Over Pensioned

fcandmp

Hi, all ideas and thoughts welcome. I am 64 and have been retired for four years and in the very fortunate position of having a combination of DB and SIPP pension that keep me challenged at the higher rate tax threshold. As I approach state pension age (projecting a full new state pension), the amount I will be able to take from my SIPP each year will diminish further if I want. to remain under the 40% tax threshold, meaning the balance will grow (currently £470k). Is it worth taking the tax hit at 40% and moving released funds into an ISA, for future tax free income?  Otherwise, with Inheritance Tax as it is, it is just creating a future nest egg for our children. Many thanks for any and all suggestions and thoughts.

NedS

Really depends on if you need the income above the 40% tax threshold, and/or if you wish to leave to your children.

If you do not need the income now, and do wish to leave to the children and inheritance tax may be an issue, it makes sense to leave it in the SIPP for now given the current regulations whereby it will sit outside of your estate and exempt from IHT (although obviously that may change in the future).

dunstonh

 Is it worth taking the tax hit at 40% and moving released funds into an ISA, for future tax free income?

Nothing you have said so far suggests that would achieve anything other than increase the tax you could pay.

What is your thinking behind paying tax at 40% now and increasing your estate vs saving paying tax at 40% later?  i.e. what are you looking to achieve?

Have you considered deferring the state pension for a couple of years?  Whilst not as beneficial as it used to be, if you are in good health, a couple of years is still viable.  plus, that is a couple more years to extract a bit more from the DC pension.

Marcon

fcandmp said:

Hi, all ideas and thoughts welcome. I am 64 and have been retired for four years and in the very fortunate position of having a combination of DB and SIPP pension that keep me challenged at the higher rate tax threshold. As I approach state pension age (projecting a full new state pension), the amount I will be able to take from my SIPP each year will diminish further if I want. to remain under the 40% tax threshold, meaning the balance will grow (currently £470k). Is it worth taking the tax hit at 40% and moving released funds into an ISA, for future tax free income?  Otherwise, with Inheritance Tax as it is, it is just creating a future nest egg for our children. Many thanks for any and all suggestions and thoughts.

One thought: don't let the tax tail wag the pensions and savings dog.

So what if you do have to pay a bit of tax at 40%? Hardly the end of the world!

If you're totally focussed on tax and avoiding it, think about investing in (say) VCTs, or donating to charity.

leosayer

I see no point in paying 40% tax on pension drawdown just to put it straight into an ISA which you might never spend.

Try not to get too hung up on the tax rate you pay. Is your current approach stopping you from doing some things you'd like to do?

What would you do if the 40% tax threshold dropped to £40k?

What would you do if increased to £60k?

Phossy

You can always withdraw 25% of the SIPP Tax free if you need funds immediately (assuming you haven't already done it), so let it grow if you don't need it.

hugheskevi

Is there a partner, and if so what is their pension position?

fcandmp

hugheskevi said:

Is there a partner, and if so what is their pension position?

She has a small DB pension of £4.5k per year and we have been putting £2880 per year into a SIPP. She gets her full state pension a year before me,.

fcandmp

Phossy said:

You can always withdraw 25% of the SIPP Tax free if you need funds immediately (assuming you haven't already done it), so let it grow if you don't need 

All fully crystallised but thanks for the suggestion

Bostonerimus1

leosayer said:

I see no point in paying 40% tax on pension drawdown just to put it straight into an ISA which you might never spend.

Try not to get too hung up on the tax rate you pay. Is your current approach stopping you from doing some things you'd like to do?

What would you do if the 40% tax threshold dropped to £40k?

What would you do if increased to £60k?

I agree with this, don't let paying a bit of tax drive your planning. But there are things to consider...so are you leaving your home to your children as this can increase the effective IHT threshold and are you married? as you can pass on unused nil rate band when a spouse dies. Other than that you can manage your pot size and avoid tax by charitable giving and also by giving gifts to family over a period of years.

Giving to local charities can be very rewarding as you can often see the results. I give to a couple of churches in my home town as they were a source of comfort and fellowship to my mother in the last couple of decades of her life. This year my donation is being used to renovate the kitchen in the church hall which makes me feel good and has helped a bit in my tax planning...although that's very secondary.

Flugelhorn

Just pay the 40% and save what you want for the children - I don't take anything from private pension pot because I don't need it, the offspring can have that