about to hit 55 - some choices to make

markyp64

Hi there – I am 54 and am toying with some ideas about managing my finances – particularly my pension - going forward. I wondered if anyone could spot any fatal flaws in the following approach (or, if so, suggest any other strategies someone about 55 might consider to make the most of current pension freedoms/tax arrangements).

I have a healthy pension (value ~ £860k) but relatively little in the way of ISAs. I now freelance and basically spend what I earn on ongoing expenses - not expecting to invest any more going forward. Given that I am 55 next May and am aware of the possibility of Govt withdrawing the 25% tax free lump sum pension withdrawal benefit I am thinking of maxing out my pension contribution this FY (in March 2019) and then taking out the full lump sum when I am allowed to (May 2019). That would mean an AVC of £40k for this year plus I also have unused pension allowances of ~£4k for both 2015/16 and 2016/17 (when I was a high rate – 40% - taxpayer) and around £35k in 2017/18 (when I was a low rate taxpayer) – making a total of up to ~ £80k contribution if I wanted to (I think). Having taken my 25% tax free lump sum I would invest this in a balanced portfolio along the lines of my current pension and drip feed this into ISAs over the coming years.

The major downside I would see is that investing more in my pension would put me at an increased but still modest risk of exceeding the (current) £1m+ ceiling at which tax on pensions becomes prohibitive. (and what are the chances of the £1m ceiling being reduced and without any of the current protections??) But I also understand that as long as I take enough income out of my remaining pension to offset any capital growth then I won’t be subject to such taxes. On the upside I would get a one-off bonus (I will get 25% of the 80k back tax free yet will have received 25-40% of tax back on my contributions – so worth £5-8K). This approach would also, over time, re-balance my retirement portfolio towards ISAs.

Alternatively, of course, I could just use the lump sum to buy a Maserati!!

Sorry a bit long winded and raises a number of issues. Many thanks in advance for any thoughts

Linton

I don’t see any chance whatsoever of the removal of the 25% tax free lump sum. Firstly it would remove the main reason for basic rate tax payers to pay more into pensions than required to maximise the employers contribution and secondly the tax free lump sum is a major part of many people’s retirement planning, for example to pay off the mortgage. For the latter reason the government would need to give many years notice of any change.

You cannot contribute more into a pension than your earnings in any one tax year. From what you say it doesn’t seem you will have £80K earnings this year.

One thing you may need to look at is whether you will be able to drawdown your pension before you die without paying higher rate tax. If this could be a problem putting more into your pension would not be helpful.

kidmugsy

A better reason for taking out some lump sum would be to fill ISAs before a reduced annual allowance is introduced for them, or indeed a lifetime allowance.

Another good reason might be if you want to de-risk your portfolio by holding more cash. Unless your pension is rather unusual you'll get better interest rates outside a pension. Also, you can hold Premium Bonds outside a pension, which are a good tax-free home for cash for someone who might exceed his savings allowance i.e. his permissible annual tax-free interest. You could also buy some gold sovereigns as part of an attempt to diversify and de-risk.


Pursuing those thoughts, any potential pension contributions this year that would not save you 40% tax might be better off bunged into an ISA for tax year 18/19.

Use your tax shelters while you may - and your wife's too; perhaps also the children's.

AnotherJoe

OP, what you are contemplating is what I did, specifically to avoid chance of hitting the LTA, drip feeding the sum into ISAs, easier if you are part of a couple as thats £40k/year.
I didnt do it because of the fear you have about the LTA being reduced or the tax free 25% going, as said above, that would be far too disruptive and counter productive, it was purely above LTA for me and I think you are in the same position.


As Linton said, if you are now a basic rate taxpayer you wont be able to use up past gaps you can only put in up to what you earn even if you do have left over allowance from previous years.

Albermarle

Currently the LTA is set to rise annually with inflation. In case of a change of political direction , it is more likely to be frozen rather than reduced. As already said I can not see the 25%TFC being changed.
Apart from the various tax and contribution questions , the OP does not mention what kind of funds the £860K is invested in . If heavily skewed towards equities then a big drop in the markets would solve any LTA issues overnight !

Triumph13

As others have said, the most you can contribute is your earned income for this tax year and you'll only get 40% relief if you are a 40% taxpayer this year. What you can do is get 20% relief on a slug of income that wasn't actually taxed by contributing all of your income for the year. Whether or not it's worth it comes down to how confident you are of getting it back out at lower than 20%. If you stay below LTA and the basic rate doesn't go up then you'd be paying 15% on the way out so it's a good deal. If you end up breaching the LTA then you are paying 40% on the way out which makes it a terrible deal. Time for some detailed spreadsheets!

atush

Given that I am 55 next May and am aware of the possibility of Govt withdrawing the 25% tax free lump sum pension withdrawal benefit

Not going to happen.

But if you do take the TFLS, do put it into ISAs going forwards (and some pension too if you like- how is your OH's pension?). That would be a good idea.

atush

In case of a change of political direction , it is more likely to be frozen rather than reduced.

You sure about that? I'm not.

Silvertabby

“ In case of a change of political direction , it is more likely to be frozen rather than reduced.

atush wrote: »

You sure about that? I'm not.

Just pray that Corbyn doesn't lie and slither his way into No 10. Private pensions would be a very tasty target for him once he runs out of money.

Albermarle

To be honest ,it is surpising that such generous rules applying to pensions still exist even before the 'threat' of Corbyn came looming, 40% tax relief is basically the opposite of income redistribution .
and is a taxpayer funded subsidy for the already better off
I make use of it, but it must be one of the more poorly targeted uses of public funds that there is.

Triumph13

Albermarle wrote: »

To be honest ,it is surpising that such generous rules applying to pensions still exist even before the 'threat' of Corbyn came looming, 40% tax relief is basically the opposite of income redistribution .
and is a taxpayer funded subsidy for the already better off
I make use of it, but it must be one of the more poorly targeted uses of public funds that there is.

Maybe they have a cunning plan - raise the HRT band to £50k and then do away with 40% relief when there are less people to complain...