Are these my retirement options?

harryajh

Hi, I'm 57 and thinking of retiring. 

I have £250k in a SIPP and get my full state pension in 9 years time with no intention of buying an annuity. 

Assuming tax rates stay the same and no other income, interest etc... can I - 

    A. Take £12.5k a year for 20 years tax free with the last 11 topped up with my state pension?

    B. Take 20% Tax free now (£50k) and take £12.5k a year for 16 years tax free with the last 7 topped up with my state pension?

I'm favouring B as thinking of smashing in some big holidays just in case we can't one day 

hope that makes sense

tia

Steve182

Why do you plan for no further growth for the next 16-20 years? Unless you plan to move your pension pot to a 0.005% savings account (or whatever the going rate for savings is now), the balance of your pot should continue to grow, hopefully at an annual rate outpacing inflation if you keep the bulk in equities, so is unlikely to run out as early as you have calculated.

AnotherJoe

The short answer is "yes' and the long answer is "yes' and the very long answer is that if you remain invested and not just in cash youd likely get more than 20 years and the complicated answer is that you coudl take (IIRC) £16,666 each tax year which consists of your £12.5k tax allowance plus the 25% tax free , or you can mix and match however you want.

But I see the wisdom in Plan B because its nice and clear plus you can get your big ticket items in early.

FWIW what i did with one of my pensions, max tax free. Ive run out of that now (the tax free part) which is both bad because i have to pay some tax, and good because it means i lived long enough to collect a DB pension and to be paying tax. Next target later this year is SP and more tax.

BuildTheWall

harryajh said:. 

Assuming tax rates stay the same

Not an assumption anymore 😉

Dazed_and_C0nfused

Although they are increasing slightly in April contrary to the press headlines this morning.

So the UFPLS option has now jumped from  £16,666/year to £16,760 from April (assuming no application for Marriage Allowance has been made).

Secret2ndAccount

You mean that once your State Pension kicks in, you will add it to your 12.5k per year? Then you will start paying tax. 

Assumptions:  State Pension in 9 yrs time is 11400;  Basic rate tax threshold in 9 yrs is 13,800

Your Plan A:

Years 1-9 take 12500. That's 3125 tax free, + 9375 taxable, so no tax, leaving you with 12500

Year 10   3125 tax free. 9375 + 11400 (State Pension) = 20775 taxable  Tax to pay on 20775 - 13800 that's 6975,

so at 20%, tax would be 1395, leaving you with 3125 +20775 - 1395 = 22505 per year in your pocket

Your Plan B    50k up front means all further withdrawals are taxable

Years 1-9 take   12500, all taxable, but no tax to pay, leaving you with 12500

Year 10   12500 SIPP + 11400 State Pension = 23900 taxable  Tax to pay on 23900 - 13800. That's 10100,

so at 20%, tax would be 2020, leaving you with 23900 - 2020 = 21880 per year in your pocket

Alternate Plan A

Years 1 - 9 take 16760.  That's 4190 tax free, and 12570 taxable, so no tax. 16760 per year in your pocket

Years 10-20 take 9012 from SIPP. That's 2253 tax free, and 6759 taxable

6759 (SIPP) + 11400 (State Pension) = 18159 taxable.

Tax to pay on 18159 - 13800 = 4359, so at 20% tax would be 1090

leaving you with 9012 + 11400 - 1090 = 19322 per year in your pocket

This gives you roughly level payments over 20 years, and more than 4k/yr extra at the start. It's an alternative to taking the lump sum.

If you will  permit me to tell you how to run your life, here is what I would do:

Take half the lump sum. 25000 tax free. Enjoy. Leave 25k in low risk investments or cash inside the SIPP. Invest the remaining 200k so that it grows, at least ahead of inflation.

Years 1-9 withdraw 14665. That's the most you can get out tax free because half of your tax free 25% is gone, but the other 12.5% remains.

Each year, if the stock market is doing okay, take the 14665 by cashing in stocks in your SIPP.  If there has been a stock market crash, and no recovery, take the money from the cash in your SIPP. This should make the money in your SIPP last as long as possible.

Once your State Pension kicks in you can reassess. Do you want to take a bit more money, and start paying tax? Or do you want to sit just at the tax threshold and make the money last longer?  Potentially, depending on stock market performance, you could withdraw a little every year, just up to the tax threshold, and never run out the SIPP.

What do you plan to do beyond 16-20 years? A healthy 57 year old has a 1 in 10 chance of living to 100. If you are a couple, the chance that one of you makes it to 100 is over 20%, and the chance one of you makes it to 95 is over 50%

SomeMadeUpName

Secret2ndAccount said:

If you will  permit me to tell you how to run your life, here is what I would do:

Take half the lump sum. 25000 tax free. Enjoy. Leave 25k in low risk investments or cash inside the SIPP. Invest the remaining 200k so that it grows, at least ahead of inflation.

Years 1-9 withdraw 14665. That's the most you can get out tax free because half of your tax free 25% is gone, but the other 12.5% remains.

Each year, if the stock market is doing okay, take the 14665 by cashing in stocks in your SIPP.  If there has been a stock market crash, and no recovery, take the money from the cash in your SIPP. This should make the money in your SIPP last as long as possible.

Once your State Pension kicks in you can reassess. Do you want to take a bit more money, and start paying tax? Or do you want to sit just at the tax threshold and make the money last longer?  Potentially, depending on stock market performance, you could withdraw a little every year, just up to the tax threshold, and never run out the SIPP.

What do you plan to do beyond 16-20 years? A healthy 57 year old has a 1 in 10 chance of living to 100. If you are a couple, the chance that one of you makes it to 100 is over 20%, and the chance one of you makes it to 95 is over 50%

Nice plan. I'm going to steal it.
Now all I need to do is get £250k each into mine and my wife's plans in the next 6 or 7 years. Only £440k to go!!
Actually, if we don't stop for 6 or 7 years then we will only be 5 years of SPA so I can revise those funds down a little, phew!

harryajh

wow guys, thanks ever so much for that, a lot to think about
I will invest whatever is left in my SIPP but I had assumed (wrongly) that I could get the £12.5k on top of my pension - a big oversight on my behalf but at least I know now

harryajh

one last thought, could I gift some of my SIPP money to my children - I remember reading somewhere that I have to live at least 7 years after but not sure how much or if it's possible from a SIPP?

dunstonh

one last thought, could I gift some of my SIPP money to my children -

Yes.   However, it would cost you in tax as it would be classed as a withdrawal.

I remember reading somewhere that I have to live at least 7 years

That is in respect of inheritance tax if the gift is above the gift allowance and cannot be classed from within income.

but not sure how much or if it's possible from a SIPP?

Theoretically, you can gift everything you own and all the money in the SIPP, after tax.     Probably not a good idea though.

Secret2ndAccount

You can't gift a SIPP. You can take some or all of the money out and give it to your children, but it's no different from any other money. You can fill out an expression of wish form which says you would like the money in your SIPP to go to your children if you die.

You can give as much as you want to anyone, any time. However, if you were to die within 7 years, part or all of that money would count towards your total estate, so the recipient could end up with a bill.

If your total estate is worth less than 325k there will be no tax to pay, so the gifts can't get caught up. If you leave your kids a house, the tax threshold (it's called the Nil-Rate-Band NRB) goes up to 1/2 million. If you pass everything to your other half, and they leave it to the kids, you could potentially get up to 1 million with no tax. Do some further reading if you are interested.

Furthermore, you can make gifts of 3k per year, and regular gifts out of your income (of a size that doesn't materially affect you) without incurring any liability to IHT.

If none of the above gets you out of inheritance tax, here is how the tax on the gift fades away over 7 yrs

Years 1-3    Tax rate: 40%

Year 4:   32%

Year 5:   24%

Year 6:   16%

Year 7:   8%

At end of year 7:    0

The inheritance tax on the gift should be paid by the recipient of the gift.