Best Tax Efficient way to take my pension at 51

LeatherOsprey

Hi - have had a look around here and other forums and think I have a pretty rare situation that I would like views on please?

I am 51, took my DB pension into a SIPP in 2018, with protected rights to draw a pension from 50.
I took Redundancy in 2019 and have set up my own business - yet to make a profit, and will probably only pay me with dividends for the next 5-10 years.
My pension pot has grown well and I am at the LTA.

A thought occurred to me that I should be taking out of the pension at least up to the tax free income allowance this tax year, and every tax year. 
So I embarked on 2 weeks of detailed research, modelling and plan, replanning and modeling sequencing etc.

My conclusions are...
- with protected rights at 50 year, I have only one opportunity to crystallise and get the 25% PCLS if I do it before 55. I have to crystallise it all and move the 75% into flexi-drawdown.
- if I then take at the very least the annual tax free allowance - and even more up to but not over the 40% tax band - and even a little bit more in the odd year if I need to keep the growth in check to avoid LTA at 75 years of age, I pay less overall tax and get more tax free than if I delay taking the pension. And the tax saving is more versus a later and later use of the pension.... so the sooner the better
- obviously I erode the pot more, but even with a conservative growth (1% pa) and a decent yearly withdrawal (£35k pa) the fund last until 82. I would expect higher growth and many years not taking out the full £35k pa (wife has a really good pension also).

Has anyone come across similar circumstances and finding?
Is this generally common knowledge and I am late coming to the party?
Is there something you think I might have missed? Throw them at me and I check if in my modelling.

I appreciate you thoughts!
 

Albermarle

In simple terms , yes if you crystallise a large pension that could keep growing to farther and farther above LTA , then you will get hit with a big bill when you reach 75 . The most obvious way to mitigate this is to take a decent income from it in the meantime , which is the idea of pensions anyway !

Notepad_Phil

It does depend very much on individual circumstances, but it does seem for you where your income will come from dividends and you are already at the LTA then yes that may well be true - a spreadsheet is very much your friend when working these things out.

As to things you may have missed, well I do wonder about how much experience of stock markets you have behind you as it sounds as though much of this SIPP has come from a DB transfer, so are you sure that you have your investments at a suitable risk setting and in suitable funds for a possible 40 years of drawdown. Too low a risk and you may run the possibility of your funds not covering the drawdowns, too high a risk and you could join the list of people who have sold everything down when their funds have plummeted 50% and then don't get back in until prices are nearly back where they were pre-crash.

Perhaps you could add to your thread with details of your funds/portfolio and your strategy for investing and drawdown.

Personally I'm early-retired in my late 50's and I'm probably invested at a higher risk level than most - but I know that I'm happy with that as I've been investing in stock markets since the 80's and have seen markets fall by 50% on multiple occasions so I'm happy to hold globally diverse equity funds with a cash savings pot and not have sleepless nights worrying about everything disappearing.

Steve182

My plan to minimise LTA liability is as follows -

Age 55 take my 41% TFLS from SIPP no1 (previously a company pension, with protected benefits) and invest in ISAs, wife's pension, wife's S/S dealing account. It may take about 5 years to shelter it all from tax but the risk of my wife paying a little CGT at 10% is small VS the benefit of sheltering the growth from LTA ASAP.

Potentially retire 1 year later, age 56 and draw £50K/year income from SIPP 1 so paying just 20% tax.

As soon as all TFLS from SIPP 1 is fully reinvested in tax shelters, take 25% TFLS from SIPP no2 and reinvest in the same way to shelter growth from LTA. 

Continue taking income from SIPPs up to the HRT limit. Take any additional income needed from the other investments. After I reach 75, the second/final LTA calculation point, reduce or stop (taxable) drawdown from pensions and live off ISAs.

I've worked out my forecast and pension income based on 6% annual pension fund growth, 2% inflation, 2% annual LTA increase and 2% annual drawdown increase to match. On those numbers I will avoid LTA and run out of money age 100.

If say I hit say 7 or 8% annual growth and also get hit with an LTA charge as a result, that will be a nice problem to have. I'm not counting on it, or counting on living to 100.   
  

TVAS

You cannot take a pension at 51.You also may have had the right to have PCLS higher than 25% of the fund value due to Post A Day rules this would be lost on transfer unless you transferred at the same time with another scheme member to the same receiving scheme. You transferred in 2018 why? This to me is bad advice because you can take no action until 2025. If I was reviewing this pension transfer it would fail on timing especially because you are taking risk by starting your own pension and as you say yet to make a profit. If the business goes tits up at least you have a pension to rely on for income in retirement. I reckon the transfer value now will be so much higher than your fund value indicating a pecuniary loss. The advice should always be transfer from guaranteed pension to non guaranteed if you have time for investment growth i.e. a min of 15 years ideally at least 20 years or just before you know you want to take benefits. If your business does really well you might not need the pension at 55 which means you did not need to take a risk. Complain to the previous adviser by the size of the funds this represents a substantial part of your working life put at risk for no good reason at that juncture in 2018. Assuming you can take benefits now and I would like you to tell me why you can take benefits under 55. You could take a pension each year up to the annual tax allowance in month 12 which is March do not take it in month 1 April. If you take it on month 12 there will be no tax paid at source because you will be using 12/12ths of the annual tax free allowance. Pension tax works in the same way as PAYE tax. You divide the annual tax free allowance by 12 so if you take a pension payment once a year in month 5 which is August for £6,000 you would have accrued 12,500/12 x 5  £5,208 is tax free the rest is taxable at 20% You would have to wait until the beginning of the next tax year to claim any rebate because HMRC will want to know other earnings for said year. LTA to leave or not to leave it is entirely up to you however in previous roles where I have done pension payments lots of people take the hit now so they take the whole amount as cash and pay 55%. This cannot be reclaimed in any way and is just a way to get more tax because no government wants to increase income tax. There will be an LTA test at 75. I would take out 35k gift it to children so no tax if you survive 7 years or gift it to a good cause if you want to. Look forward to hearing why you can take benefits at 51. Lastly if you are in a SIPP that plan should be drawdown ready. If it is not you were recommended the wrong receiving pension product.   

GunJack

Guys, you both may want to check your SIPPs - pension protected rights (to age or larger lump sums) are normally lost on a transfer out of the scheme that had them, so double-check you can both actually do what you're thinking of doing...

Steve182

GunJack said:

Guys, you both may want to check your SIPPs - pension protected rights (to age or larger lump sums) are normally lost on a transfer out of the scheme that had them, so double-check you can both actually do what you're thinking of doing...

I did a block transfer with another member to retain benefits.

JoeCrystal

TVAS said:

You cannot take a pension at 51.You also may have had the right to have PCLS higher than 25% of the fund value due to Post A Day rules this would be lost on transfer unless you transferred at the same time with another scheme member to the same receiving scheme. You transferred in 2018 why? This to me is bad advice because you can take no action until 2025. If I was reviewing this pension transfer it would fail on timing especially because you are taking risk by starting your own pension and as you say yet to make a profit. If the business goes tits up at least you have a pension to rely on for income in retirement. I reckon the transfer value now will be so much higher than your fund value indicating a pecuniary loss. The advice should always be transfer from guaranteed pension to non guaranteed if you have time for investment growth i.e. a min of 15 years ideally at least 20 years or just before you know you want to take benefits. If your business does really well you might not need the pension at 55 which means you did not need to take a risk. Complain to the previous adviser by the size of the funds this represents a substantial part of your working life put at risk for no good reason at that juncture in 2018. Assuming you can take benefits now and I would like you to tell me why you can take benefits under 55. You could take a pension each year up to the annual tax allowance in month 12 which is March do not take it in month 1 April. If you take it on month 12 there will be no tax paid at source because you will be using 12/12ths of the annual tax free allowance. Pension tax works in the same way as PAYE tax. You divide the annual tax free allowance by 12 so if you take a pension payment once a year in month 5 which is August for £6,000 you would have accrued 12,500/12 x 5  £5,208 is tax free the rest is taxable at 20% You would have to wait until the beginning of the next tax year to claim any rebate because HMRC will want to know other earnings for said year. LTA to leave or not to leave it is entirely up to you however in previous roles where I have done pension payments lots of people take the hit now so they take the whole amount as cash and pay 55%. This cannot be reclaimed in any way and is just a way to get more tax because no government wants to increase income tax. There will be an LTA test at 75. I would take out 35k gift it to children so no tax if you survive 7 years or gift it to a good cause if you want to. Look forward to hearing why you can take benefits at 51. Lastly if you are in a SIPP that plan should be drawdown ready. If it is not you were recommended the wrong receiving pension product.   

Sorry, TVAS but could you please use paragraphs? So far, all your posts on this forum are a single block of text that makes it very difficult for me (and maybe others?) to follow your train of thoughts, especially a long one.

LeatherOsprey

GunJack said:

Guys, you both may want to check your SIPPs - pension protected rights (to age or larger lump sums) are normally lost on a transfer out of the scheme that had them, so double-check you can both actually do what you're thinking of doing...

I did a block "buddy" transfer that protected the rights to a pension from 50.

LeatherOsprey

Notepad_Phil said:

It does depend very much on individual circumstances, but it does seem for you where your income will come from dividends and you are already at the LTA then yes that may well be true - a spreadsheet is very much your friend when working these things out.

Agreed - I have two pretty major Excel spreadsheets on the go covering this. Good job I did the advanced Excel course 

LeatherOsprey

Notepad_Phil said:

As to things you may have missed, well I do wonder about how much experience of stock markets you have behind you as it sounds as though much of this SIPP has come from a DB transfer, so are you sure that you have your investments at a suitable risk setting and in suitable funds for a possible 40 years of drawdown. Too low a risk and you may run the possibility of your funds not covering the drawdowns, too high a risk and you could join the list of people who have sold everything down when their funds have plummeted 50% and then don't get back in until prices are nearly back where they were pre-crash.

Perhaps you could add to your thread with details of your funds/portfolio and your strategy for investing and drawdown.

Thanks Notepad_Phil.
When I made my decision to transfer out I worked with a Financial Advisor at the time. We did all the appetite for risk assessments and lengthy discussions. Result is I am invested in a split across in Levitas A and B Pension funds through Standard Life. These are managed funds and have achieved for me an average 4.6% growth p.a. since I bought in. I plan to continue the investment in the same once move across to flexi-drawdown account. I am going to review this on a frequent basis  to see if I need to alter percentage split across the funds, or even switch to something else, to diversify a bit wider for risk mitigation of a volatile market. 
I have modelled using 4.6% and 1% growth - with both I can make the fund last long enough - the realised growth will just dictate how much I will have to spend!