Here's a personal scenario - any thoughts?

billybach

Here are our circumstances:

• Married, no dependent kids 
• Me 65, semi-retired (ie: would work if I could get a job), state-pensionable from December 2021
• Wife 68, retired
• Health for both is ok
• Cash held - c £30,000

Current Pensions:

• Me: Military pension £16,000pa
• Wife: DWP: £6,900 pa  Local Authority: £6,000 pa

My SIPP (with HL): circa £300,000

SIPP shortfall: I’ve not used my total SIPP allowances for the last 3 years - this could be a shortfall of £40,000 in total

Property

Currently own 2 homes, both mortgaged, with a plan that one house is to be sold that will release sufficient funds to pay off both debts and leave a residue of £500,000

Expenses

Anticipated monthly expenses expected to be circa £4,000 pcm post-sale of first home

Life Assurance 

£260,000 to be paid on my death, currently not in a trust, costs £250 pcm

Questions:

I can “see” a monthly income of circa £3,000 from pensions later this year and want to maximise tax benefits from pensions

What is the best way to use the residual cash from the house sale?

Should I "top up" my SIPP?

Should I draw down my savings from my SIPP before the released cash?

What haven’t I thought about?

ussdave

I think the first part to consider is that if you're not working the maximum you can add to your SIPP per year is 2880 (plus tax relief).  Pension income doesn't count as earned income.

MX5huggy

Have you considered the potential capital gains tax liability from selling the house? 

I don’t understand Life insurance but is there any reason to keep paying this? Is the premium set for life or does it change each year? You or your wife should get spousal pension from whoever goes first. How much will this be?

How’s the state pension looking for both of you? 

QrizB

The OP doesn't often reply to his posts, it seems.

In 2020 his wife was 69 so I'm not sure how she's 68 now. And he's been pointed to of the £2880/yr limit several times already.

Dazed_and_C0nfused

QrizB said:

The OP doesn't often reply to his posts, it seems.

In 2020 his wife was 69 so I'm not sure how she's 68 now. And he's been pointed to of the £2880/yr limit several times already.

New wife 

kidmugsy

In which year did your wife qualify for her State Pension?

If it's not too late why not buy yourself a bit more State Pension?

You refer to two houses - is that in addition to an owner-occupied house?

Anyway, leave the SIPP intact until you've burned through the other capital.  If you die before you are 75 then your wife will be able to draw SIPP income tax-free, assuming you're done the trivial paperwork.  Fill ISAs for both of you.  Gift heaps of capital to your wife so that you can use both savings allowances, both dividend allowances, both CGT annual exempt amounts, and she can use the Starting Rate for Savings.  Fill up Premium Bonds for both of you.

That's a start.

ussdave

QrizB said:

The OP doesn't often reply to his posts, it seems.

In 2020 his wife was 69 so I'm not sure how she's 68 now. And he's been pointed to of the £2880/yr limit several times already.

What an odd hobby for the OP to have.

lisyloo

ussdave said:

QrizB said:

The OP doesn't often reply to his posts, it seems.

In 2020 his wife was 69 so I'm not sure how she's 68 now. And he's been pointed to of the £2880/yr limit several times already.

What an odd hobby for the OP to have.

Younger model? It’s not unheard of.

ussdave

lisyloo said:

ussdave said:

QrizB said:

The OP doesn't often reply to his posts, it seems.

In 2020 his wife was 69 so I'm not sure how she's 68 now. And he's been pointed to of the £2880/yr limit several times already.

What an odd hobby for the OP to have.

Younger model? It’s not unheard of.

Not that aspect so much as the post and runs.

Dazed_and_C0nfused

ussdave said:

lisyloo said:

ussdave said:

QrizB said:

The OP doesn't often reply to his posts, it seems.

In 2020 his wife was 69 so I'm not sure how she's 68 now. And he's been pointed to of the £2880/yr limit several times already.

What an odd hobby for the OP to have.

Younger model? It’s not unheard of.

Not that aspect so much as the post and runs.

Maybe that's their view to life in general, not just MSE 

jamesd

Thoughts on potential income, which affect tax choices.

Wife on combined £12,900 so extra income at basic rate and I'll call it all free of tax.
You on £16,000 now and I assume another £9,000 in state pension shortly taking you to £25,000 with extra income starting at basic rate. Around £22,500 net
Near future combined annual income £35,400 net annual, £2,950 pcm net.


Your HL pension is currently £300,000 and assuming you want to use 3.2% as a safe withdrawal rate, increasing income with inflation annually, that's £9,600 gross, 25% tax free, rest still at 20% so £8,160 net, £680 pcm.

House sale to raise £500,000 which can be invested similarly to a pension, say £360k in wife's name since she has lots of basic rate band income left but £140k for you to use your capital gains tax allowance. Assuming it can be arranged to be tax free, which is probably largely true through efficient CGT allowance usage and gradual move into ISAs, the same 3.2% drawing rate is another £16,000 net, £1,333 pcm.

That's ultimately £59,560 net annual income  £4,963 pcm so well in excess of anticipated £4,000 pcm expenses.

I suggest prioritising the house money for income initially. That's because it starts off outside any tax wrapper, with just the personal savings allowance, starting rate for savings and capital gains tax allowances available. So look to move £20,000 into the S&S ISA tax wrapper for each of you every year and draw on it to fairly rapidly reduce the potentially taxed bit of income. This involves drawing £8,160 + £16,000 for income each year and redirecting £40,000 a year into the ISAs for a total depletion rate of £64,160 a year from the outside tax wrapper portion, most drawn from the wife portion. Ignoring investment growth that means that in seven years there's £140k ISA in each of your names and still  £50,880 in your wife's sole name. That's fairly rapidly got it into the ISA tax wrapper to complement the one your pension is already in.

Around that seven years but in any case before your 75th birthday take a tax free lump sum of 25% of the SIPP, £125,000 ignoring growth, and divide it say £60,000 you, £65,000 wife and continue the £20k a year from each of you into ISAs. Stop drawing on the property sale capital and switch to drawing taxable income from the 75% portion of your pension. Draw £8,160 + £16,000 a year net which means £30,200 gross a year. But ..

Now we make an iterative change. £30,200 + £25,000 gross a year will exceed your basic rate band and that's a bad idea. So, start drawing from the pension sooner, taking out £4,000 tax free and £12,000 taxable a year from now, with a view to reducing the drawing rate on your wife's portion of the property proceeds by £13,600 a year, that money coming from your pension instead.

This changes the seven years on situation to add 7x £13,600 to her non-ISA capital of £50,880 taking it to £146,080. She still concentrates on moving 20k a year into the ISA but draws a bit as income.

Meanwhile seven years on your pension will have dropped to £300,000 - 7 X £16,000 = £188,000 ignoring growth. Pretending that the higher rate threshold is £50,000 you can draw £25,000 taxable and still pay basic rate tax, so start drawing £25,000 taxable, £20,000 net. That's a shortfall on the £8,160 + £16,000 = £24,160 income so the ongoing wife capital drawing is the £4,160 shortfall.

The tax free lump sum should be taken at £20k a year to match the ISA investing rate but I'll do it all at once for calculation convenience. 25% of £188,000 is £47,000 and as with most of the wife's £146,080 it gets moved into an ISA at £20,000 a year. The £141,000 taxable divided by £25,000 taxable implies that that portion can be expected to last some 5.5 years ignoring growth. Whenever it's depleted just switch to the extensive non-pension capital.

3.2% drawing is extremely cautious, it's a rate that survived the worst conditions in the last 125 or so years without failing. To be less pessimistic if you have some flexibility I suggest that you start on 4% of capital. That's an increase of 0.8% of  (£300,000 + £500,000) = £6,400 a year gross and I suggest that you take it all from your pension starting immediately, though sticking within your basic rate band. Adding to the previous £16,000 plan this comes to £22,400 a year, £5,600 tax free and £16,800 taxable. This £16,800 + £25,000 in your pensions is £41,800 so still within the current basic rate band.

You might also choose to be pessimistic about tax rates and optimistic about growth and start out drawing your full remaining basic rate band for a while.

More beyond this outline in the next post.