FIRE Girls Pension Diary - Aim High & Dream Big

michaels

We work in real terms and use inflation protected income (dB, state pension, annuity, index linked bonds) and are willing to assume our personal inflation rate won't be wildly different to cpi.

However also see my thread re the impact of frozen tax thresholds where there are not obvious products that provide protection.

Saving using ISA rather than sipp offers some protection as you pay the tax now rather than later on the inflated values.

Firegirl

Thanks @michaels very good points. 

Very interesting to think about ISA. I’d never really thought about the tax being paid upfront on the smaller amount, before the investment grows. 

Emmmmm I need to give this some thought because I’ve been putting money into my pension to bring me below the higher tax bracket. I had been thinking of putting more to my ISA to give me some flexibility on retirement/financial freedom age.

MallyGirl

Firegirl said:

Thanks @michaels very good points. 

Very interesting to think about ISA. I’d never really thought about the tax being paid upfront on the smaller amount, before the investment grows. 

Emmmmm I need to give this some thought because I’ve been putting money into my pension to bring me below the higher tax bracket. I had been thinking of putting more to my ISA to give me some flexibility on retirement/financial freedom age.

I have higher risk investments in the ISA where the growth is tax free and lower risk (and likely lower growth) in the SIPP where there will be tax to pay on getting it out.

michaels

Firegirl said:

Thanks @michaels very good points. 

Very interesting to think about ISA. I’d never really thought about the tax being paid upfront on the smaller amount, before the investment grows. 

Emmmmm I need to give this some thought because I’ve been putting money into my pension to bring me below the higher tax bracket. I had been thinking of putting more to my ISA to give me some flexibility on retirement/financial freedom age.

In theory pension has a lot of a head start, especially if you are going to save 40% on the way in and pay 20% on the way out and also have LTA headroom.  If you have filled LTA and are likely to be drawing at 40% (which is pretty likely with the freeze of the tax thresholds) then taking the taxed money now and filling your ISA may well be the win.

[My analysis shows that if the freeze in thresholds carries on longer term your drawdown could even hit the 100k personal allowance withdrawal rate!!!!]

GenX0212

michaels said:

Firegirl said:

Thanks @michaels very good points. 

Very interesting to think about ISA. I’d never really thought about the tax being paid upfront on the smaller amount, before the investment grows. 

Emmmmm I need to give this some thought because I’ve been putting money into my pension to bring me below the higher tax bracket. I had been thinking of putting more to my ISA to give me some flexibility on retirement/financial freedom age.

In theory pension has a lot of a head start, especially if you are going to save 40% on the way in and pay 20% on the way out and also have LTA headroom.  If you have filled LTA and are likely to be drawing at 40% (which is pretty likely with the freeze of the tax thresholds) then taking the taxed money now and filling your ISA may well be the win.

[My analysis shows that if the freeze in thresholds carries on longer term your drawdown could even hit the 100k personal allowance withdrawal rate!!!!]

Is it LTA or LSA?

If you are anticipating investment growth on your pot (even if not relying on it in your projections) then you need to think about leaving headroom against the LSA £268,275 tax free limit. By my calculations I have filled about £220k of that allowance so far but my DC pot has seen significant investment growth in the last few years and if the trend continues then the remaining headroom will be consumed by investment growth rather than additional contributions. I can't see the LSA being increased by the government anytime soon.

michaels

Yes, was using LTA as shorthand for the 268k which like you I can't see ever increasing.

However the problem is that it is a double whammy effect, once you get over £1m pot and with state pension it is very likely that you will be drawing down in the higher rate tax band, especially with inflation continuing to reduce this band in real terms.  Even if your investments stand still in real terms you will be well into 40% tax.

ex-pat_scot

michaels said:

Yes, was using LTA as shorthand for the 268k which like you I can't see ever increasing.

However the problem is that it is a double whammy effect, once you get over £1m pot and with state pension it is very likely that you will be drawing down in the higher rate tax band, especially with inflation continuing to reduce this band in real terms.  Even if your investments stand still in real terms you will be well into 40% tax.

Yes - I'm of the same opinion.
Hitting the (frozen) LTA threshold, with decent growth, means that a reasonable sustainable withdrawal rate nudges the HR threshold.
Hence my general thought / approach, which is to decumulate to the HR threshold, else you risk building up surpluses in SIPP that can only be accessed by suffering HR tax, further down the line.

(not that this is a necessarily dreadful thing, but it certainly is suboptimal).

Firegirl

I thought the Life Time Allowance (LTA) was abolished so there’s no longer a cap on what you can accumulate in your pension, with out getting extra tax charge?

Lump Sum Allowance (LSA) currently £268, 275. This is the max tax free amount you could take out across all pensions.  My current thinking is not to take the Lump Sum.

Another consideration is Lump Sum and Death Benefit Allowance (LSDBA) - usually £1,073,100

So now that the LTA is abolished it is more about how you take your pensions and the tax you’ll be charged at that point. It’s sort of annoying the rules can change at any point. 

My current total pensions are £379, 500.  What this chat has taught me is that I really need to think about how I’ll take my pension before it gets to high.  I feel a spreadsheet coming on, or maybe go modern and see what chat GPT has to say😆

SouthCoastBoy

I am around 55:45 in pension to isa ratio, and about 70k from the old lta, normally I add another 15 to 20k into my pension in March, which means I get a nice little tax refund when I complete my tax return on May. I imagine I will do the same this year but getting close to tax free threshold has made me pause and think for a moment or two, I may just gift it to my kids, especially with the 40% iht on the horizon.

Firegirl

@SouthCoastBoy I’m sure the kids would be delighted and nice for you to see them benefit from it. 

I think your ratio sounds sensible in the sense of when you withdraw pension it gives you options to withdraw tax efficiently using your ISA when you need to.  I think I’m a bit nervous about pension rule changes but less so about ISA rule changes.  

I haven’t done calcs yet but I thinking perhaps over next 2 years keep going with my pension for now and then perhaps focus on ISA a bit more after that.  Hard to work out sometimes but you eventually land on a decision you’re comfortable with.