targeting a 4.5% natural yield

Linton

NedS said:

easyrider11 said:

NedS said:

My plan is to draw my tax free allowance from my SIPP each year (£16,760), and the income fund needs to generate that income. I'm just about there on generating the income and not due to retire for another year or so, which should put me comfortably over the threshold with that income reinvested and another year of contributions.

Once I begin drawing income, any excess income over my personal tax allowance will then get reinvested to help grow the capital and future dividend payments. Until the personal tax free allowance starts to rise again, I will not be taking inflationary increases, which again should help build a buffer.

Good idea. But is it not more sensible to draw your tax free allowance and put it straight into your annual ISA allowance to build you tax free income potential?

I'm currently still working, so have no tax free allowance available. Once I stop work, I will need to draw the £16,760 income to supplement other non-taxable income streams. At some point I will have to pay (basic rate) tax.

From a tax perspective, it makes no difference if money is drawn now and paid into an ISA for tax free growth or left in a SIPP to grow and be taken later. Assuming the same 20% tax rate, the same amount of cash is available after tax. The important thing is to fully utilise any marginal or tax free rates where available to avoid paying higher rates of tax later.

Assuming 20% tax this is true.  However if you are in danger of paying higher rate tax in retirement any time in the furture  getting income that does not use up your tax band is highly beneficial.  Even if your annual income is very unlikely to exceed the tax band you wll get greater flexibility in the size of lump sum you can draw down without paying excessive tax.