Tax efficient drawdown method

236dave

af1963 said:

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.

Hi af1963,
I have paid up enough of my wifes missing NI years, so we both now qualify for full state pensions.

My wife works about 7-8hrs a week, but may retire in 2023 as well.  She earns about £3k/yr.
Contributing into a small pension for my wife might be an option?  ie, £2880 which is topped upto £3600

236dave

LHW99 said:

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.

Hi LHW99,
Where can I find out what the level of protected payment is, which my wife might get?
My wife would inherit 100% of my DC pension and 50% of my DB scheme (maybe a bit more in the earlier years)

Albermarle

236dave said:

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)

As Pat 38493 calculated your commutation rate on the DB pension is around 17 or 18. This is on the low side but probably reflects the fact that the DB pension is ( sadly and unusually) not inflation linked in some way. So it is probably not such a big deal whether you take it or not.
However I stick by my original comments regarding taking the tax free cash from the DC pot i.e. think about it carefully as it may be better to take it in stages.

LHW99

236dave said:

LHW99 said:

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.

Hi LHW99,
Where can I find out what the level of protected payment is, which my wife might get?
My wife would inherit 100% of my DC pension and 50% of my DB scheme (maybe a bit more in the earlier years)

You would get an idea by checking your state pension - if your projection is more than the NSP of around £185, then any excess would likely be the "protected" bit. Someone here would be able to point you towards finding exact details.

236dave

Ive discovered my wife earns close to £4k/yr in her part time job.
I think this means she can contribute upto her earnings level and get tax relief?

If we opened a drawdown pension in her name and I contributed an amount equal to her salary, I beileve it would recieve basic rate tax refief.

FYI - My wife is 57 yrs old, but if we left the pension contributions in the scheme, then when she reaches 67 and gets the full state pension, it would use all her personal tax allaowance (I'm assuming with the triple lock state pension growth, it will catch up with the personal tax allowance amount).  So she would end up paying back the tax relief when drawing down her pension.

What if the contributitions where drawn out in the following tax year,
ie, contribute £3200 net grossed upto £4000 with tax relief in say March.
Then withdrew most of it in April (say £3900 withdrawn), leaving a £100 in.

And did the above for each year until she reached state pension age.

Note: she has mentioned that it would be nice to be able to give any profit from tax relief to charity,  ie essentially HMRC would be paying for our charity contributions.

Qyburn

236dave said:

What if the contributitions where drawn out in the following tax year,
ie, contribute £3200 net grossed upto £4000 with tax relief in say March.
Then withdrew most of it in April (say £3900 withdrawn), leaving a £100 in.

And did the above for each year until she reached state pension age.

Note: she has mentioned that it would be nice to be able to give any profit from tax relief to charity,  ie essentially HMRC would be paying for our charity contributions.

Would that fall foul of the recycling rules?  It seems like it maybe should, but I don't know whether they enforce for such relatively small values.

Dazed_and_C0nfused

Qyburn said:

236dave said:

What if the contributitions where drawn out in the following tax year,
ie, contribute £3200 net grossed upto £4000 with tax relief in say March.
Then withdrew most of it in April (say £3900 withdrawn), leaving a £100 in.

And did the above for each year until she reached state pension age.

Note: she has mentioned that it would be nice to be able to give any profit from tax relief to charity,  ie essentially HMRC would be paying for our charity contributions.

Would that fall foul of the recycling rules?  It seems like it maybe should, but I don't know whether they enforce for such relatively small values.

She can give away what she wants but if she did it under the Gift Aid scheme she would, as a non taxpayer, end up with a tax bill for the tax claimed by the charity.

Albermarle

Ive discovered my wife earns close to £4k/yr in her part time job.
I think this means she can contribute upto her earnings level and get tax relief?

If we opened a drawdown pension in her name and I contributed an amount equal to her salary, I beileve it would recieve basic rate tax refief

She can contribute gross up to her gross salary level. So if she earns £4K, she can add £3200, and £800 would be added as tax relief by the provider.

What if the contributitions where drawn out in the following tax year,
ie, contribute £3200 net grossed upto £4000 with tax relief in say March.
Then withdrew most of it in April (say £3900 withdrawn), leaving a £100 in.

That would be OK, just when choosing the provider, just check the T's & C's on charges. This kind of business is not great for the providers and they may have some kind of extra charge for with drawing in the same year as adding.

Would that fall foul of the recycling rules? 
They only affect the tax free cash ( about a £1000) and at that level, it is too small to be considered for recycling. In any case it seems HMRC are hardly enforcing recycling rules on individuals anyway.

Secret2ndAccount

Yes, your wife should pay her entire salary into a pension. If she earns 4k, she pays no tax, but she still gets a tax relief top-up which turns her 4k into 5k. If she were to earn less than 2880, she could still pay in 2880.

She can withdraw the money any time. Doesn't need to wait until her State Pension Age, and indeed she shouldn't. Take it out over the next few years so it all comes out without hitting her tax free allowance. Even if she was paying tax, there would still be a small profit because 25% of the pension comes out tax free.

She could pay in 4k in January; draw out 5k in March of the same year; a few weeks later in April, pay in 2880. Then, as the next April approaches, make a top-up payment to match her total paid in to her salary for the year. It's free money.

At this level, none of this comes close to triggering pension recycling rules. But it is better to pay in a little less than she earns rather than a little more. If you contribute too much there are forms to fill to sort it all out.

MallyGirl

she can't contribute 5k gross if she earns 4k. As above, she can put in 3200 and it will be grossed up to the 4k she earns