Penguins, pelicans and the inland revenue...

Workerdrone

... all have one thing in common. They can all shove their bills up their ar*e :-) Oz, Auf Wiedershen pet.

Sorry for the long post. My real question is at the bottom. It's about being tax efficient.

Aside from the odd work bonus, I’ve never been a higher rate taxpayer. I have however always been a good saver. I started my pension early, made large contributions via Salary Sacrifice and its grown well.

Having never had the advantage of 40% tax relief on the way in I would like to be as tax efficient as possible in retirement.

With a fair wind I am on track to hit the current LTA by 60. With my wife being an NHS shift worker we would both like to retire at that age and enjoy life whilst we are still fit enough to do so.

Mortgage will be paid off before then and kids hopefully flown the roost and financially independent.

I have opened a SIPP for my wife which I contribute a small amount to monthly, plus the odd extra from unused personal items I sell. I keep a close eye on my DC pension balance and as I approach LTA I plan to divert my savings and top both this and an S&S ISA in her name up with contributions

At 60 she can access the 1995 section of her NHS pension. £9.7k a year plus 29k PCLS. We will put the PCLS into an S&S ISA.

Others things. We currently have a cash buffer of 42k (Sitting in the offset mortgage account), we will invest this once the mortgage is paid off

Heres my plan to get her to SPA without paying income tax. (Based on the current personal tax allowance)

Forgive the way I’ve broken this down. Maths isn’t my forte.

Let’s assume for arguments sake by then her SIPP has a modest 50k in it.

£9.7k NHS pension

£3k from SIPP for 7 years

= £12.7k Tax free allowance so no tax to pay

Plus £4.1k from the PCLS pa for 7 years

Now we are up to £16.8k without paying tax

Now I add the 25% tax free lump sum from the SIPP = £1.7k

Tax free total for 7 years =18.5k

Of course the personal tax threshold will change between now and then but hopefully my logic above is sound?

At 67 she will then have the above plus

Full SP of £9.3k pa

NHS 2015 section £15.3k

Total £34.3k

Which she will pay 20% tax on of £4.3k

(I don’t really mind the £4.3k tax, the way I look at it, the SP is a bonus. She is just getting back the NI contributions she paid whilst working)

—————————————————————————————

Right that’s her plan, now for mine which is trickier.  I have to make some assumptions here.

1.) That Rishi won’t reduce the LTA this autumn

2.) That after the 5 year freeze the LTA will resume growth at say 2.5%pa

3.) That in 15 years time the LTA will be circa £1.373m

So I plan to have £1.19m in my pot by 60.

Having led a frugal life I intend to reward myself (This is where the forum members scream) by buying a very nice car for around £120k (Not a new one of course).

It’s this goal which keeps me saving so although many might rightly ask, why would you want to, I’m afraid for me it’s a none negotiable.

As I understand it, I could take up to 25% of my pot tax free, so there would be no problem funding it. The trouble being this will then crystallise around £476k of my pot leaving it liable to inheritance tax.

A better route would be taking some sort of finance product and using UFPLS. (I know I’d be paying interest on the finance, but I would rather that that give it to the taxman)

Say I want to pay myself an annual pension of 23.5k and finance the best part of a £119k car being as tax efficient as possible.

What suggestions might you have?

Dazed_and_C0nfused

Let’s assume for arguments sake by then her SIPP has a modest 50k in it.
£9.7k NHS pension
£3k from SIPP for 7 years
= £12.7k Tax free allowance so no tax to pay
Plus £4.1k from the PCLS pa for 7 years
Now we are up to £16.8k without paying tax
Now I add the 25% tax free lump sum from the SIPP = £1.7k
Tax free total for 7 years =18.5k

What method are you planning on using to take the TFLS from the SIPP?  All up front, part of each withdrawal or something else?

EdSwippet

Workerdrone said:

...

As I understand it, I could take up to 25% of my pot tax free, so there would be no problem funding it. The trouble being this will then crystallise around £476k of my pot leaving it liable to inheritance tax.

To release a £119k (25%) tax-free lump sum from your SIPP you would indeed need to crystallise £476k.

However, the 75% that is not this tax-free lump sum can remain in the pension as a separate 'drawdown' pot, leaving it protected from inheritance tax. (All under current law, of course.)

pip895

Given your requirement for cash and the fact that you are approaching the LTA, crystallising your SIPP would seem a good idea. 

You are then left with a crystallised pot from which you draw what you need -  stay away from 40% tax but probably withdraw a good proportion of the basic rate band or you are likely to get caught by the LTA at 75 if the SIPP pot has grown.  

Albermarle

The trouble being this will then crystallise around £476k of my pot leaving it liable to inheritance tax.

This is incorrect as pointed out by Ed Swippet

You might find some useful info in this current thread .

Should I go over the SIPP lifetime allowance? — MoneySavingExpert Forum

Workerdrone

Dazed_and_C0nfused said:

Let’s assume for arguments sake by then her SIPP has a modest 50k in it.
£9.7k NHS pension
£3k from SIPP for 7 years
= £12.7k Tax free allowance so no tax to pay
Plus £4.1k from the PCLS pa for 7 years
Now we are up to £16.8k without paying tax
Now I add the 25% tax free lump sum from the SIPP = £1.7k
Tax free total for 7 years =18.5k

What method are you planning on using to take the TFLS from the SIPP?  All up front, part of each withdrawal or something else?

It will be a fairly small SIPP of around 50k, its just a buffer for the first 7 years. I need to find a way of taking 3k from the pot and 1.7k from the tax free lump sum. Every year I'm not sure how to do that. Any advice?

Workerdrone

EdSwippet said:

Workerdrone said:

...

As I understand it, I could take up to 25% of my pot tax free, so there would be no problem funding it. The trouble being this will then crystallise around £476k of my pot leaving it liable to inheritance tax.

To release a £119k (25%) tax-free lump sum from your SIPP you would indeed need to crystallise £476k.

However, the 75% that is not this tax-free lump sum can remain in the pension as a separate 'drawdown' pot, leaving it protected from inheritance tax. (All under current law, of course.)

Thank you. It seems I had misunderstood. So even if its crystallised. As long as it stays in the pension fund, and I draw from it. And I try to keep the fund below the LTA until 75 its still protected from IHT. My next question is what happens beyond 75. Can I just let the fund grow. Ive read so much on this I am bamboozled. If I do the above and keep it below LTA, then let it grow post 75, what are the tax implications for my children when they inherit it.

p00hsticks

Competely off topic, but as the OP started it....

I would have thought pelicans (definitely) and penguins (probably) are species of birds that couldn't stick their bills up their *rses.

I mean, have you seen the size of a pelican's bill !?

Albermarle

And I try to keep the fund below the LTA until 75 its still protected from IHT.

The LTA and IHT are not connected . So whether the fund is below or above the LTA , it is still not taken into account in IHT calculations . Unless the legislation changes at some point as it is not really logical that pensions are not included in your estate.

Workerdrone

p00hsticks said:

Competely off topic, but as the OP started it....

I would have thought pelicans (definitely) and penguins (probably) are species of birds that couldn't stick their bills up their *rses.

I mean, have you seen the size of a pelican's bill !?

I blame Jimmy Nail, it was the 80's and a throwaway comment typical of Oz. But I do agree from a biological perspective. Now the taxman... that's a different matter :-)

Workerdrone

Albermarle said:

And I try to keep the fund below the LTA until 75 its still protected from IHT.

The LTA and IHT are not connected . So whether the fund is below or above the LTA , it is still not taken into account in IHT calculations . Unless the legislation changes at some point as it is not really logical that pensions are not included in your estate.

Not that a plan to, but in theory, If I kept myself within the LTA until the BCE at 75, I could go in for higher risk/return funds after that and grow the pot to as large as I wanted without facing another test.(Taking into account the investment risk) Or is the LTA test on death going to kill that dream.