Can I use my pension to boost savings to draw down 25% at age 55?

lilysmum0151

Newbie alert - please be kind!
Wondering if I can add more money into my pension now (thus saving 40% tax) and then draw down 25% of my pension pot tax free at 55 (to buy a house abroad)?

I am 45 and a higher rate tax payer. My pension contributions are made via salary sacrifice (saving me 40% tax and NICs).  I would like to buy a place abroad when I am around 55(ish).  I have 2 jobs both of which can be done from anywhere in the world with good internet. I will probably go into semi-retirement (ie reduce my hours) somewhere between 55 and 65.

Our remaining mortgage (est £30k) will be paid off in approx 3 years. I originally planned to save the money currently being paid towards the mortgage over about 7 years (to save for a place abroad). However, any ‘savings’ will be saved from my net income (thus I will have already paid 40% tax on that money).  

I then heard about the 25% tax-free pension draw down at 55 and began to wonder if I can use this to my advantage. Would it not be better to increase my pension contributions (paid via salary sacrifice from my gross income thus saving me 40% tax) and then draw down 25% of my pension pot at age 55 tax-free to make my ‘place in the sun’ purchase?

Worried there must be an obvious flaw (other than Brexit) in this plan that I’m missing? any thoughts?

eskbanker

Is the remaining 75% sufficient for your retirement needs?

lilysmum0151

I think so yes. Not as much as an IFA would recommend but I think I’ll have enough. 

I don’t need to draw pension from the remaining 75% of the pot until about age 65 (happy to leave it invested). Will work part-time for about 10 years (55-65) and both employers would continue to contribute on those part-time earnings. We’d also have our house to rent out once we move abroad (so would have an income from that).

cloud_dog

This is basically what we have been doing for repaying the mortgage.

We have been primarily using my HRT contributions under SS.  I've recently significantly increased the pension contribution by substituting lost salary income with liquidated investment monies.  This takes me significantly back in to the 25% tax rate but with the 12% NI savings it very much makes it worthwhile.

Bravepants

This is certainly one reason why people take the 25% tax free lump sum. Nothing wrong with doing that as long as you are happy that your remaining pot will ocver your other needs.

Albermarle

Worried there must be an obvious flaw (other than Brexit) in this plan that I’m missing? any thoughts?

There seems no reason why Brexit would affect UK pensions, but it might impact on your ability to work and live permanently in an EU country ( maybe that is what you meant ?) 

There is some speculation that 40% tax relief; salary sacrifice loophole & the 25% tax free cash, may feature in next months budget, but this speculation happens every year and nothing has happened so far . The 25% TFC seems the least likely to ever get changed, as it is popular with all pension holders , not just wealthy ones. 

You do not mention how your pension is invested, this is a point not to be neglected.

lilysmum0151

Albermarle said:

Worried there must be an obvious flaw (other than Brexit) in this plan that I’m missing? any thoughts?

There seems no reason why Brexit would affect UK pensions, but it might impact on your ability to work and live permanently in an EU country ( maybe that is what you meant ?) 

You do not mention how your pension is invested, this is a point not to be neglected.

Yes, that’s exactly how I think Brexit may impact on my plans. I have always envisaged keeping one or both of my jobs (just on fewer hours) and having a 10-year period of semi-retirement abroad, but there is now no guarantee I will be able to live and work in an EU country post 31 Dec 2020.

I have three pension pots (possibly a fourth from my first job - I’m trying to trace it, but if it exists it’s probably quite small). Workplace DC pensions which are invested in balanced managed funds (the one recommended when you sign up).  

There is a risk they’ll change the 25% draw down rule (thus trapping my cash) but the benefit of saving from gross income probably outweighs that risk.

tetrarch

It is a great plan. Have you considered however what would you do if the TFLS benefit is removed or massively reduced?

Regards

Tet

Albermarle

Have you considered however what would you do if the TFLS benefit is removed or massively reduced?

You might as well say ' have you considered what you would do'

if tomorrow you fell down the stairs and broke your back 

if next week Trump launches an invasion of Iran

if next month your wife left you .

All possible but hopefully not very likely.