Run out of ISAs - should I throw more into pensions?

dansakman

My current plan for retirement is to retire in about 2 years time 60 and a half years old at end of a tax year.

I planned to hold off accessing my two DC pensions for 6 years to give them time to grow and just not cross any "point of no return". 

For baseline there are small DB pensions that have fixed start date of 60 and full state pension at 67.

For 7-10 years into retirement theres a small DC scheme thats 60% stocks and "with profits" which I might lose if I transfer.

For 11-X years my current employer scheme is invested in 80% stocks.

For 1-3 years into retirement I've been using cash ISAs, low coupon gilts, and "inside the allowance" interest at maturity fixed savings bonds as tax efficient way to store cash for retirement years 1-3 with some growth to counter inflation. 

For 4-6 years into retirement theres a stocks and shares ISA with 60/40 stocks/bonds that I will top up to the max over the next two years but it won't be enough especially if stock market is in bad shape. 

I wonder if I'm just being mad and rather than trying to find non-pension tax efficient savings I should just throw a bit more into a pension and commit to accessing earlier? 

Upsides are

a) I get tax relief at 40-60% so more funds to grow

Downsides

a) I might trigger MPAA earlier and limit future contribution if I were to change course and return to work

b) I probably will exceed the original LTA threshold in a year or two (will LTA removal be completed in April / will labour bring it back / will there be protections for people who went over in the meantime)  

c) I'll probaby have to create a third pension to be more cautious and more controlable/flexible than my two existing DC schemes - more fees, more admin

Albermarle

a) I get tax relief at 40-60% so more funds to grow

For me this would be the deciding point despite the possible downsides. Bird in the hand and all that.

Not just more funds to grow but free money, unless you plan to be a 40% taxpayer in retirement, which is not that common.

Marcon

dansakman said:

Downsides

a) I might trigger MPAA earlier and limit future contribution if I were to change course and return to work

b) I probably will exceed the original LTA threshold in a year or two (will LTA removal be completed in April / will labour bring it back / will there be protections for people who went over in the meantime)  

c) I'll probaby have to create a third pension to be more cautious and more controlable/flexible than my two existing DC schemes - more fees, more admin

a) Then make sure you don't trigger it. You can cash I up to 3 'small pots' (each worth no more than £10,000 each) using the small pots rule, with 25% of each pot being tax free and the rest taxable - BUT if you specify you are using the small pots regime, it won't trigger the MPAA. Any further funds you need could be taken from the tax free element of your pension savings.
b) Who knows?!
c) Hardly a big deal. Fees are usually based on fund value, so unlikely to cost any more just because you have 3 pensions rather than 2, and the admin will be minimal.

There are other vehicles you could explore eg VCTs.

jamesd

dansakman said:

For 1-3 years into retirement I've been using cash ISAs, low coupon gilts, and "inside the allowance" interest at maturity fixed savings bonds as tax efficient way to store cash for retirement years 1-3 with some growth to counter inflation. 

... 

a) I get tax relief at 40-60% so more funds to grow

...

a) I might trigger MPAA earlier and limit future contribution if I were to change course and return to work

What you described as tax-efficient looks tax-inefficient instead

You can hold those things beside a pension of the SIPP type with the bonus of the tax relief on the way in. With the LTA gone for a while, now is the time to be maximising pension contributions to exploit the opportunity.

You can take the tax free 25% of a pot, up to the 25% of LTA or new from 6 April cap, without triggering the MPAA. Also, once the pot has been crystallised it becomes hard to subsequently impose any LTA replacement in you. You can crystallise in excess of the bit entitled to 24% tax free.

Your income tax position in retirement can matter but you'll probably have much more income at basic rate then higher rate and still benefit from the tax relief.

jimjames

Based on the original subject, how can you run out of ISAs when you can open a new one with £20k each year. Or do you mean you have too much to put into an ISA from cash savings?

dansakman

jimjames said:

Based on the original subject, how can you run out of ISAs when you can open a new one with £20k each year. Or do you mean you have too much to put into an ISA from cash savings?

Not too much. I mean I have used up all of this years allowance and expect to be able to use up next years and still have some to save elsewhere before April.

So I guess I'm debating whether to stop finding ways to keep cash when my savings allowance is £0 and savings interest will be taxed at 60% and instead just throw more into a pension. 

I will have contributed £55K to my pension via salary sacrifice this year and I could not only throw in extra £5K in before end of tax year to use up the £60K annual allowance but I could potentially carry forward £22K allowance from 3 years ago.

(Feb bonus dependent of course which might be zero!)

It sounds like from what others have said regarding being able to avoid triggering MPAA and there being this window where LTA will disappear for a bit that it makes sense to use up all pension allowance for 2023/2024 and as much carry forward as I can ("use it or lose it")

VCTs were suggested but they are high risk and I'm most concerned about making years 4-6 of retirement as grounded in certainty as I can.

jamesd

Yes, I think it does make sense to maximise the pension contributions this year and likely next.

If your employer allows changes during the year you can get some NI saving by concentrating sacrifice beyond the employer matched part into as few months as possible at minimum wage. NI is calculated for individual pay periods so this gets you some 10% NI saving, potentially around £170 for each month it's done.

dansakman

If I put go the pension route then...

....create a SIPP just for these excess funds

(my employer scheme does not allow ad-hoc payments and my Aviva Schema I feel I'm paying too much for and want to transfer that)

and then choose some investments intended to return funds in year 4-6 of retirement (6-8 years from now).

Assuming this isn't a small pot by then....

If I want to avoid triggering MPAA then I can only take the PCLS which (probably) will be 25% of whatever is in there. 

So possibly this might not help make plan A (retirement) more a certainty if I'm trying to keep the plan B (keep working and contributing) an available option.

Perhaps I need to just go all out for plan A and forget trying to prepare for all outcomes in an unknowable future.

jamesd

You're allowed to transfer money to create a small pot.