At 55 take lump sum now and reinvest or leave as is

mark55man

Hello

So I turned 55 this year, I am a HRT, and through sacrificing bonuses into the pension scheme not yet losing my allowance. I plan to carry on doing this every year for the next 5 or so which is my target retirement date. However this year is my silver anniversary and would like to splash more cash than usual so I want to take some of the tax free element.

If I am going to go down this route it occurred to me I might as well take the maximum and reinvest (in much the same investments) but in ISAs in which I am 100% deficient, due to high fixed costs, a certain lack of frugality but mainly having lost OH income for most of the last decade looking after DS2. (OH is currently part time and is in the Basic Rate band but with not much taxable income)

My understanding is that by using the remainder of the tax free cash in the ISA would be beneficial as I would then be able to withdraw it when needed and this would be income tax free whereas if I left it in the pension it would be taxed on withdrawal

I know timnig is key - in theory I could do this at any time between now and retirement, but can I ask for any disavantages in this plan, or any advice about how best to time it. The sum is not huge and would only fill one years ISA allowance for OH and I.

For completeness I have another DC pot about the same size which I was planning to leave alone for now, but could do the same with in the next tax year. I am also well under LTA even allowing for the DB element which will be main income at 65. I have had significant annual allowance left over for the last few years, but I understad I cant recycle the lump sum it into my current pension

Sorry for the long question, I beleive this is a good plan, but I know there is always a way to make it better or advice about other ways and I look forward to your help


Mark

dunstonh

My understanding is that by using the remainder of the tax free cash in the ISA would be beneficial as I would then be able to withdraw it when needed and this would be income tax free whereas if I left it in the pension it would be taxed on withdrawal

Not correct. If you dont take all the tax free cash in your pension, then it remains available to take later. So, it would still be tax free. Plus, with the value being higher in future, you would be able to take a greater amount of tax free cash (although if you used the exact same investments in the ISA that bit would be neutral).

but can I ask for any disavantages in this plan, or any advice about how best to time it. The sum is not huge and would only fill one years ISA allowance for OH and I.

Pension is slightly more tax efficient than the ISA whilst invested as it is outside of the estate. ISA is not.

Is this your current workplace scheme or a paid up one? If current, then there is a high probability that it does not support drawdown. So, you would need to transfer it. If you are an active member, that may or may not be possible without leaving the scheme and losing the employer contribution.

mark55man

Thanks dunstonh

OK good point about the estate. Hadn't thought of that - at the moment I'm just beginning to think that aspect through - currently assets are pretty much pension plus house which is well less than £650K but over £325K

I think I understand that if I don't take all the 25% then I can take it later (and it may have grown, and/or take 25% of any new contributions). Withdrawing from ISA is also tax free

The pot I am considering is my current workscheme (the other pot was a SERPS pot I transferred to HL after advice in 2010) and they do allow this - I was at a webinar recently provided by the providing company when they explained how they allow this and to continue with scheme discounts in both the untaken pot and the taken one

AndyAdams

Once you take the tax free lump sum are you then only allowed to contribute up to 4k per year into your pension?

Paul_Herring

AndyAdams wrote: »

Once you take the tax free lump sum are you then only allowed to contribute up to 4k per year into your pension?

No, that's if you take at least a penny more than the tax free lump sum.

mark55man

Paul_Herring wrote: »

No, that's if you take at least a penny more than the tax free lump sum.

Also my understanding.

That is, having taken a penny less than 25% out then I will not access the runp sum until I decide to stop making contributions and need to start drawdown proper

kidmugsy

Are you filling your wife's pension? If not that might be a good use for TFLS.

cloud_dog

mark88man wrote: »

However this year is my silver anniversary and would like to splash more cash than usual so I want to take some of the tax free element.

I'm still scratching my head trying to get past the reason. :shocked:

Are you sure you really need to go down this financial path to achieve this goal? Are you sure you really need to splash sooo much cash?

Do we assume that you have insufficient savings to achieve this, or that you have insufficient financial capacity to accommodate achieving this goal via another means; loan or 0% credit card???

Don't wish to sound negative but this would be the last measure I would consider, and if it is the last measure then perhaps you need to reconsider what/how much you think you need to splash.

mark55man

kidmugsy wrote: »

Are you filling your wife's pension? If not that might be a good use for TFLS.

She is currently on TPS so it is building slowly - ner contribs would be less than £1K this year - I don't think I can use the £3600 trick as well as that, although she may have £3K income in the BR tax range which I could use.


I will investigate further to see if I can do either or both of these things

mark55man

cloud_dog wrote: »

I'm still scratching my head trying to get past the reason. :shocked:

Are you sure you really need to go down this financial path to achieve this goal? Are you sure you really need to splash sooo much cash?

Do we assume that you have insufficient savings to achieve this, or that you have insufficient financial capacity to accommodate achieving this goal via another means; loan or 0% credit card???

Don't wish to sound negative but this would be the last measure I would consider, and if it is the last measure then perhaps you need to reconsider what/how much you think you need to splash.

So - by splash I was thinking of a bit of a do, a slightly more sun kissed holiday, a couple of household improvements and a jewellry item. Very unoriginal but there you go.

Against that background I did consider just opening up the CC a little knowing I had the abaility to cover it when needed. I do understand your concern if this was a wanton raiding of my future pot for luxury today, however in my mnd this is a specific tactical move to turn a highly succesful year (and bonus) into a pension contribution to minimise tax but also to return it to me via the TFLS as I am eligable to do this.

Now I can hear you saying I can do both - leave the money in the pension and build up a bit of debt this year with higher than usual spendthriftery. I don't entirely disagree with you, its just at the current moment I am feeling with 2 years to go on a 2 car loan and a zero % CC that is sitting at 8K I am already at (actually over) the boundary of where I feel comfortable. An alternate line of thought was instead of putting the TFLS into ISA was just to clear debts and start clean - but I rejected that along the lines you are concerned about

mark55man

So after a bit more research and discussion and the plan is

* take the max TFLS from my current employer pension
* help my OH's set up pension (SIPP or other vehicle TBD) for the amount of her taxable income for her so that she gets BRT refund - but double check what effect her existing TPS contribution already has and think a little about investment choice but largely replicating what was there but in cheaper funds
* contribute most of what's left half and half into ISA for me and OH - similarly invested
* retain the rest in cash for anniversary activities
* rinse wash and repeat next year with my other pot - then leave it all alone until 2023

Thanks all for your help