Filling the gap tax efficiently

Retireinten

Albermarle said:

Also I had ruled out the £2880/£3600 thing as I hadn't realised it still benefits if we are basic rate taxpayers in retirement. 

It does still benefit but only by £180 per year, unless you are lucky enough to have LTA issues then it actually gives a negative result.

That is £180 x 2 for a couple (in the basic rate tax band in retirement), so £360 a year in total for a bit of admin. I think that's worth it to be honest but then again I'm tight and I like free money


May not be worth that though when I get to make use of it as I don't think the £3,600 increases each year so its value will erode over time. 

jamesd

zagfles said:

Also where does P2P fit in? You're a fan of P2P as well as VCTs aren't you?

I use P2P as a bond substitute, as I do cash in my mortgage offset account.

For me, both are suitable so I use them. For other people, depends on them.

jamesd

SouthCoastBoy said:

I always thought there are two choices to access the tax free amount  either 25% of pot or 25% of the drawdown amount. From the explanation above it appears the two can be mixed I.e. take 16k from drawdown so 4k tax free and also take another 20k tax free?

If you are placing money into drawdown you can once and once only elect to take up to 25% of the portion of the pot that you're taking benefits from as a tax free lump sum.

Say you start with 400k uncrystalised. You can crystallise 100k and take from £0 to £25k as a tax free lump sum and the remaining £100k to £75k goes into the flexi-access drawdown account where it's taxable when withdrawn. You can't then take another tax free amount from the flexi-access drawdown account, not even if you took less than 25% initially.

What you can do is take benefits from more of the still uncrystalised 300k if you want more tax free money.

DT2001

I have 3 separate pots with the same company. Presumably I could 25%tax free from one pot and take payments from the others with 25% of each payment tax free? I am not sure why 3 were set up originally but doesn’t affect fees so haven’t pursued any further.

jamesd

Yes, if you use the UFPLS payment method for the other two every withdrawal from an uncrystalised pot is 25% tax free and 75% taxable. You might as well consider using this to gradually take everything out of the smaller pots.

Sun-Is-Fun

zagfles said:

sheslookinhot said:

Albermarle said:

Also I had ruled out the £2880/£3600 thing as I hadn't realised it still benefits if we are basic rate taxpayers in retirement. 

It does still benefit but only by £180 per year, unless you are lucky enough to have LTA issues then it actually gives a negative result.

Why do you only benefit by £180 ?

You put £2880 net in. It gets grossed up to £3600.

25% of that £3600, ie £900, is tax free when you take it out (usual PCLS) for everyone unless above LTA.

The other £2700 is taxable.

If the £2700 is within the personal allowance it's not taxed, so you get £2700 plus £900 PCLS = £3600 out for a cost of £2880.

If the £2700 is in the basic rate band, you get charged 20% tax so only get £2160 out after tax, plus the £900 PCLS = £3060 for a cost of £2880.

This is great - didn't realise you could do this. 

To clarify, getting this £180 uplift is still possible if you have already drawn 25% of your pension pot as a tax free lump sum and pay tax on your pension for the rest?

jamesd

Yes.  If you had £2700 of personal allowance available the gain would be £720 instead.

michaels

zagfles said:

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Why do you think that gets you more?

Any future growth that happens in an isa rather than a pension won't be taxed, so as long as you leave enough in the pension to always take full advantage of your personal allowance (not much post state pension age as this will swallow most of the allowance) then you are best off taking out 20% taxed pension money as early as possible and moving it to an isa so that future growth is not subject to 20% tax.

AlanP_2

michaels said:

zagfles said:

jamesd said:

Yes, you can do what I think you described:

1. Take benefits from the whole 500k, 125k as a tax free lump sum, the rest placed into a taxable flexi-access drawdown pot.
2. Draw taxable money from the flexi-access drawdown pot to use your full income tax personal allowance every year, so you get out more with no tax cost and don't waste your use it or lose it personal allowance. £12,570 a year.

This might involve drawing more taxable money from the drawdown pot than you spend, just invest the extra in a stocks and shares ISA until you want to use it.

You want 20k a year and with 12,570 personal allowance that's 12,570 taxable desired. To get that you also get the other 25% tax free, another 4,190. That's 16,760 total, short of your 20k target. Take another 3,240 tax free to hit the target and the 3/4 taxable part of that adds  9,720 to the flexi-access drawdown pot that you just leave alone. So in this case you'd be taking benefits from 16,760 + 3,240 + 9,720 = 29,720 a year. Ignoring growth and other factors you could do this for 16.8 years.

You can do a bit better than that. Also take 20k tax free to put into a stocks and shares ISA, adding another 60k a year of untouched money to the flexi-access drawdown pot. This takes total benefits of 109,720 a year which you can only do for almost five years, but it accumulates growth in the ISA not the pension, so you'll probably get out more tax free. After the almost five years you switch to the ISA for the tax free top up above the income tax personal allowance.

Don't forget to pay in 2880 net grossed up to 3600. Even when withdrawn with basic rate tax due you make 180 on the deal. This means another 2880 * 4 = 11,520 a year of benefits to take from the 500k so you do it with tax free money.

Why do you think that gets you more?

Any future growth that happens in an isa rather than a pension won't be taxed, so as long as you leave enough in the pension to always take full advantage of your personal allowance (not much post state pension age as this will swallow most of the allowance) then you are best off taking out 20% taxed pension money as early as possible and moving it to an isa so that future growth is not subject to 20% tax.

There is no difference either way on the taxble money:


£1k in SIPP (all taxable) - Take it all out and pay £200 tax, put £800 in to ISA, get 10% growth = £880.

Get 10% growth on the £1k in the ISA = £1100, take it all out and pay £220 tax leaves you with £880.

drumtochty

Yes the real win is when you are paying 40% or 45% tax in employment and are paying 20% tax in retirement or even having a bit of free personal allowance in retirement.