Can I take taxable DC income before tax free?

SMcGill

My early retirement at 57 will be funded by cash savings so my taxable income will only be whatever interest I receive on a declining savings balance for 10 years. This is likely to be £7k p/a max in the early years.

I also want a healthy cash reserve and I wondered whether I could use my DC pension and draw on just the taxable income if needed i.e take advantage of the personal tax threshold?

Is there a way to leave the tax free element untouched or is it a hard rule that this must be taken before / alongside taxable income?

Dazed_and_confused

You could take £11,500 taxable income from the DC pension before you would have any tax to pay so UFPLS may be the best (only?) option.

Withdraw £15,333 of which £3,833 is the 25% tax free.

Others will no doubt say if you can get the taxable element out without any tax free but not sure this is possible.

SMcGill

Thanks, I thought that might be the case but didn’t want to assume it was just because I couldn’t find the answer myself.

Maybe instead of using my DC pot as a reserve fund I would be better off using it to fund a few years of my early retirement? At the moment I’m holding all my income needs from 57 to 67 in cash savings and I’m far, far below maximising my pension contributions.

Dazed_and_confused

Even if you're not earning you can contribute £2,880 into a relief at source pension and the pension company will top this up to £3,600 with basic rate tax relief. Even if you don't pay any tax.

If you keep the DC fund in reserve could you end up having to pay tax on the taxable element when you do eventually take it i.e. after your State Pension and DB(?) pension come into payment and utilise your Personal Allowance.

The savings starter rate and savings nil rates of tax may still be around then but it could be argued you are currently only really using £1,000 of your Personal Allowance and will end up paying tax on the DC pension if taken in the distant future.

SMcGill

If you keep the DC fund in reserve could you end up having to pay tax on the taxable element when you do eventually take it i.e. after your State Pension and DB(?) pension come into payment and utilise your Personal Allowance.

Yes, that’s exactly what’s going to happen as all my early retirement income is currently in cash savings. From 67, my SP and DB pensions all start.

That’s why I was wondering whether to put my reserve money (for treats or troubles) into my DC pension rather than hold it as more cash savings ... or go further than that and fund say £10k p/a of my early retirement income by moving some of my cash savings into my DC pension now.

jamesd

SMcGill wrote: »

Is there a way to leave the tax free element untouched or is it a hard rule that this must be taken before / alongside taxable income?

Hard rule. Workaround is to say take 20k tax free lump sum and pay it into an ISA with the 75% taxable placed into a flexi-access drawdown account. Then take out whatever taxable amount fits.

Dazed_and_confused

That’s why I was wondering whether to put my reserve money (for treats or troubles) into my DC pension rather than hold it as more cash savings ... or go further than that and fund say £10k p/a of my early retirement income by moving some of my cash savings into my DC pension now.

Well if you have sufficient earnings to put more than the basic £2,880/£3,600 then you would get the immediate 25% uplift on anything added to the pension. And even if held in cash within the pension wrapper that may be better, for a few years at least, than the interest it's currently earning.

But if course once in the pension it can't be touched until you are 55 at the earliest.

MK62

From the info you've given, on the face of it, it would seem that the most efficient method at retirement would be to take an UFPLS each year from your DC pension, at 1.333x your Personal Allowance (1.333x because each UFPLS has a 25% tax free element).
Be careful in the tax year you retire though, if earning, as some of your PA will already have been used.

Once retired, then if your PA is the standard £12500, that means an annual UFPLS of £16666 each tax year, would be entirely tax free (you'd pay tax of course, due to the way PAYE works, but you could immediately claim it back using a P55 form).
On top of that, you could also earn £6000 pa in interest, tax free, using the Starting Rate for savings (£5000) and your Personal Savings Allowance (£1000).

If you currently have earnings to allow large lump sum payment(s) into your DC pension, then that would usually be very worthwhile.....(plus it might take your annual interest below £6000)

However, it might depend on the amounts involved....the size of your DC pot and the desired post-57 annual retirement income etc...

SMcGill

Thanks, there’s clearly something worth looking into here if I put aside my very old-fashioned ideas of keeping everything I need sitting in the bank ... better than under the mattress but maybe not by much!

I’m 55 now, so I have a couple more years to sort out a better plan. Sounds like my current set up of £350k cash savings and £50k DC pot is not the best balance. I’ve got at least £75k unused pension allowance accrued and 2 more years to add savings so this should help.

My post-67 finances are okay as my DB and SP will cover my everyday income needs, but I’ll speak with an IFA about restructuring my 57-67 finances.

MK62

SMcGill wrote: »

Thanks, there’s clearly something worth looking into here if I put aside my very old-fashioned ideas of keeping everything I need sitting in the bank ... better than under the mattress but maybe not by much!

I’m 55 now, so I have a couple more years to sort out a better plan. Sounds like my current set up of £350k cash savings and £50k DC pot is not the best balance. I’ve got at least £75k unused pension allowance accrued and 2 more years to add savings so this should help.

My post-67 finances are okay as my DB and SP will cover my everyday income needs, but I’ll speak with an IFA about restructuring my 57-67 finances.

Remember though, that you can only use this "£75k unused pension allowance accrued" if you have current tax year earnings to match, plus £40k.

For example, if your total contributions were £15k pa for the last 3 tax years, you'd have £75k in unused annual allowances, but you could only use that fully if you earned £115k this tax year (£40k for this tax year's annual allowance, then £25k for TY16/17, £25k for TY 17/18 and £25k for TY18/19).

SMcGill

Yes, fair point thanks I may need to move savings into DC pension by stages across both 2019/20 and 2020/21.