Best Tax Efficient way to take my pension at 51

LeatherOsprey

Steve182 said:

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.   
  

Steve - this is near identical to my plan - the only difference is the starting age! I have two SIPPs also and would delay taking the second until the right time (ie first TFLS invested in ISAs/spent/in wife's S/S, pension). My wife who will be retiring with a very decent DB pension (will keep that one we think) and AVC/Pension Extra fund, will also generate a sizeable TFLS.
Good to read that your research/planning is also indicating this approach is the best to minimise the LTA tax, and indeed overall tax burden, maximise the pension we can spend, and as you say, if growth higher than modelled (mine is net 4.6%) then an LTA tax at 75 is a nice problem to face!   

LeatherOsprey

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. 

Hi TVAS - transferred out with a "buddied" block transfer so age protected.

TVAS said:
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. 

Great clarification - thank you, very useful. I plan to take tax free income of £12500 next month, will then leave it until next March (2022) for the next amount up to next years income tax allowance.TVAS said:

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. 

Will look into this - thanks - good suggestion.

Notepad_Phil

LeatherOsprey said:

TVAS said:
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. 

Great clarification - thank you, very useful. I plan to take tax free income of £12500 next month, will then leave it until next March (2022) for the next amount up to next years income tax allowance.

I take it that this is not from your 25% tax free PCLS and is just taxable drawdown which will be tax free because you have no other income. If so, then be careful if this is your first taxable payment from your pension as it will be taxed at 1250M1 and so it does not matter when it is taken i.e. you will pay emergency tax of just under £4k even if you take it in the last month of the tax year  - though you will of course be able to reclaim this.

Once the platform has a tax code then further payments can be taken as and when it allows.

Steve182

LeatherOsprey said:

Steve182 said:

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.   
  

Steve - this is near identical to my plan - the only difference is the starting age! I have two SIPPs also and would delay taking the second until the right time (ie first TFLS invested in ISAs/spent/in wife's S/S, pension). My wife who will be retiring with a very decent DB pension (will keep that one we think) and AVC/Pension Extra fund, will also generate a sizeable TFLS.
Good to read that your research/planning is also indicating this approach is the best to minimise the LTA tax, and indeed overall tax burden, maximise the pension we can spend, and as you say, if growth higher than modelled (mine is net 4.6%) then an LTA tax at 75 is a nice problem to face!   

I'm also glad to see I'm not the only person planning this approach, otherwise I might start to wonder if there was some major flaw in my plan that I had missed. Of course there could be any number of hurdles thrown at us in forthcoming budgets, but for you that's less of a concern as you can start right away. I'm slightly envious about that!

My 6% model is total return, with the effect of inflation essentially reducing that to 4% net. If your 4.6% model is based on the same criteria (so you are expecting say around 2.6% above inflation) and you are planning to stay mainly in equities indefinitely, then I think that's a very conservative long term growth forecast, so despite your best endeavours to mitigate it I think you are odds on to have a nice problem of LTA at age 75! 

Steve182

TVAS said:

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. 

TVAS, If I understand this, if I decide to take £50K/year drawdown and take it all in April, I will initially be taxed on the basis that I will be taking £50K/month so £600K/year and have to wait for a rebate

If however I take the £50K in March, or circa £4K/month X 12 months, I will just be taxed on the correct basis that I've drawn down £50K total for the tax year?

LeatherOsprey

Steve182 said:

TVAS said:

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. 

TVAS, If I understand this, if I decide to take £50K/year drawdown and take it all in April, I will initially be taxed on the basis that I will be taking £50K/month so £600K/year and have to wait for a rebate

If however I take the £50K in March, or circa £4K/month X 12 months, I will just be taxed on the correct basis that I've drawn down £50K total for the tax year?

Hi Steve182 - My understanding is...
i) what TVAS indicates above, and you have correctly summarised, is for payments taken from tax year 2 onwards of pension drawndown. Assume for easy we are only taking the Income tax free allowance amount. If you take the full tax free allowance in any month other than March, you will pay tax on it because you will have only accumulated less than 12 individual months worth of tax free allowance. So for one off yearly payments from drawdown, take them in March to avoid the hassle of claiming back of HMRC/waiting until September after tax year end to get the refund automatically. Or you can take 12 months of equal amounts to avoid a need to claim tax back.
ii) For year 1 of drawdown it is different again. As the Pension supplier has no tax code for you yet, it will use an emergency tax code. Therefore, even taking the payment in March it is hit with a tax deduction that you have to claim or wait to get back from HMRC. This is what I am facing this year.

Dazed_and_C0nfused

Or take it part in February and part in March.

The emergency tax code will be used in the February payment (no tax unless taxable payment exceeds £1,042) and an accurate tax code should be in place for March.  Allowing a full years tax code allowances.

LeatherOsprey

Dazed_and_C0nfused said:

Or take it part in February and part in March.

The emergency tax code will be used in the February payment (no tax unless taxable payment exceeds £1,042) and an accurate tax code should be in place for March.  Allowing a full years tax code allowances.

Yes - that would be the ideal way around it in the first year.