Minimising tax when accessing DC pension

Hector66

Hi 

My wife and I are likely to retire in around 2 years time when we both reach 59. We're interested in thoughts on how we might best access my wife's pension. Our circumstances are:

• I have a DB pension from current employment which will pay £35k pa at 60, fully index linked. This alone will cover our annual costs comfortably.
• My wife has a DB pension from previous employment which will pay £10k pa at 65.
• My wife also has a DC pension from current employment containing £165k, to which she is contributing £20k per year, so we hope it will be around £200k by the time she retires. 
• We will have full state pensions at 67.

We also have £450k across S&S ISAs and cash, with the latter for larger expenses such as a potential house move. We have no mortgage and no dependents.

I've only recently started reading up about how best to access DC pensions, including several old threads on this forum. From what I understand, the choices (other than buying an annuity) are:

• withdraw 25% of the full pot up front tax free, then all subsequent withdrawals would be taxable; or
• withdraw lesser amounts but each withdrawal would comprise a 25% tax free element and a 75% taxable element. Am I correct that this is called UFPLS? 

The second option appeals, assuming my wife has no other income when she retires. I think this would enable her to withdraw c£16k each year without paying tax (until her DB starts at 65) comprising c£12k taxable, but within her personal allowance, and c£4k tax free. Is this correct? Our intention would be to reinvest the £16k each year into her S&S ISA. 

We do not require a 25% lump sum of the entire pension pot up front so have dismissed the first option. But I don't know whether this is a flawed conclusion. In our circumstances is there any reason why we should apply the first option?

I've also read that the timing of pension withdrawals can cause a complication in terms of tax codes. For example if you withdraw a largish one off amount early in the tax year HMRC will assume you are going to withdraw that amount every month and tax it accordingly, leaving a need to correct it later. Is this the case? If so, would it be better to withdraw the £16k per year as a single amount each March? 

Many thanks for any comments to help us make some sensible decisions.

jimjames

Your conclusion sounds sensible. Others may be able to advise but I assume once you have made that choice you have to stick with it so you get 25% tax free of every payment out and can't change if you suddenly need a lump sum. Worth bearing in mind (although it sounds like it won't affect you) is that that you can only contribute £4k to your pension once you start drawing from it.

agent69

I was in a similar situation wanting to remove as much as possible tax free from my SIpp, after early retirement.

• If you have no other taxable income you can get about £16k each year tax free
  

• you are correct regarding taking a large tax free amount early in the tax year. I did this and it got taxed, so spent the next month trying to get the tax back.

In the end I just waited until the end of the tax year and took out a lump sum that was equal to the tax free allowance. Unfortunately it all goes t*ts up when you start to receive your state pension.

 

Albermarle

There is a specific pensions board, for any future posts. 

• withdraw 25% of the full pot up front tax free, then all subsequent withdrawals would be taxable; or
• withdraw lesser amounts but each withdrawal would comprise a 25% tax free element and a 75% taxable element. Am I correct that this is called UFPLS? 

Both options are possible. Regarding the second one, yes you can take around £16.5K pa , with 25% tax free and 75% taxable ( but not taxed if you still have your full personal allowance available)

Another method is flexi access drawdown, where similar to UFPLS you take some tax free ( but not all of it) and some taxable, but not necessarily in the rigid 25:75 ratio that you take with UFPLS. Although you always need to take some tax free before taking taxable. By this method you could take some tax free one year and taxable the next as an example. Or if you prefer monthly payments it seems easier to organise this way as monthly UFPLS is not possible with some providers.
Probably taking one UFPLS payment per tax year is the simplest option though. if you are organising it yourself.

I've also read that the timing of pension withdrawals can cause a complication in terms of tax codes. For example if you withdraw a largish one off amount early in the tax year HMRC will assume you are going to withdraw that amount every month and tax it accordingly, leaving a need to correct it later. Is this the case? If so, would it be better to withdraw the £16k per year as a single amount each March?

Yes, but if you take it earlier and get overtaxed it is pretty easy to get a refund.

jaypers

Everyone is different and there are tools and techniques available that will fully answer your question. My best advice to you would be to sit down with an independent financial advisor to do a full review.

Albermarle

jaypers said:

Everyone is different and there are tools and techniques available that will fully answer your question. My best advice to you would be to sit down with an independent financial advisor to do a full review.

The OP seems to have done OK so far, so debatable whether paying an IFA would be such a good idea in this case.They have two DB pensions underpinning their retirement income ( and state pensions later ) , if they did make the odd mistake and paid a bit too much tax then not a big deal. Anyway it is clear from their post that they have some good  understanding of the options already .

The only advice they probably need is to think carefully why they want to continue working another two years, when they are so well set up financially already ?

Expotter

Regarding emergency tax codes, as far as I understand it, it doesn't matter which month of the year it is, as it assumes it is Month 1, so whenever it is applied you only get 1/12 of your allowance tax free.
This earlier thread might give you some useful information
https://forums.moneysavingexpert.com/discussion/6403450/emergency-tax-code

Hector66

Many thanks for everyone's comments.

I'm interested in Albermarle's reference to flexi access drawdown. I need to read up about that.  Also a good challenge about why continue to work another two years, but the best I can say is that at least it's progress from our original plan to work until 60.

I realised I'd posted on the savings board instead of pensions the moment I pressed send. I need to take more care next time. 

Thanks again.  


  

Albermarle

Hector66 said:

Many thanks for everyone's comments.

I'm interested in Albermarle's reference to flexi access drawdown. I need to read up about that.  Also a good challenge about why continue to work another two years, but the best I can say is that at least it's progress from our original plan to work until 60.

I realised I'd posted on the savings board instead of pensions the moment I pressed send. I need to take more care next time. 

Thanks again.  


  

This thread might be of interest
What made you 'pull the trigger'? — MoneySavingExpert Forum

NedS

Hector66 said:

Hi 

My wife and I are likely to retire in around 2 years time when we both reach 59. We're interested in thoughts on how we might best access my wife's pension. Our circumstances are:

• I have a DB pension from current employment which will pay £35k pa at 60, fully index linked. This alone will cover our annual costs comfortably.
• My wife has a DB pension from previous employment which will pay £10k pa at 65.
• My wife also has a DC pension from current employment containing £165k, to which she is contributing £20k per year, so we hope it will be around £200k by the time she retires. 
• We will have full state pensions at 67.

We also have £450k across S&S ISAs and cash, with the latter for larger expenses such as a potential house move. We have no mortgage and no dependents.

I've only recently started reading up about how best to access DC pensions, including several old threads on this forum. From what I understand, the choices (other than buying an annuity) are:

• withdraw 25% of the full pot up front tax free, then all subsequent withdrawals would be taxable; or
• withdraw lesser amounts but each withdrawal would comprise a 25% tax free element and a 75% taxable element. Am I correct that this is called UFPLS? 

The second option appeals, assuming my wife has no other income when she retires. I think this would enable her to withdraw c£16k each year without paying tax (until her DB starts at 65) comprising c£12k taxable, but within her personal allowance, and c£4k tax free. Is this correct? Our intention would be to reinvest the £16k each year into her S&S ISA. 

Spot on, and that's exactly what I would do in her position - she should be able to get a fair chunk out of her DC pot without paying any income tax on it. Unfortunately the rest will likely incur basic rate income tax as long as she doesn't take so much in one year as to enter the higher rate tax bracket.

Hector66

Thanks for replying, NedS. Reassuring that I seem to have grasped the correct basic idea from my research.

Thanks to Albermarle for the link to the Trigger post, which I've had a read through this morning. It contains some thought provoking and inspiring stories. I don't want to detract from those but, I suppose for us, we have found careers which suit us. And reaching the latter stages of our working lives has brought us more control than when we were starting out, alongside a sufficient acceptance of the inevitable corporate nonsense.

But two more years and that's it, we think. So the information everyone has provided above will be a great help in planning for it.