Tax efficient drawdown method

236dave

Hi,
I wanted to check if my method is good.
I may retire during 2023?.....I'm weighing it up.

Facts:
I am a 60 year old, married and have several pensions and some savings, but my wife has no pension, but some savings.
We have no debts.
I plan to combine all but one (final salary) pension into flexible drawdown.
My drawdown pension once combined = £462k
My final salary scheme will give @ age 65 = £8k/yr (fixed) + £53k tax free lump sum.
My savings = £60k of which I'm willing to use £40k towards future pension withdrawls.
I don't want to include my wifes savings in my plan.
We do own our house, which if required later in life may downsize releasing £100-£150k ?? (in todays money)

Target:
For us both to live on = £35k net / year to age 79, then reduce by 10% (31.5k/yr) from 80-90 age. (If I live that long?)

Method:
Crystallise some or all of drawdown pension, releasing 25% tax free lump sum. (invest whats not being spent tax efficiently)
Remaining Drawdown Pot £346.5k with £115.5k tax free lump sum.

Draw £13.8k (I've got marriage tax allowance)....so will pay zero tax
Add £24.4k from tax free cash = £38.2k net, reinvest £3.2k back into pension (grossed upto £4k by HMRC)
Question - Even though I'm not paying tax will HMRC still gross up my £3.2k to £4k ????....staying within pension recycling rules.
Leaving us with £35k net

I'm using todays money value as I've assumed in the long term my pension keeps pace with cost of living.
Use same method until:

At age 64, my tax free pot is empty, and I start using some of my cash savings.

At age 65, my final salary scheme kicks in, and I get a new £53k tax free lump sum.
Drawdown £5.8k
Recieve £8k from final salary scheme (still no tax due)
Add £24.4k from tax free cash = £38.2k net, reinvest £3.2k back into pension (grossed upto £4k by HMRC)
Leaving £35k net

Age 66 do the same. (still no tax being paid)

Age 67 my state pension kicks in........not sure to carry on reinvesting £3.2k, as my savings are getting low.
State pension £10.6k
Final salary £8k
Pay about £1k tax leaving £17.6k net
Add £16.4k from the last bit of my tax free pot + cash savings
Total £35k net

Age 68
Same, but start taking some drawdown.
Drawdown £3k
State pension £10.6k
Final salary £8k
Pay about £1.5k tax, leaving £20.1k net
Add £14.9k from last of cash savings
Total £35k net

Age 69
Wifes state pension kicks in, tax free using her allowaence £10.6k
Drawdown £9k
State pension £10.6k
Final salary £8k
Pay about £2.8k tax, leaving £24.8k net + wifes pension
Total £35.4k net

Carry this on till age 79, then live on 10% less in older years.

Sorry the above is a bit long, but any comments / advice ???

NoMore

236dave said:

Question - Even though I'm not paying tax will HMRC still gross up my £3.2k to £4k ????....staying within pension recycling rules.

You are getting the MPAA and the tax relief for non earners confused. The MPAA is a limit on earned income , once a pension  has been accessed beyond the 25% tax free.

As you, at that point, will be classed as a non earner, the limit is £3600 (2880 net) not 4k. 

Dazed_and_C0nfused

You could only contribute more than £3,600 in a tax year you have equivalent earnings for pension purposes i.e. taxable pay, business profits. Pension income doesn't count for this purpose.

236dave

Thanks NoMore & Dazed, I can adjust to the lower amount.
Otherwise does my method look good, as far as limiting my tax?

Pat38493

"My final salary scheme will give @ age 65 = £8k/yr (fixed) + £53k tax free lump sum."

Just to be clear, do you mean fixed as in it will never increase and will always pay 8K per year regardless of inflation?  If so your drawdowns will need to increase to compensate as inflation will erode your DB payment.  

Also is there an option to not take the lump sum - I've seen various discussions here that often taking a lump sum on a DB pension is not optimal depending on the commutation rates (even though the lump sum is tax free).

Albermarle

As above you should think carefully about taking the tax free lump sum from the DB pensions and reducing your guaranteed income. It is often a 50:50 decision depending on various factors.
Even more so you should think even more carefully about taking all the tax free lump sum at once from your DC pension. Usually better to take it in stages and leave the rest in the pension, where it is fully protected from capital gains, dividend and inheritance tax.

I don't want to include my wifes savings in my plan.
Normally it is better to look at the family finances as a whole. leaving out one possibly critical part makes little sense. If possible it would have been maybe better for you to have funded a small pension for her, so you could utilise her personal tax allowance which is currently being wasted.

We do own our house, which if required later in life may downsize releasing £100-£150k ?? (in todays money)
Downsizing is not as easy as it sounds, because as soon as you start looking you start to upgrade your expectations.
Probably best to see this as only a final back up in case other things go wrong, which seems unlikely.

You have several DC pensions to combine into one large drawdown pot, that you want to last for a long time ( hopefully) but you do not mention any investment/drawdown strategy . Perhaps that is all under control separately from your overall plan?

af1963

Have you made sure your wife (and yourself) will both get a full state pension  - checked online ?  If either of you doesn't - then buying NI topups might need to be considered.

Is your wife currently working ? No figures for income for her included above, so presumably not ?  She could contribute to a pension for her as well, and get a further tax relief topup, up to the same £2880 net limit.

LHW99

Also calculate what your wife would get if you happen to walk under the proverbial bus. New State Pension is no longer inheritable, so she would only get (I think) 50% of any protected payment, if you have accumulated any.

236dave

Pat38493 said:

"My final salary scheme will give @ age 65 = £8k/yr (fixed) + £53k tax free lump sum."

Just to be clear, do you mean fixed as in it will never increase and will always pay 8K per year regardless of inflation?  If so your drawdowns will need to increase to compensate as inflation will erode your DB payment.  

Also is there an option to not take the lump sum - I've seen various discussions here that often taking a lump sum on a DB pension is not optimal depending on the commutation rates (even though the lump sum is tax free).

Hi Pat38493,
Yes the £8k/yr will not rise with inflation, and yes I will increase withdrawls from either tax free cash / savings or taxable drawdown accordingly to compensate.

I haven't considered leaving my tax free allowance in my pension.  I know that if I did I would get £11k/year, would this be better?

Pat38493

236dave said:

Pat38493 said:

"My final salary scheme will give @ age 65 = £8k/yr (fixed) + £53k tax free lump sum."

Just to be clear, do you mean fixed as in it will never increase and will always pay 8K per year regardless of inflation?  If so your drawdowns will need to increase to compensate as inflation will erode your DB payment.  

Also is there an option to not take the lump sum - I've seen various discussions here that often taking a lump sum on a DB pension is not optimal depending on the commutation rates (even though the lump sum is tax free).

Hi Pat38493,
Yes the £8k/yr will not rise with inflation, and yes I will increase withdrawls from either tax free cash / savings or taxable drawdown accordingly to compensate.

I haven't considered leaving my tax free allowance in my pension.  I know that if I did I would get £11k/year, would this be better?

There are other contributors here who could comment better, but you are getting £17/18 of lump sum for each pound of pension lost I guess.  I am not sure if that's good or bad in the context of a pension that doesn't have an inflation link.  Hopefully someone else could comment there.  I've seen a lot of posts saying that people often take the cash lump sum from their DB pension when actually they would be better off in the long run to take the higher pension but it all depends on these commutation rates.  

Back of a napkin you are quids in if you live much beyond 80 but it's probably a bit more complicated with inflation.

236dave

Albermarle said:

As above you should think carefully about taking the tax free lump sum from the DB pensions and reducing your guaranteed income. It is often a 50:50 decision depending on various factors.
Even more so you should think even more carefully about taking all the tax free lump sum at once from your DC pension. Usually better to take it in stages and leave the rest in the pension, where it is fully protected from capital gains, dividend and inheritance tax.

I don't want to include my wifes savings in my plan.
Normally it is better to look at the family finances as a whole. leaving out one possibly critical part makes little sense. If possible it would have been maybe better for you to have funded a small pension for her, so you could utilise her personal tax allowance which is currently being wasted.

We do own our house, which if required later in life may downsize releasing £100-£150k ?? (in todays money)
Downsizing is not as easy as it sounds, because as soon as you start looking you start to upgrade your expectations.
Probably best to see this as only a final back up in case other things go wrong, which seems unlikely.

You have several DC pensions to combine into one large drawdown pot, that you want to last for a long time ( hopefully) but you do not mention any investment/drawdown strategy . Perhaps that is all under control separately from your overall plan?

Hi Albermarle,
How to know which is best?  take tax free lump sum or not from DB scheme.
If I did take it, then yes I would take it in stages leaving the rest in the pension.

Think I've missed the boat in funding a pension for my wife.

Yes downsizing the house is a plan B, which may not be required.

I have a spreadsheet showing how long the drawdown would last, before being exhausted. (About age 90)