final salary pension : take early or not?

ukdw

jamesd said:

The three small pots let you take out some taxable money without triggering the MPAA. No other benefit.

There used to be the additional benefit that the lifetime allowance wasn't involved either but that's currently moot.

The mortgage is just shifting some money from your future self to when it's more useful. You're young for equity release but if you don't care about inheritance that's a tool you could use later to improve your lifestyle. Most people won't like either but they are just tools to use to achieve objectives.

I do find the idea of a  pension funded mortgage or equity release interesting concepts, or even interest free credit cards.

Not DB deferral related I know - but just for fun ran some numbers comparing DC large taxable lump sum drawdown to Mortgage with annuity purchase to fund payments.

option 1 - £200k lump sum drawdown (assuming 40%,60%,45% tax) would cost you about £90k in tax - so yield about £110k net.

option 2 - instead use the £200k DC to purchase an annuity (single life, level, age about 60, enhanced, 30 year guarantee) should yield about £1k gross or £800 net per month after 20% tax.

Mortgages the £800 per month could fund at todays rates...
option 2.1 - 30yr lifetime fixed rate repayment - £140k
option 2.2 - 30yr repayment, with 5 year fix - £170k
option 2.3 - interest only =  £215k  - balance would have to come off from other funds on death.
 

jamesd

Thanks for running the numbers that illustrate the potential to get more for your money. I wouldn't usually want to recommend a £200k taxable lump sum but option 2.2 actually costs less than 20% income tax on the lump sum. But that's not a permanent interest rate unlike the the other two so it's true cost isn't known.

flyguy66

Thanks everyone for your feedback, thoughts and comments. I thought I'd feedback as part of my thank you, looking at all of this again and considering some of the feedback.

I've decided to shift my plans slightly, delay taking my DB a few years, mindful of some of the comments about hedging risk in later life for possibly higher expenses. 

At present my SIPP, always intended as a bridging pension rather than a long term source of income is at 270k. Part of what I was trying to do was access that in a tax efficient way, avoiding breaching the higher rate tax threshold as much as possible. Thresholds are frozen until Apr 2028 at present, I can amend as these change but don't think any changes will have a big impact over the time frame I'm looking at. 

I think I can do that by taking my 2008 DB at 60, and my 2015 at 64. That balance seems to give me the best balance of accessing early vs income in later life vs efficient SIPP drawdown. That together with a small USS DB I can access at 60 without reduction and state pension at 67 will provide around 42k (pre tax). That will increase with inflation as later life hedge.  I haven't factored in McCloud remedy giving me a better NHS pension than my current forecast in this, too difficult to know for sure until trigger is pulled, even with the published calculator I looked at.

That would leave a small 50k back up in my SIPP that I'd take a 40% hit on anything other than the 25% that would be tax free.

ISA pot is at 260k at present, majority was invested until recently, now held in cash. I know cash isn't the way to go and looking at reinvesting at some point, but interest of 5.8% risk free was too tempting. Any residual from SIPP draw down and DB income, which on current spend looks like around 15k, will go into that. I see this as gradually shifting from taxable income to non taxable (under current rules). Even if I held in cash rather than reinvesting, interest of around 15k based on 4% if the interest is untouched until 67. Inflation factor for cash to consider

I also have income from rental of 10k I'm currently adding to my SIPP for tax efficiency. That rental has been reliable for the last 25 years but that could change. The asset that generates rental will still be there though and could be re let or sold if needed. I don't see how I can avoid 40% tax on that. At least putting it in my SIPP after I've started drawdown, as I think I can under current rules, it would benefit from 25% tax free.

Thanks again, anything overtly obvious negative about what I've come up with feel free  

leosayer

Thanks for the update. Gives me food for thought for my own arrangements which are not dissimilar to yours.

You haven't said what your income requirements are in retirement but if you will have a surplus from drawing down c.£50k per year then do consider investing that in an appropriate way now for your time horizon. Cash is not great for longer term savings.

Rental income isn't counted as pensionable earnings.

flyguy66

leosayer said:

Thanks for the update. Gives me food for thought for my own arrangements which are not dissimilar to yours.

Cash is not great for longer term savings.

Rental income isn't counted as pensionable earnings.

Yes, understood, long term holding large cash not great and reinvestment of any drawn down surplus as well as current held in cash is part of my thinking. 
Based on present situation, no mortgage, children grown but not yet flown the next, wife with her own income and pension income of 36k. As a couple our current expenses are 24k. My discretionary spend barely touches 1k most months. Discretionary spend I anticipate will go up, possibly up to double -that may determine whether full ISA allowance could be used each year. 
Rental income. I didn't realise that. So even if it's taxed at 40%, as it is following my SA tax return, it can't be added into a SIPP even with MPAA at 10k? I guess that eliminates any question of my adding to or not then.....  

leosayer

flyguy66 said:

leosayer said:

Thanks for the update. Gives me food for thought for my own arrangements which are not dissimilar to yours.

Cash is not great for longer term savings.

Rental income isn't counted as pensionable earnings.

Yes, understood, long term holding large cash not great and reinvestment of any drawn down surplus as well as current held in cash is part of my thinking. 
Based on present situation, no mortgage, children grown but not yet flown the next, wife with her own income and pension income of 36k. As a couple our current expenses are 24k. My discretionary spend barely touches 1k most months. Discretionary spend I anticipate will go up, possibly up to double -that may determine whether full ISA allowance could be used each year. 
Rental income. I didn't realise that. So even if it's taxed at 40%, as it is following my SA tax return, it can't be added into a SIPP even with MPAL at 10k? I guess that eliminates any question of my adding to or not then.....  

In simplified terms, only salary can be added to a SIPP and attract tax relief. Is your wife's non-pension income from a salary? If not then you're out of luck.

If you expect your family's annual expenses including discretionary to be around £48k per year and your wife's pension income + rental income is £46k then I don't see why you are looking to draw from your SIPP when your DB pension will give you more than your family need even with a reduction for taking it early. Having 100% of your retirement income needs met by guaranteed income for the rest of your life is a great place to be and then (I assume) this will be further enhanced with state pensions.

If it was me, I would commence your DB schemes as soon as you retire and retain your SIPP as an investment should they be required for additional spending now, or for later life care should that be necessary. Seeing as this could be 20+ years the SIPP has plenty of time to grown significantly if invested sensibly.  If the SIPP isn't depleted when you die then it can go to your kids.
In fact, that above is pretty much exactly what I am planning to do when my wife and I stop working next year.

flyguy66

leosayer said:

Rental income isn't counted as pensionable earnings.

I get it, I'm getting two things confused, MPAA which has increased to 10k, and amount you can add if 75 and under or not working which remains at 3.6k.....So I can add up to 3.6k of rental income into SIPP if I'm no longer employed, correct?

MallyGirl

you can add 2.880k and have it grossed up to 3.6k - from any source

af1963

Not sure, from reading the earlier posts, whether you have already stopped work, and if so, when ?  If you have earned income during this tax year, you could pay in to the SIPP up to the total amount of your relevant earnings. (pay 80% of that amount and get tax relief added.)  If you're still working, and continue into next tax year, you could also pay in up to (80% of) what you earn that year before stopping work.  Even if you don;t earn enough to actually pay tax on it.

Doesn't matter where you consider that the money actually came from - as long as there are relevant earnings of the right amount.

flyguy66

af1963 said:

Not sure, from reading the earlier posts, whether you have already stopped work, and if so, when ?  If you have earned income during this tax year, you could pay in to the SIPP up to the total amount of your relevant earnings. (pay 80% of that amount and get tax relief added.)  If you're still working, and continue into next tax year, you could also pay in up to (80% of) what you earn that year before stopping work.  Even if you don;t earn enough to actually pay tax on it.

Doesn't matter where you consider that the money actually came from - as long as there are relevant earnings of the right amount.

Yes, still working at the moment, and into the next financial year all being well.