Grrrr...trying to optimise drawdown plans for tax efficiency is tricky!

GazzaBloom

Just a rant...

I'm retiring at the end of this year and plan to start drawdown from a combination of my wife and my DC pensions and a stocks and shares ISA from April 2025 in that new tax year. This is in addition to a DC pension that is already in payment. All spend looks like it will be within the 20% tax band.

It's complicated by a lumpy, one off, first year of retirement spend over and above the regular living expenses.

I'm working through the options of using both wife & my tax free allowances fully, and crystallising just what we need for year 1 and paying tax on the crystallised 75% over the 12 months of the first tax year vs using the ISA to cover some expenditure vs crystallising a larger sum so all year 1 spend is tax free...and the implications of having a larger residue crystallised sum in a drawdown account to carry into year 2....or a combination of options.

It's complicated isn't it? Planning drawdown appears to be much harder than just being a PAYE employee and deciding how much to salary sacrifice into you accumulating pension and what you to spend from the after tax pay while working.

Accumulation is easy, spending is harder...I'm already in spreadsheet sums overload 

sausage_time

I found this informative and inspirational.  https://www.youtube.com/watch?v=AMJ8Ya3CPj4

Chris Bourne has some great straight-talking videos.

Bostonerimus1

You can plan for tax efficiency to the first order ie what account to draw from first given tax rates and your spending, but more than that is so full of unknowns that it becomes frustrating. Just do your best and stop worrying about it.

GazzaBloom

Thanks @sausage_time , yes I subscribe to Chris Bourne and watching that again was useful.

@Bostonerimus1 I agree, measure twice, cut once and live with it

NedS

Simplistically it would seem like you have the option of taking (crystallising) more tax free cash up front in year one to cover the higher spend, or use ISA savings to cover the higher spend and seek to replenish over the next few years by fully drawing down on your 20% tax band allowance.

jamesd

It seems that you're destined to pay basic rate income tax eventually, unless you die first. Dying first seems unlikely so is it better thought of as when rather than if to pay the tax?

I solved it for myself with VCT buying to largely eliminate the tax cost but that might not be right for you.

GazzaBloom

NedS said:

Simplistically it would seem like you have the option of taking (crystallising) more tax free cash up front in year one to cover the higher spend, or use ISA savings to cover the higher spend and seek to replenish over the next few years by fully drawing down on your 20% tax band allowance.

Yes, I think that's probably the crux of it. I need to establish if having some residue crystallised funds to carry over to future years, with any growth it achieves being taxable at 20%, but saving me income tax in year one is more or less advantageous than just paying the income tax in year one and keeping more funds uncrystallised.

GazzaBloom

jamesd said:

It seems that you're destined to pay basic rate income tax eventually, unless you die first. Dying first seems unlikely so is it better thought of as when rather than if to pay the tax?

I solved it for myself with VCT buying to largely eliminate the tax cost but that might not be right for you.

Yes, it is a case of when not if. That's what I need to work out, which route sees me paying the least income tax. Crystallise more to cover the one off spend at the start to avoid tax but accumulate more crystallised money that will be taxed over the £12,570 personal allowance when drawn in later years. Versus just paying the income tax in year one and keeping more uncrystallised for future years.

I'm sure one more go on the spreadsheet will reveal the answer, when I get time.

MK62

Don't forget to index link the tax........ie, £1000 paid today is more than £1000 paid in 5 years, in real terms.

michaels

jamesd said:

It seems that you're destined to pay basic rate income tax eventually, unless you die first. Dying first seems unlikely so is it better thought of as when rather than if to pay the tax?

I solved it for myself with VCT buying to largely eliminate the tax cost but that might not be right for you.

Any worked examples of using VCTs?
Lets suppose I am planning on taking £30k pa of taxable money from my pension every year for the rest of my life. 
So in 24/25 I pay 30k x 20% = 6k of tax and 24k of income.  I invest 20k in 'a VCT' in the same tax year and my income tax liability falls to zero so 30k from pension of which 20k is invested in VCT?
Next I receive dividend from the VCT for the next 5? years say 5% pa so 1k pa tax free
Finally after 5 years I can sell the VCT for whatever it is then worth say 10k which is also tax free.
And I have turned 24k of post tax income into 25k?

Is this correct?

If I actually want to achieve a steady income should I draw max from pension in Y1 to stay in basic rate tax and put enough into the VXT to cover the tax liability and then similar in Y2 but taking into account the dividend income then gradually reducing amounts until I am at steady state with new pension drawings and VCT investments less dividends and sale proceeds?

jamesd

Do remember that VCTs invest in very small companies. VCTs are right for me but that doesn't mean they are right for you.

Here's a discussion I started with the results of the VCTs I purchased around the time I started mentioning them in My use of VCTs as part of retirement planning: https://forums.moneysavingexpert.com/discussion/6293901/my-use-of-vcts-as-part-of-retirement-planning/p1

Albion remains a very well respected manager but I've been buying others for diversification since, using six more different VCTs. Not meaning anything bad about Albion, just me being sensible because diversification is important. It's really time now for me to revisit them.

You might also find interesting Retirement planning is main use of VCTs, 56% of users: https://forums.moneysavingexpert.com/discussion/6320619/retirement-planning-is-main-use-of-vcts-56-of-users/p1

This post says more about selling VCTs: https://forums.moneysavingexpert.com/discussion/comment/80487916/#Comment_80487916

This and following posts say more about VCT risk and the way the tax relief calculations work: https://forums.moneysavingexpert.com/discussion/comment/80525918/#Comment_80525918

More on VCT risks and mitigations: https://forums.moneysavingexpert.com/discussion/comment/80501678#Comment_80501678