more to her work pension? Can she use salary sacrifice?

With some work pensions it would make no sense for her to drive her earnings down below the Personal Allowance. In that case she'd want to make at least part of her contribution to a personal pension of some sort.

My wife has a workplace pension as part of the Auto enrollment legislation (NEST?). It's not a salary sacrifice scheme though. She may be able to contribute more in future, but she is paying off a professional studies loan and in the process of starting a new part-time business so money will be tight for a while.

Linton

tony4147 wrote: »

I think the OP is asking a very sensible question, we all want to reduce our tax burden in retirement, just not sure of the best way to do it.
I'm now 55 and I've been wondering about taking the 25% TFLS and opening a S&S ISA and putting the money in there, I can probably invest in the same funds as my pension. Therefore any growth the 25% TFLS makes in the S&S ISA wont be subject to tax when with withdrawn, but if it were left in my pension then 75% of the growth would be subject to tax when withdrawn.
Not sure if I'm correct with my thoughts, I will let my IFA advise me.

If all tax is at say basic rate it works out the same whether you put 25% into an ISA now and get x% return and pay tax on the other 75% later, or get x% return in the pension and withdraw the whole lot later, 25% tax free and 75% taxed.

eg you have £40K in a fund which will give 100% return in 10 years...

You withdraw 25% now and put it in an ISA which increases its value to £20K and keep 75% (£30K) in the pension which after 10 years increases its value to £60K. After 20% tax this gives you £48K and a total of £68K if spread over several years.

If you dont withdraw from the pension until after the 10 years: you will have £80K in your pension, £20K is tax free and £60K is taxed at 20% giving a total of £68K if spread over several years.

Or mathematically: a X b = b X a



The best trategy is to take out all the money you can whilst keeping within your long term tax band.

kidmugsy

pile-o-stone wrote: »

She may be able to contribute more in future, but she is paying off a professional studies loan and in the process of starting a new part-time business so money will be tight for a while.

Then let her contribute when she can afford to. After all she can continue contributing tax-efficiently until she is 75. No rush.

Triumph13

As Linton says, it makes no difference when you take your 25% (provided tax rates don't change and you aren't near LTA). The only thing that matters tax-wise is how you take out the 75% ie making best use of the PA and the 20% band.
You are not supposed to take two bites at the cherry by putting your lump sum back into a pension. It is possible to dodge around the rules on this, particularly for a couple, but it's something many people would consider an abuse of the system. It's good to know that you are indeed planning to draw down the 75% as this wasn't clear.