Maximising tax free income leaves me worse off?

SMcGill

I’m 56 now and hoping to retire at 57. I’ll have no income apart from interest on the savings that I plan to live off until my DB and state pensions kick in. By age 67 my state and DB pensions will cover my basic needs and I’ve been building a private pension to top this up to a more comfortable level.

I’ve read many posts here about minimising tax and this made me look at taking my personal pension early on, when I won’t have taxable income, instead of using it to top up my income post 67, but it seems to leave me worse off.

Am I not understanding how tax works, or is my maths right and it’s simply my circumstances that make it more efficient? Had anyone else been in a similar situation?

AnotherJoe

It's hard to unpick a post about whether someone's understanding of nunbers is off when it contains no numbers
As at school, show your workings

xylophone

I’ve read many posts here about minimising tax and this made me look at taking my personal pension early on, when I won’t have taxable income, instead of using it to top up my income post 67, but it seems to leave me worse off.

You have a personal pension which you can access from age 55.

Let's say that you give up work at age 57 on 6/4/20.

You want your savings and pension income to cover you for the eight years until you draw your DB pension.

How much interest do you anticipate on your savings?

How much is the personal pension pot?

SMcGill

I’ll try! I can’t post the spreadsheet but here’s how I worked it out

Income needs = £30k net from 57 to 70, then £27k net to75. I haven’t planned further out.
Assumed income needs to increase 2.5% pa
Personal pension = £93k. Assumed this keeps pace with inflation only
DB pensions at 65 = £15,200 and State Pension at 67 = £8,800. Both gross figures
Total index linked pension at 67 = £24,000 or £21,700 net, so shortfall for 8 years to get this to £27k net

NedS

Once you hit 65, your DB pension income already exceeds your personal tax allowance (at current levels), so anything you take out of your DC pot will attract income tax. For that reason you should probably look to use your tax free allowance every year from 57-65 to draw down your tax free allowance regardless of whether you need that income at that time or not (if you don't need it, just reinvest into an ISA). The aim is to withdraw as much as you can from your DC pot tax free.

cloud_dog

You've not provided full information, missing savings pot, so it is difficult to know if you can achieve your target income goal(s) but, in your shoes I would be taking an uncrystalised UFPLS withdrawal (£16666.66 each year, based on current 19/20 personal allowance and 25% tax free) and topping this up with your savings to £30k.

Based on this your personal pension will only last 6 years (assuming some growth), and we have no knowledge of your savings pot so really cannot comment further.

Linton

Its far from clear what your problem is. It is far from clear how are you going to fund the:
£30K from 57 to 64 inclusive=£240000
+ approx £15340/year from 65 to 66= £30680
+ £8300/year from 67 to 69=£24900
+ £5300/year from 70 to 74=£26500


Total sum required:£322080.



And that is assuming zero inflation. And why stop at 75? You could easily live a further 20 years.

Brynsam

SMcGill wrote: »

Income needs = £30k net from 57 to 70, then £27k net to75. I haven’t planned further out.
Assumed income needs to increase 2.5% pa
Personal pension = £93k. Assumed this keeps pace with inflation only
DB pensions at 65 = £15,200 and State Pension at 67 = £8,800. Both gross figures
Total index linked pension at 67 = £24,000 or £21,700 net, so shortfall for 8 years to get this to £27k net

If you plan to retire at 57, and state/DB pensions don't kick in until 67/65, you have to fund 8 years (ignoring inflation) to give you £30K a year net. That's £240K, so your personal pension of £93K (again ignoring inflation for simplicity) leaves you a shortfall of £147K over that 8 year period. Somehow I suspect your interest isn't going to cover that, never mind any tax due!

Your figures look way off reality.

jamesd

Since it's a tax gain and you've provided no tax calculation details it's of some but limited use.

You're still working and you should try to make gross pension contributions equal to gross pay, within the annual allowance.

You can take a pension tax free lump sum while working and can use 30% of its value to help increase pension contributions without needing to get into the other restrictions on recycling pension tax free lump sums. With 93k that's 23.25k. Anything extra from this can be placed into a stocks and shares ISA and invested as in the pension. The 75%, 69.75k, should go into a flexi-access drawdown account that you take no money from until you've made your last pay-based pension contributions; that's to avoid triggering the MPAA restriction to 4k a year from the time you flexibly access your pension, the tax free lump sum doesn't count. As soon as you've made your last pay amount based contribution you can start to take taxable money if you like.

In each tax year until you reach age 75 you will want to make gross pension contributions of 3600, 2880 net since this provides a tax benefit.

With a desire for 30k a year net and only 93k it's plainly impossible to do this for more than a bit over 3 years so your intent to do it from age 57 to 65 is unachievable unless you have more money. I assume you do, since you wouldn't have planned obvious failure. But that's a problem for us because it might be taxable. I'll just assume it's there and tax free when taken.

Say you start to take taxable money from the personal pension when the DB pension is in payment. The 15200 from it uses your whole income tax personal allowance. The money from the personal pension will be taxed at 20%.

Take the taxable money from the personal pension before the DB starts and the personal allowance of 12500 is available and you save 20% of that, 2500 of basic rate income tax, unless your other source of money is using some. Since the personal allowance is a use it or lose it one we normally suggest ensuring that you use it.

Audaxer

NedS wrote: »

Once you hit 65, your DB pension income already exceeds your personal tax allowance (at current levels), so anything you take out of your DC pot will attract income tax. For that reason you should probably look to use your tax free allowance every year from 57-65 to draw down your tax free allowance regardless of whether you need that income at that time or not (if you don't need it, just reinvest into a SIPP). The aim is to withdraw as much as you can from your DC pot tax free.

I agree, but I think you meant to say OP should just reinvest it into an S&S ISA.

NedS

Audaxer wrote: »

I agree, but I think you meant to say OP should just reinvest it into an S&S ISA.

Yes, thank you for the correction