Maximising tax free income leaves me worse off?

SMcGill

Thanks for trying to help, didn’t spot I’d missed off my cash savings total which is £325k.

Even after I receive my full DB and SP income from 67 there’s a shortfall between 67 and 75 of £5,300 pa net in today’s money to raise my net income from £21,700 to £27,000. I can fund this either by using savings I’ve built up prior to retirement or by using my personal pension.

As my cash savings will likely lose ground against inflation and my pension should hopefully grow ahead of it, there seems to be a tipping point of when it’s best to use my pension, even taking into account the tax advantage of taking it before my DB pensions begin. This is what my maths is struggling to work out so any help would be much appreciated.

jamesd

SMcGill wrote: »

As my cash savings will likely lose ground against inflation and my pension should hopefully grow ahead of it, there seems to be a tipping point of when it’s best to use my pension, even taking into account the tax advantage of taking it before my DB pensions begin. This is what my maths is struggling to work out so any help would be much appreciated.

You take 12500 taxable from the pension and move 12500 from the savings into whatever the pension money was invested in, normally doing it inside a stocks and shares ISA. No net change in amount invested.

The tax effect of the savings interest needs to be considered as well. 1% interest on 325k would be 3250. 5000 starting rate for savings available until DB eliminates part of it then state pension eliminates the rest. Plus 1000 personal savings allowance. Those two would cover 2% interest on all 325k.

enthusiasticsaver

If your plan is to live on the cash and the personal pension for the first 10 years of your retirement I would be looking to maximise your pension contributions for the last year of your working life. You can put up to 100% of your earned income into your pension (less the HMRC contribution of 25% and any other pension contributions you are making). I would do that from the cash pot you have. I would also move some of that cash into stocks and shares isas over the next few years. Are you married and if so what is your spouses position?

You will be using your whole personal allowance from 67 from sp and db pension so I would be looking to withdraw down on the personal pension up to the tax allowance every year until then from 57 to 67. Use cash/stocks and shares isa to top that up to £30k so you could drawdown approx. £11k from the pension each year after crystallising and taking 25% TFLS and take £19k annually from the cash pot/isa. Ideally you should have used the whole personal pension by the time your DB pensions and SP pay out. So you only pay tax on those two sources of income and have the remaining cash and stocks and shares isa as backup income to top you up to the required level.

SMcGill

Thank you very much everyone! jamesd and enthusiasticsaver I’ll look more closely into what you’ve suggested.

sandsy

SMcGill wrote: »

Thank you very much everyone! jamesd and enthusiasticsaver I’ll look more closely into what you’ve suggested.

You should be looking at cloud_dog's suggestion too as this gives you a more effective way of getting more money out of the pension taxfree, so requiring a lower top-up from your savings.

jamesd

sandsy wrote: »

You should be looking at cloud_dog's suggestion too as this gives you a more effective way of getting more money out of the pension taxfree, so requiring a lower top-up from your savings.

Which suggestion?

If you meant UFPLS that would be harmful now because it triggers the MPAA while they are still working and able to gain from pension contributions over 4k a year.

Once work is no longer relevant anything that fully uses the personal allowance each year is likely to be good.

cloud_dog

jamesd wrote: »

Which suggestion?

If you meant UFPLS that would be harmful now because it triggers the MPAA while they are still working and able to gain from pension contributions over 4k a year.

Once work is no longer relevant anything that fully uses the personal allowance each year is likely to be good.

But all the discussions have been about retirement income:

SMcGill wrote: »

I’m 56 now and hoping to retire at 57

SMcGill wrote: »

Income needs = £30k net from 57 to 70, then £27k net to75.

And, hence my suggestion in relation to drawing a retirement income.

jamesd

Fine for what you intended to cover but after your post there was one about increasing retirement income by making high contributions while at work, and how to fund that. Which is why I mentioned that UFPLS was unsuitable at that stage.

jamesd wrote: »

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