Tax efficient pension strategy advice please

planforfuture

Hello,
I am 60 and am looking to retire and stop working in Sep-2022. I would like to know what are the most tax efficient strategies for taking out pension between age 61 and 67 (and the state pension kicks in) and order of withdrawal in order to maximize the income tax allowance. My wife is three years younger than me and have smaller pension pot than me.
I estimate that my own combined company and personal pension pot is about £650k in Sep-2022.  We also have other ISA and non-ISA funds/equities investments that will also be used to fund my retirement. For the non-ISA investments,  me and my wife will be able to sell the stocks (if needed) to maximize the yearly capital gain tax allowance each for a number of years i.e. £12k each. Btw, I don't need the 25% free lumpsum (i.e. ard £160k) at this stage unless there is a real advantage to take the tax free lumpsum earlier rather than keep them invest in to build a bigger pot.
So in order to maximize tax efficiency:
1) For the first 6 years during my retirement and before the state pension kicks in, should I withdraw money from my personal pension pot of upto the maximum income tax allowance i.e. £12.5k p/a (which should give me ard £16k p/a after 25% tax free) i.e. un-crystalized? With this approach, will I be able toto get a 25% lumpsum of the pot  (let's say is a few years time) and when will happen after I take the 25% lumpsum - is is considered as 'crystalized' and i need to to decide what to do next i.e. buy annuity or regular withdrawals?
2)  When the state pension kicks in let's say ard £12k p/a (in 7 years time) which may not be sufficient to support my preferred retirement lifestyle, hence any additional money i withdraw from my personal pension pot is likely to be subjected to personal income tax as it will likely exceed the allowance. So what will be the strategy?
Thanks in advance for your help.

dunstonh

I would like to know what are the most tax efficient strategies for taking out pension between age 61 and 67 (and the state pension kicks in) and order of withdrawal in order to maximize the income tax allowance. My wife is three years younger than me and have smaller pension pot than me.

There are multiple ways of doing it but there is no one best way that suits everyone.  It depends on your circumstances (now and future).

So in order to maximize tax efficiency:

Which would also include lifetime allowance planning and IHT planning.  Not just income tax.

1) For the first 6 years during my retirement and before the state pension kicks in, should I withdraw money from my personal pension pot of upto the maximum income tax allowance i.e. £12.5k p/a (which should give me ard £16k p/a after 25% tax free) i.e. un-crystalized?

seems reasonable.

 With this approach, will I be able toto get a 25% lumpsum of the pot  (let's say is a few years time) and when will happen after I take the 25% lumpsum - is is considered as 'crystalized' and i need to to decide what to do next i.e. buy annuity or regular withdrawals?

You dont take the 25% unless there is a justifiable reason for doing so.   You may well have to at some point as part of your tax planning.

Crystallising the fund doesnt require you to take an income.   You can still do ad-hoc lump sums or irregular payments as well as regular ones.

planforfuture

Thanks dunstonh for the info.
So that at age 67 and onwards where I need to take additional fund from my personal pension, income tax will apply?
Please can you also elaborate re IHT related to pension? Is it about the 7 years rules or else?
Thanks in advance for your help.

planforfuture

Btw, is there any strategy for crystalling pension pot e.g. delay as long as possible if i don't need to buy an annuity etc?

dunstonh

So that at age 67 and onwards where I need to take additional fund from my personal pension, income tax will apply?

Your personal allowance is unchanged due to age.    However, you will have less available due to the state pension eating most of it up.

Please can you also elaborate re IHT related to pension? Is it about the 7 years rules or else?

Pensions are outside of your estate.  No IHT applies to them.   With your other assets, it sounds like IHT could be an issue.   So, you may hit a point where not drawing from the pension but from other wrappers (or unwrapped) may be better.  However, you have to link in the lifetime allowance as another consideration.

Btw, is there any strategy for crystalling pension pot e.g. delay as long as possible if i don't need to buy an annuity etc?

If there is no justifiable reason for drawing the 25% then you dont do it.  Forget annuity.  It doesn't sound like it would come into play here.

squirrelpie

Apart from the pensions, I would suggest recognizing the capital gains on the non-ISA as soon as possible, and move them to the ISA if not needed as cash. It seems likely that Rishi will do something with CGT when he gets a chance.

Albermarle

hence any additional money i withdraw from my personal pension pot is likely to be subjected to personal income tax as it will likely exceed the allowance. So what will be the strategy?

The strategy is that you will have to pay the tax that you owe.

You seem to be maybe rather too focused on trying to avoid paying income tax rather than looking at the bigger picture ?

Btw, is there any strategy for crystalling pension pot e.g. delay as long as possible if i don't need to buy an annuity etc?

There are many  books, research papers etc along with numerous different opinions on drawdown strategy and as mentioned it also depends on personal circumstances & preferences.

Have you considered paying for professional advice ?

planforfuture

@Albermarle
Yes, it is our plan to meet pension wise and possible professional advice once COVID is tackled.
Please can you shed some light re bigger picture?

Dazed_and_C0nfused

Don't forget if you have unequal pension pots you can make use of the (current) tax system to have unequal Personal Allowances.

If your wife had much less scope taking money from a DC pension she could apply for Marriage Allowance and have a Personal Allowance of £11,250 whilst you would retain your Personal Allowance of £12,500 and get £250 knocked off your tax bill, as recipient of Marriage Allowance.

This would only apply if you weren't a higher rate taxpayer.

Albermarle

As an example an overarching investment strategy for your pension pot , ISA's , especially in relation to how long you want it to last, and/or if you want to use your pension as a way of leaving a legacy that is not subject to IHT.
One saying you hear is 'don't let the tax tail wag the investment dog' 
I am no expert but I am aware it can get complicated , to do it properly anyway . Not sure PensionWise will help that much , they are more geared up for general guidance for the average person who is a bit clueless about these things.. You will probably learn more by regularly checking this forum for relevant threads as there some very knowledgeable contributors ( I am not including myself in that group) 

Brynsam

dunstonh said:

Please can you also elaborate re IHT related to pension? Is it about the 7 years rules or else?

Pensions are outside of your estate.  No IHT applies to them.   

Pensions are normally outside your estate and not subject to IHT, but there are exceptions such as where an estate has a legal entitlement to, say, arrears of an annuity or a payment is made to estate as the result of a binding direction from the deceased member.

If a lump sum payment on the death of the member is made to their to the estate at the discretion of the trustees/managers, it is not subject to IHT - a point which is not well understood by many schemes, providers and their advisers.