It's time to start digging up those Squirrelled Nuts!!!!

enthusiasticsaver

Sea_Shell said:

BarbaraG2000 said:

So now here we are, aged 57 (me) and 61 (him), with zero income until our various DB and state pensions kick in, between 3.5 and 10 years from now.  But that’s fine, because we have got a whole load of ISA’s, from which we will be taking a monthly ‘income’ from next month.  Plus a DC pension pot each, which is going to be left to grow.

Any particular reason you're doing it that way round? *   ISAs first and leaving DC pension untouched?

Will you be both utilising your Income Tax Personal allowances over the years until other pensions kick in??

If you don't use it, you lose it!!!     Why pay tax on a joint £25k per annum if you don't need to?   



As you can see from my post above, we're actually doing the complete opposite!!!    This means that we can "get at " our DC pensions pots in the most tax efficient way possible, to both live off and reinvest into our ISA's if any is spare.


* ETA - is this purely as a consideration of the IHT rules?

I wondered this as well.  I can understand this year as presumably the personal tax allowance has already been used although if @BarbaraG2000 retired in May then maybe not.  My personal preference would be to draw on the DC pot and leave the ISAs untouched too.  As you say if you don't use it you lose it.  We should have drawn more on our DC and SIPPs in the first year or so of retirement as there is little leeway in my allowance now and none in DHs so we will probably end up paying tax on any withdrawals now.  To be fair though we did not draw on it because we did not need it so hopefully the additional growth will offset the eventual tax when it is drawn.  Another option is now to switch to ISAs for withdrawals as I think pensions can be transferred to heirs although I have not investigated that yet so we might be better to now leave them untouched as we are almost at the point where the amount I can take out of the pension without paying tax is pitiful and they always remove tax and I have to claim it back anyway. Then we just transfer the pensions to our daughters names at some point. Not sure it is that easy but will do some research. 

Sea_Shell

@Dizee123

Glad your enjoying the thread.     

I've promised to try and increase our spending...but only on things that bring us joy!!   

But then we've never been ones that have needed stuff or things to make us happy...so not sure extra spending will make us "happier" if you see what I mean!.

We're still going to make sure we get good deals on all the "have to buys".

BarbaraG2000

Re using ISA first rather than DC….

We did originally intend to do it the other way round, the plan was to put the DC’s into flexible drawdown, NOT to take the 25% tax free up front but to have 25% of each withdrawal tax free. This would enable each of us to withdraw £1,250 each month, giving us the £2,500 total income we want, and we would both remain below the personal allowance threshold. For me this would only have started in the next financial year, as I have basically used all my allowance for this.

However - did I mention our IFA retired and we got a new one at the crucial point? The new one recommended drawing on the ISA’s first so as to reduce the size of our estates and therefore future inheritance tax. If we die before the age of 75 apparently our heirs can have the pensions tax free anyway, whereas they would pay IHT if the ISA’s plus house exceed the threshold, which they currently do by a long way.  The money within the ISA’s is all tax free, as are the pensions as long as they stay there.  I think she said that if we die after age 75 then our heirs can choose between taking the pension pots as a lump sump or an income, and either it is liable to income tax at their marginal rate. So depending on their circumstances, they may well pay less tax on that than they would on the house and ISA money.

Of course, neither of is planning on dying any time soon….. and when one of us does, the other one will inherit without IHT anyway. We have no children, so have left the residue to our nieces and nephews - who are probably not expecting it, it will be a bonus for them.

The good thing is, none of this is set in stone.  So if rules or circumstances or priorities change, we can draw income from a different pot easily enough.

In terms of income tax liability going forward - we have some to sort out for last year because we were renting this house back to the developer as a showhome for the past 15 months, so we both have a bit of tax to pay for 2020/21.  For 2021/22, neither of us will have any liability, so I think that means I will get a refund because I was on PAYE on the assumption I would be earning for the full year whereas I only did 4 months. Beyond that - we will both do occasional sessions in relation to our previous job, but it pays peanuts, I doubt we’ll earn as much as £1,000 in a year.  So, no income tax to pay until the DB and SP kick in.

Sea_Shell

You're like us in that respect too...no children, just nieces and nephews, so we only get to have a joint IHT allowance of £650,000.

I do understand the reasoning around the DC pensions being exempt.

Personally, as our house is "only" worth £400k, we're currently only just over IHT, and as we take pensions this may increase.

I'm guessing your house is worth significantly more than ours!?

However if we both die "soon" IHT will not be "our" problem and the N&Ns can hardly quibble on sharing the balance!!!

Our plan is to start gifting once DB/SP are in play...if we remain consistently above the IHT threshold.

So for us, I feel the "DC before ISAs" is a solid plan.

Rather a bird in my hand, than potentially 2 in the IHT bush!!

enthusiasticsaver

I think to a certain extent we are ignoring the inheritance tax for now even though we have children.  We are still relatively young for retirees and still have a lot of things we want to do so our priority is to do that and make sure we are covered for care costs above all else. If there is anything left then we will try and minimise  IHT but we have already gifted them quite a lot to help with house deposits etc so anything else will be a bonus for them.  I certainly do not intend to reduce assets as low as possible to avoid our house being sold for care costs as we do not want to rely on state help in old age. 

MallyGirl

We are also not particularly thinking about inheritance tax - with just one child she will get a lot anyway even if there has been tax deducted. We are planning on living a good few years and have a full set of parents still doing well (some good for age in 80s and some just fit as a fiddle) so we will support her but prioritise ourselves for a while.
I will be withdrawing just under the 20% threshold from DC then adjusting for the tiny DB that starts at 60, OH will be doing some LTA management and taking just under the 40% threshold. What we don't spend (if any) will go into ISAs, PBs and savings accounts.

ex-pat_scot

MallyGirl said:

We are also not particularly thinking about inheritance tax - with just one child she will get a lot anyway even if there has been tax deducted. We are planning on living a good few years and have a full set of parents still doing well (some good for age in 80s and some just fit as a fiddle) so we will support her but prioritise ourselves for a while.
I will be withdrawing just under the 20% threshold from DC then adjusting for the tiny DB that starts at 60, OH will be doing some LTA management and taking just under the 40% threshold. What we don't spend (if any) will go into ISAs, PBs and savings accounts.

Sensible.

In general principle, there is a balance between the desire to retain funds in pension wrapper until required, from IHT perspective, set against the desire to minimise LTA impact (particularly the age 75 BCE).
I haven't researched in detail yet, but the broad plan is to deplete up to top of BR tax each year, from 55, and use any surplus in ISA / PB / offset mortgage (if not paid off).

It's important to be aware of the broad tax implications of the strategy, but not get too wound up in the detail and end up having the tax tail wag the dog.

BarbaraG2000

@Sea_Shell Our house isn’t worth significantly more than yours - they are selling the same design on the same estate for between 435 and 449, and I think brand new carries a premium so we wouldn’t get that if we put ours up for sale.   But our ISAs are nudging up against the IHT threshold on their own.  I occasionally have to pinch myself, and wonder how we got here.

We carried quite a bit of cash in instant or nearly-instant access for quite a while, on the basis we weren’t quite sure how much we would need and when, with house purchase and set-up and a new car being top of the list.  Both of those are now resolved and we have done pretty much all the house set-up spending we intend to.  Just the car charger and (if I can persuade the husband) solar panels to go.  

That would leave us with a cash buffer of about 5 months’ expenditure, which is enough to cover most of the emergencies I can envisage as well as a nice post-retirement holiday, if that ever becomes feasible again.  If there are other big spends ahead, such as replacing the 2nd car, we would have time to plan it and access the ISAs in an orderly way.  We intended to change my car after we moved, but the previous one became expensively unreliable last Autumn, so I bought a nearly-new electric one in November, which I absolutely love, and although expensive to buy is much much cheaper to run than my previous diesel.  Husband is driving a 10 year old little Toyota iQ, also very economical to run (though not as cheap as an electric).  We are keeping that for the foreseeable, which gives us time to assess whether we need 2 cars.  We haven’t done since we moved, it has only been out of the garage for the sake of giving it a run.

We have always been the sort of people whose instinct has been to try to save at least a bit each month, so I wouldn’t be surprised to find that once we are well and truly settled, we are not actually spending the amount we have allocated ourselves.  But instructions are easily changed - there will be no need for us to accumulate more instant access cash, so if it comes to it we would reduce the monthly income we are taking.

Sea_Shell

Sorry I must have misunderstood.

I thought your "pot" was £450,000?!?

"At the start of 2020, we had a total of nearly £520K, we withdrew £100K in March 2020 from a pot which had fallen significantly, and as of today our pot is £450K."

I take "pot" to mean everything available for retirement, so cash, ISAs, and DC pensions.

So only excluding DB pensions and house from your total net worth.

What is your total pot, then?

How is it split between cash, DC and ISAs?

german_keeper

Dizee123 said:

It has been interesting to note that there has been a marked change in my spending habits this month now that it is my savings/pension that I am spending rather than a salary.  

This may be completely irrelevant to your circumstances or indeed already factored in.

I am hoping to do something very similar next year. Officially retired from 1st August but with accrued leave off into the sunset around end of May. I am already in receipt of my DB pension, taxed at BR. But I am leaving my DC pension to the following April and we intend living off my DB, my wife's salary and savings until then. During April to July I will pay tax on both my DB pension and wages but I have worked out that I should get back somewhere between £500 and £600 of the tax I will pay during that time.

Not sure I could get anything like that return from savings unless I end up having to cash in some premium bonds and happen to miss out on some decent prize money!