Non Earner should I start drawing down pension at 55 into ISA's

alwayslearning77

Hi just wondering if anyone thinks it’s a bad idea to start taking my personal pension early at 55 and putting it into ISA’s (still invested in funds) so it’s protected from future tax.  I am currently a 54 year old non-earner and unlikely to be earning before Husband retires in 3-4 years.  Originally, I was going to the leave my prudential with profits personal pension currently 240k alone until we both retire, then put it into drawdown after taking TFLS at age 59 and drawing 6-7k approx a year  Now I’m thinking it would be a good idea move it to drawdown at 55, withdraw the TFLS and yearly personal allowance of 12.5k and feed it into investment ISA’  (Hubby and I can utilise 40k a year) so it’s still growing as if in the pension but now protected from future tax (ie not spend it yet).  I would be able to get 125k plus the 60k TFLS out in the next 10 years using my personal allowance, free of tax.

At 65 I would have a small DB pension of 7k, so would reduce my drawdown to 5.5k for 2 years (now I've drawdown 136k plus TFLS), at 67 I would get State Pension of 9k+, so would minimize withdrawal to pay a little tax as possible but be able to offset it with the ISA funds built up.

I’m aware the amount I can put into a pension would be reduced to 4k but as I can only save 2880 as non-earner it’s not an issue.  Also, aware the money is protected from IHT in a pension and not in an ISA.  Can anyone forsee anything I have missed?  Originally I was planning to leave all pensions alone until Husband retires when I’m 59 but now realise I can minimize the tax if I start to draw earlier but don’t use it.  Grateful for any insight, I feel I'm missing something.  Thanks

ussdave

It sounds like a sensible plan to me.  

Other things to consider:

1. Utilise Married Couples Allowance to allow your husband to reduce their tax burden (if you're not already doing this).

2. Rather than draw £12.5k, you can take advantage of the fact that 25% of your withdrawal is tax free, drawing ~£16.3k per year instead.

Albermarle

 Rather than draw £12.5k, you can take advantage of the fact that 25% of your withdrawal is tax free, drawing ~£16.3k per year instead.

This will depend on how flexible the pension/provider is.

OP - Older pensions are normally less flexible in how you can withdraw the income than a more modern pension. For example you maybe only have the option of taking the 25% tax free in one go, rather than being able to take it in tranches along with some taxable income, as suggested above. You maybe be able to work out what is possible from their website or you may have to call them.

However you have an extra problem that your pension is with the Pru. The reason I say this is that it seems that since Covid and a new IT system I think, their customer service has really deteriorated. Probably if you call, then nobody will answer.

Secondly if you did arrange to transfer to a more modern Pru pension, then you will have to go through one of their advisors and pay 3% for the privilege. They may even insist on this 'advice' even if you just want to start withdrawing from the current pension ( I am not sure about that)

You may want to consider starting a new pension with another provider, and transferring the Pru one into it.

Sea_Shell

This is just what I'm planning on doing in 5 years time!

13 years to get it all out tax free and moved to ISA.

Once state pension kicks in, then drawdown would need to be reduced to "mop up" any balance, within the PA at the time.


I might even spend some of it!!! 😉😲

Audaxer

Absolutely makes sense. My wife is planning to do the same.

If you are putting £2,880 back in each year to get the added tax relief, it is also worth doing, but on the other hand that makes it longer to get the whole lot out without paying tax. I assume that may be a factor if State Pension kicks in before you get the whole lot out tax free?

Somebody

Do you have kids? 

Are you planning to pass on inheritance?

Will IHT thresholds come into play?

As you know pensions pots are favourable in terms of IHT vs ISAs

I want to pass on as much as possible so I'm avoiding touching the SIPP in the first instance, though I may draw the TFLS and gift it as a PET whilst I'm relatively young and in good health. 

alwayslearning77

Somebody said:

Do you have kids? 

Are you planning to pass on inheritance?

Will IHT thresholds come into play?

As you know pensions pots are favourable in terms of IHT vs ISAs

I want to pass on as much as possible so I'm avoiding touching the SIPP in the first instance, though I may draw the TFLS and gift it as a PET whilst I'm relatively young and in good health. 

Yes we do have kids of university age and have thought about the IHT, but my husband will have larger pensions than I and we will try to keep in the 20% tax bracket so I think quite a bit of his pension will be still left in his drawdown for Inheritance for them along with the house.  We are aware of the IHT issue, but feel we also need to prioritise our income too.  We can always gift them money for house deposit if we can afford it later on.  But I do take your point that it's much better to leave in the pension for IHT purposes.

alwayslearning77

Audaxer said:

Absolutely makes sense. My wife is planning to do the same.

If you are putting £2,880 back in each year to get the added tax relief, it is also worth doing, but on the other hand that makes it longer to get the whole lot out without paying tax. I assume that may be a factor if State Pension kicks in before you get the whole lot out tax free?

thank you - You make a good point, yes I was planning putting the £2880 back in each year, but I suppose I could look at it that it could stay in the pension for IHT purposes if I didn't want to pay tax on it.  But hopefully it would attract some growth over the years so worth having even if I have to pay tax.  It also crossed my mind that my hubby is 40% tax payer and we could use some of the pension money to put into his pension as he will get more tax relief, but then we have the problem of getting it back out again which will cause a tax issue, so after having got it out tax free I'd be trying to work out how to get it out again with less tax.  So I need to think about that one very carefully.  He has larger pensions than myself but it would make us even more lopsided on the pension front if we put my pension into his. 

alwayslearning77

Albermarle said:

 Rather than draw £12.5k, you can take advantage of the fact that 25% of your withdrawal is tax free, drawing ~£16.3k per year instead.

This will depend on how flexible the pension/provider is.

OP - Older pensions are normally less flexible in how you can withdraw the income than a more modern pension. For example you maybe only have the option of taking the 25% tax free in one go, rather than being able to take it in tranches along with some taxable income, as suggested above. You maybe be able to work out what is possible from their website or you may have to call them.

However you have an extra problem that your pension is with the Pru. The reason I say this is that it seems that since Covid and a new IT system I think, their customer service has really deteriorated. Probably if you call, then nobody will answer.

Secondly if you did arrange to transfer to a more modern Pru pension, then you will have to go through one of their advisors and pay 3% for the privilege. They may even insist on this 'advice' even if you just want to start withdrawing from the current pension ( I am not sure about that)

You may want to consider starting a new pension with another provider, and transferring the Pru one into it.

Thanks hadn't realised that it the pru might charge me to access my money lol!!!  My thought was to transfer the whole pot to drawdown scheme which I need to investigate as had planned on doing it much later.  I will message the pru and find out the ins and outs of accessing it now I know it's the sensible thing to do.

alwayslearning77

ussdave said:

It sounds like a sensible plan to me.  

Other things to consider:

1. Utilise Married Couples Allowance to allow your husband to reduce their tax burden (if you're not already doing this).

2. Rather than draw £12.5k, you can take advantage of the fact that 25% of your withdrawal is tax free, drawing ~£16.3k per year instead.

Thank you, yes was aware I could take the tax free in tranches but we will need to TFLS immediately when my husband retires in 4 years so I wouldn't able to get enough out it time if we didn't take it one go, but I will look at it again to make sure.  Planning to keep 3 years of drawdown so that we don't have to drawdown during falls in the market....at least that's my plan until we've spoken to IFA before we retire.

alwayslearning77

Albermarle said:

 Rather than draw £12.5k, you can take advantage of the fact that 25% of your withdrawal is tax free, drawing ~£16.3k per year instead.

This will depend on how flexible the pension/provider is.

OP - Older pensions are normally less flexible in how you can withdraw the income than a more modern pension. For example you maybe only have the option of taking the 25% tax free in one go, rather than being able to take it in tranches along with some taxable income, as suggested above. You maybe be able to work out what is possible from their website or you may have to call them.

However you have an extra problem that your pension is with the Pru. The reason I say this is that it seems that since Covid and a new IT system I think, their customer service has really deteriorated. Probably if you call, then nobody will answer.

Secondly if you did arrange to transfer to a more modern Pru pension, then you will have to go through one of their advisors and pay 3% for the privilege. They may even insist on this 'advice' even if you just want to start withdrawing from the current pension ( I am not sure about that)

You may want to consider starting a new pension with another provider, and transferring the Pru one into it.

Thanks for that, I was planning to set up with a new provider and get it transferred across from the Pru as I'm not sure that Pru is known for reasonable charges! Just looked at AJ bell as an example as Which recommended and it seems you can manage a lot of the drawdown side online, which is good. I've just seen that there's an MVR if I take it out before May 2023 which is odd as I'm 55 in August 22, so I've just queried that with them.  I might need to wait until then before transferring to new pension.