Pension income sequencing

PJM_62

Advice appreciated on best approach to income sequencing when in 2 years I take early retirement at 55.
I'd like to find most tax efficient way to achieve a pension of 18k, (which will supplement my wife's DB pension of 10k also payable in 2 years.) (so 28k joint pension)
Married, kids left home. No mortgage or other debts.

• At 55 - reduced workplace DB pension will be 6.5k + 19k lump sum (commutation rate of 22 to buy more pension)
• At 55 - workplace DC pension (AVC) pot of about 100k. (commutation rate of 44 to buy more of the DB pension)
• At 55 - ISA s&s VLS funds of 100k
• At 60 - an old preserved DB pension kicks in of 6k + 18k lump sum.
• At 67 - full SP of 8.5k for both me and my wife

TIA for any advice on best way to sequence this.

Linton

Can you take your AVC without taking your DB pension, eg by transferring elsewhere?
What and when is the full DB pension?
Can you take the DB TFLS from the AVC, thus increasing your DB income?
Is your wife's DB pension also reduced?
After retirement in 2 years time do either of you have any other income?


My initial thought was for you to take your DB pension at 55 and £6K/year from your AVC to fully use your £12500 (currently) tax allowance.The extra £5.5K/year can come from your S&S ISA. Put the tax free lump sum into your S&S ISA or use as a cash buffer/emergency fund.

The idea behind my questions is that there may be advantage in delaying the DB pensions in order to extract more of the DC pension tax free.

LHW99

Slightly off topic, but don't forget to check the position of the survivor if the unthinkable were to happen.

AnotherJoe

Put as much as you are able into a new DC pension (Or existing AVC DC pension) over the next two years, getting the 20% relief (I presume you are not a HR taxpayer?) , and then burn that down under the tax threshhold when you are 55, thus getting maximum benefit from the tax bump, also allowing you to delay taking the DB pension for a year or two and thus losing out less on that reduction.
Time is short but you could put some more into your existing AVC now, this week without having to start a new DC pension

Linton

AnotherJoe wrote: »

Put as much as you are able into a new DC pension (Or existing AVC DC pension) over the next two years, getting the 20% relief (I presume you are not a HR taxpayer?) , and then burn that down under the tax threshhold when you are 55, thus getting maximum benefit from the tax bump, also allowing you to delay taking the DB pension for a year or two and thus losing out less on that reduction.
Time is short but you could put some more into your existing AVC now, this week without having to start a new DC pension

Likewise for the Mrs, if not more so.

PJM_62

I'm paying as much extra into the current workplace DC pot as I can afford to between now and 55. The 100k DC pot I quote includes that.
+ ISA is maxxed for 18/19.
Beans for tea again tonight

My DB pension is the universities USS scheme. I'm not a HR tax payer.
I think the figure I was quoted for not drawing on that DB pot until age 67 was 9k. So only an extra 3k or so (+ larger TFLS obviously). I thought I might as well just take that reduced DB now and find best way to build the extra needed on top. But I'm happy to change plan if advised.

My other DB at 60 is an armed forces pension.

Wife's DB is a retire at 55 NHS pension with no reduction. ('special class' nurse).
She would be able to do some hospital bank shifts if necessary.

Neither of us want for much, but having both worked full time since age 17, we want to enjoy worry free retirement , the time + the fruits of our savings / investing, by doing a little travelling and doing some volunteering.
I think we'll be financially ok for our needs. Esp once our state pensions kick in.
Just don't want to make any bad sequencing mistakes. So appreciative of all advice from those that understand these things

Linton

Were your wife to put say £20K into a SIPP using S&S ISA money over the next 2 years it would be increased to £25K by HMRC and the whole lot could be taken out tax free over the following 7-8 years, ignoring any charges and increase in value of the SIPP.


In your situation it is less advantageous because of your large taxable AVC.

PJM_62

The 100k DC pot I quote, includes 20k that I'm paying in this year. And another 20k planned for next year. (hence the beans for tea again)
Next year I wont be able to fill my ISA as well.
Would I be better off not doing the DC payments and instead put the 20k into 2019/20 S&S ISA (VLS funds). ?

Linton

PJM_62 wrote: »

The 100k DC pot I quote, includes 20k that I'm paying in this year. And another 20k planned for next year. (hence the beans for tea again)
Next year I wont be able to fill my ISA as well.
Would I be better off not doing the DC payments and instead put the 20k into 2019/20 S&S ISA (VLS funds). ?

Assuming that you invest in the same things in the DC pension and an ISA and that you are a basic rate tax payer both before and after retirement then the DC pension has a 20% of 25% =5% advantage. If however you are not a taxpayer when drawing the DC pension then the figure becomes 25%.

However the 5% advantage at least could disappear if the SIPP provided better investment options than the ISA.

Albermarle

you are a basic rate tax payer both before and after retirement then the DC pension has a 20% of 25% =5% advantage.

It is actually a 6.25% advantage for the pension e.g.
Contribute £800 to a SIPP . HMRC add £200, so you have a £1000.
Take £250 tax free then pay 20% tax on £750 . Final result £850 in your pocket : £50/£800 X 100 = 6.25%

Aiki

When I ran my numbers for my upcoming 55th Birthday, I thought that the DC option first and leaving my DB to closer or at the non-actuarial reduction date would be better but it showed better to take the DB early. What I did was set up a speadsheet with the various options and ran different scenarios of CPI/RPI and investment performance. This included trying to pay no tax on DC in the early years by using ISA to supplement my icome needs. In my case, the 5 years of income of the DB before 60 would dominate all scenarios i could come up with. If I live to my mid to late 90's it may become a problem but I will worry about that in 40 years time. My only decision now is whether to take any lump sum from my DB. The benefits are marginal.

You will need to run your own numbers with your own assumptions to test the options. Good luck.