Lump sums - are we doing the right thing

Ewan_Kerr

Hi,

I retired 3 years ago with a DB pension, I took the max lump sum and invested 50k in Close Bros ISAs in my own and my wife's names. Half in Balanced Portfolio X GBP and half Managed Balanced X GBP. I recently started receiving a small extra wage from a hobby turned new job which brings my yearly income to just under 20k. My pension & wage cover my existing outgoings plus a few hundred at the end of the month. I'm a basic rate tax payer.

My wife retired this year with a DB pension, she took the max lump sum and so far we have invested 50k in NSI 6.2% 1 year fix in my name for now and 75k in Santander EA 5.2% also in my name for now (we intend to give 50k to our son to help buy a home and HMRC are due 13k). She is a high rate tax payer. That leaves us with 26k in our current account, of which we think we want to invest 20k in a S&S ISA. She also has 31k (22k after HMRC get their share) in a Royal London Open Fund which we think should be in another ISA. My wife has gone back to work part time until the end of the year. Her pension covers her outgoings plus some.

We don't live extravagantly and think that a yearly drawdown of 6k plus our extras, plus state pension in a few years will make for a comfortable life.

Are we doing the right thing to allow for 6k plus inflation for the rest of our lives?

 

jimjames

If your wife is working then is there an option to pay into pension for tax relief rather than ISA especially if higher rate taxpayer? DB pension shouldn't affect the amount you can pay in as it's only DC pensions being drawn that reduce it. 

Albermarle

jimjames said:

If your wife is working then is there an option to pay into pension for tax relief rather than ISA especially if higher rate taxpayer? DB pension shouldn't affect the amount you can pay in. 

In fact the OP is also working, so should also be looking at opening a new DC pension to gain tax relief and investing within the pension.

OP Contributing to a pension brings a minimum 6.25% tax gain over investing in an ISA. Your current platform Close Brothers offers a SIPP I believe. 

Ewan_Kerr

jimjames said:

If your wife is working then is there an option to pay into pension for tax relief rather than ISA especially if higher rate taxpayer? DB pension shouldn't affect the amount you can pay in. 

If my wife is only working for the next 3 months, is it worth putting money in pension? Pension is now no longer DB.

Ewan_Kerr

Albermarle said:

jimjames said:

If your wife is working then is there an option to pay into pension for tax relief rather than ISA especially if higher rate taxpayer? DB pension shouldn't affect the amount you can pay in. 

In fact the OP is also working, so should also be looking at opening a new DC pension to gain tax relief and investing within the pension.

OP Contributing to a pension brings a minimum 6.25% tax gain over investing in an ISA. Your current platform Close Brothers offers a SIPP I believe. 

I'm confused. 75% of any interest on the SIPP is taxable whereas the ISA isn't.

jimjames

Ewan_Kerr said:

jimjames said:

If your wife is working then is there an option to pay into pension for tax relief rather than ISA especially if higher rate taxpayer? DB pension shouldn't affect the amount you can pay in. 

If my wife is only working for the next 3 months, is it worth putting money in pension? Pension is now no longer DB.

Difficult to know without your personal circumstances but putting into a DC pension at the age you can immediately draw it doesnt seem to offer any negatives especially when you can get 40% tax relief on contributions and possibly reduce your tax into the lower band.

NoMore

£100 in a ISA is £100

£100 in a Pension, gets tax relief to £125.

On withdrawal you get 25% tax free £31.25 (125*25%)

The rest is taxed at 20% leaving £75 ((125 - 31.25) * 0.8)

Giving you at total of £106.25 (75 + 31.25)

Its down to the 25% tax free, which is truly tax free, with tax never being paid on contribution or withdrawal, ISA you have paid tax on contribution and only the gains are tax free. 

Albermarle

Ewan_Kerr said:

Albermarle said:

jimjames said:

If your wife is working then is there an option to pay into pension for tax relief rather than ISA especially if higher rate taxpayer? DB pension shouldn't affect the amount you can pay in. 

In fact the OP is also working, so should also be looking at opening a new DC pension to gain tax relief and investing within the pension.

OP Contributing to a pension brings a minimum 6.25% tax gain over investing in an ISA. Your current platform Close Brothers offers a SIPP I believe. 

I'm confused. 75% of any interest on the SIPP is taxable whereas the ISA isn't.

Yes you are confused.
Firstly 25% of the total in a SIPP/DC pension is available as tax free cash and 75% is potentially taxable ( depending on your tax position) How much 'interest' or investment growth there has been is not relevant to the tax situation.

The rest is clearly explained by @NoMore

Pensions: Everything you need to know for retirement - MSE (moneysavingexpert.com)

Ewan_Kerr

jimjames said:

Ewan_Kerr said:

jimjames said:

If your wife is working then is there an option to pay into pension for tax relief rather than ISA especially if higher rate taxpayer? DB pension shouldn't affect the amount you can pay in. 

If my wife is only working for the next 3 months, is it worth putting money in pension? Pension is now no longer DB.

Difficult to know without your personal circumstances but putting into a DC pension at the age you can immediately draw it doesnt seem to offer any negatives especially when you can get 40% tax relief on contributions and possibly reduce your tax into the lower band.

Apologies, It's a NHS CARE pension now, which is still DB. I need to check if it can be added to.

Ewan_Kerr

As for myself - it looks like a SIPP is a no brainer.

Ewan_Kerr

Ewan_Kerr said:

As for myself - it looks like a SIPP is a no brainer.

.....no brainer for my new wages. 

But what about the 20k for a S&S ISA and the 22k from Royal London? Any thoughts?