Is there an optimum month to retire?

worksurvivor

I know there are seasonal-based arguments that suggest it's better to retire in the spring or summer as the days are longer, and one can use the long days to clear out the shed, start on retirement projects, etc., but what about financial considerations such as the tax-free earnings threshold?

Is there any merit to starting retirement at the end of April, May, or June because those months are early in the financial year and earnings (up to £12570) will be effectively tax-free, or the tax can be reclaimed? 

Or will the Treasury simply claw back that tax by levying it on one's USS pension income instead? 

Marcon

worksurvivor said:

I know there are seasonal-based arguments that suggest it's better to retire in the spring or summer as the days are longer, and one can use the long days to clear out the shed, start on retirement projects, etc., but what about financial considerations such as the tax-free earnings threshold?

Is there any merit to starting retirement at the end of April, May, or June because those months are early in the financial year and earnings (up to £12570) will be effectively tax-free, or the tax can be reclaimed? 

Or will the Treasury simply claw back that tax by levying it on one's USS pension income instead? 

Tax is levied on your income (from all sources - earnings, pension, savings etc) for the whole year, so if you exceed the personal allowance during the 12 months, you'll pay tax. Your month of retirement won't impact on your overall tax position.

Notepad_Phil

I think there is definitely some potential merit if you had to drawdown your income from a DC pension, but given that yours is coming from a DB pension then I wouldn't be thinking about tax-efficiency but I would be thinking about maximizing your DB income. E.g. are you taking it early by taking it in April, in which case postponing it by six months might mean more DB income for the rest of your life.

ex-pat_scot

From a finances perspective:

1. NI. If you haven't got your full state pension entitlement (check online at gov.uk), then work enough of the year to get another year's worth of credit.

2. Pension. If you are not at LTA, then you have a year's Annual Allowance that you can use

3. You might get a bonus, and it's sensible to leave after it's due (and paid).

4. Tax. You will be taxed on the total of earned income and pension income. You'll also pay NI on the earned income, but not on the pension income.  The first £12,570 of that total will be tax-free.

5. refunds. Your tax will be calculated on the assumption that you will be working the full year, so you may have to request a refund from HMRC. It's not tricky.

My (very rough) financial plan is to get the NI credit, get a full £40,000 Annual Allowance, and earn up to the basic rate ceiling, using accrued holiday for the last 5-6 weeks when I'll technically still be working. To achieve the £40,000 AA and £50,000 effective gross, I'll need to work for about 7 months of the tax year, ie to end October, but the last working day will be somewhere in early September and the remainder would be accrued leave.

MX5huggy

If you have non pension savings then live off these. In the tax years before retirement put all your earnings into pensions (subject to limits) maybe work place, maybe a SIPP. 

In the year of retirement work part of the year put all of this in the SIPP, then stop work. Take £12570 + 25% out the SIPP (all tax free). Then either live off savings or take more from SIPP, because of the 25% tax free you are 6.25% better off than just using earned income. Do this for as many years as possible so DB pension grows due to taking it later (I’m not familiar with the actual USS rules). 

jimi_man

Yes there is, September 2021. Around the middle of the month!!!

(Little fed up with work at the moment!) 

ex-pat_scot

jimi_man said:

Yes there is, September 2021. Around the middle of the month!!!

(Little fed up with work at the moment!) 

Indeed! Except I think my stab is Sept 2024.
(Conveniently, just before my really busy season)

worksurvivor

Notepad_Phil said:

I think there is definitely some potential merit if you had to drawdown your income from a DC pension, but given that yours is coming from a DB pension then I wouldn't be thinking about tax-efficiency but I would be thinking about maximizing your DB income. E.g. are you taking it early by taking it in April, in which case postponing it by six months might mean more DB income for the rest of your life.

I'm a bit puzzled but also intrigued by the related concepts of "maximizing DB income" and "taking it early".

My USS benefits come in two forms, a tax free lump sum and an annual income (there is actually a third pot, for AVCs but, foolishly, I have neglected this instead of adding to it on a monthly basis, so its potential value to my retirement income is minimal at this stage, i.e. in the twilight of my employment).

I can adjust one to see its effect on the other via an online tool. 

Other than selecting a departure date and opting for the chosen income/lump sum ratio, I can't see any information or guidance on the USS site that refers to the twin concepts of "maximizing DB income" and "taking it early".

Would you be kind enough to elucidate?

Thanks

worksurvivor

ex-pat_scot said:

From a finances perspective:

1. NI. If you haven't got your full state pension entitlement (check online at gov.uk), then work enough of the year to get another year's worth of credit.

2. Pension. If you are not at LTA, then you have a year's Annual Allowance that you can use

3. You might get a bonus, and it's sensible to leave after it's due (and paid).

4. Tax. You will be taxed on the total of earned income and pension income. You'll also pay NI on the earned income, but not on the pension income.  The first £12,570 of that total will be tax-free.

5. refunds. Your tax will be calculated on the assumption that you will be working the full year, so you may have to request a refund from HMRC. It's not tricky.

My (very rough) financial plan is to get the NI credit, get a full £40,000 Annual Allowance, and earn up to the basic rate ceiling, using accrued holiday for the last 5-6 weeks when I'll technically still be working. To achieve the £40,000 AA and £50,000 effective gross, I'll need to work for about 7 months of the tax year, ie to end October, but the last working day will be somewhere in early September and the remainder would be accrued leave.

1. I've got enough NI contributions to take the maximum state pension, although I will have to wait a few more years (until my 66th birthday) before I can get my hands on this little bonus.

2. I'm not sure Lifetime Allowance (LTA), which is over £1m, will be troubled by my pension income, although I may not have fully understood how it works. My combined benefits are itro £20k pa + £60k tax-free lump sum. 

Is the annual £20k added to the £60k over the course of my lifetime? If I live to enjoy 30 years of pension income, the combined USS sum will be a bit less than £700,000; adding 26 years of State Pension (is it reasonable to estimate £10k pa?) to the USS sum doesn't bring the total up to £1m.

3. Bonus? Sadly not! The education industry doesn't reward common or garden salaried staff with bonuses.

4. Noted: I'll be paying lower-rate income tax (20%) on about £8k, the difference between £20k and the Tax Free Allowance.

5. Noted, although even if I were to retire at the end of March (although I'll probably do another 2 or 3 months) and start taking my pension from April, to align with the start of the new tax year, I'll still earn more than the tax free amount.

Scraping up this year's un-taken holiday together with next year's pro rata entitlement will be a nice way to move my departure date forward by a few weeks! 

Thanks for the detailed tips! 

mark55man

There was a complicated thread about when the DB pension increases in a year (its a balance between the %age increase paid while deferred and the increase paid when taken), and for me (because of the precise personal factors of scheme rules, my DoB and what inflation/CPI were doing) if I take it in March I will get 5% less than if I take it in May

Notepad_Phil

worksurvivor said:
Other than selecting a departure date and opting for the chosen income/lump sum ratio, I can't see any information or guidance on the USS site that refers to the twin concepts of "maximizing DB income" and "taking it early".

Would you be kind enough to elucidate?

I'll start off by stating that I assumed you were a current member of the USS and that I'm not in the USS so I don't know the intricacies of it but the two main factors I was thinking of were:

1) with most DB pensions you are able to take a lump sum which effects the amount of income you can then take. Many people look at a large amount of tax-free cash and just think great, lets take the max without calculating whether it really is a great deal for them in the long term (e.g. they could live for another 30 to 35 years and who knows what inflation will be over that period of time) and what they'll do with it (e.g. putting it in a low paying savings account might mean it slowly loses its real value over their retirement).

2) You've not mentioned your age, but taking it before a DB scheme's NRA (normal retirement age) would usually mean that it is reduced by a certain percentage which decreases the closer you get to the NRA. Some schemes will also increase your pension if you defer taking it i.e. you take it after the NRA and that increases the longer you defer.

So when I mentioned "maximizing you DB income" (where I perhaps should have said "maximizing your DB benefits") I meant to make sure that you don't lose out long term from the decisions you make now. E.g. depending on the factors above and on a person's other income streams there could prove to be a big difference in someone's longterm financial position from them simply retiring 6 months early and taking a large lump sum as opposed to retiring that little bit later with a smaller or no lump sum.

Now that difference will not always be positive or negative, and even if negative it can still be worthwhile in the broader scheme of things for that person.

So that's what I was basically saying.