Frozen tax allowances - draw full standard rate allowance now to avoid HR in future?

michaels

For those who given inflation and frozen allowances might in future become higher rate tax payers, does it make sense to draw down to the full standard rate band from day one putting funds above planned expenditure into an ISA?

I know normally the advice is that a DC pot is outside of the estate for inheritance but are there potentially tax advantages.  What are either party likely to do with tax thresholds going forward - is it safest to err on the side of caution and assume they will be frozen until at least 202 and possibly longer (especially for the higher rate band)?

hugheskevi

That is my plan, unless things change quite significantly soon after the Election.

I don't think it is possible to sensibly anticipate what either Party may or may not do, so many permutations are possible, and you could even see things like a return to the past policy of increasing Personal Allowance but clawing that back from higher rate taxpayers by reducing the basic rate band.

Prior to the ramping up of fiscal drag, I had planned to first use any surplus cash savings and ISAs along with at DC to at least Personal Allowance threshold once I turned 55, delaying drawing DB pension. Now due to the threat of higher rate tax, I plan to draw DB pension at 55 and draw up to higher rate threshold from DC, adding it to ISAs, Premium Bonds, or General Investment Account.

NedS

Yes, if the risk of becoming a HRT payer in retirement is significant, then this seems a perfectly reasonable mitigation strategy.

Potential risks to consider:

Future reduction in basic rate tax rates to a level lower than the current 20% (offset by the risk basic rate tax rates may increase?)

Inheritance planning having moved capital outside of a pension wrapper and into scope for IHT.

Future access to means-tested benefits including help with care costs where capital held outside of a pension wrapper may limit or prevent any financial help available due to exceeding capital limits.

Linton

A major advantage of drawing up to the top of the basic rate band is that the money can be reinvested in an S&S ISA to provide tax free income later, no matter what happens to tax bands.   Also S&S ISAs are much less hassle to manage since you can easily withdraw any amount of money within a few days without any worries about excess tax for example.

ProDave

I have a slight twist to the plan.

That is to draw the entire contents of my DC pot by the time I reach state pension age.  If I get the drawdown rate correct the DC pot will run out the day I start drawing state pension.  That will leave me with SP and DB pensions in old age.

Any other plan with the DC pot, drawing it more slowly, risks the higher tax rate trap which is the topic of this thread.

I don't have any control over the DC pensions, they pay out their defined rate until I die.

michaels

ProDave said:

I have a slight twist to the plan.

That is to draw the entire contents of my DC pot by the time I reach state pension age.  If I get the drawdown rate correct the DC pot will run out the day I start drawing state pension.  That will leave me with SP and DB pensions in old age.

Any other plan with the DC pot, drawing it more slowly, risks the higher tax rate trap which is the topic of this thread.

I don't have any control over the DC pensions, they pay out their defined rate until I die.

My plan used to be more like that but it appears there are lifetime allowance advantages to taking the DB pension early with the actuarial reduction.  Depends what Labour do on the LA as I can't pre-empt as I have no access for more than a year.

Albermarle

NedS said:

Yes, if the risk of becoming a HRT payer in retirement is significant, then this seems a perfectly reasonable mitigation strategy.

Potential risks to consider:

Future reduction in basic rate tax rates to a level lower than the current 20% (offset by the risk basic rate tax rates may increase?)

Inheritance planning having moved capital outside of a pension wrapper and into scope for IHT.

Future access to means-tested benefits including help with care costs where capital held outside of a pension wrapper may limit or prevent any financial help available due to exceeding capital limits.

I know we should never base pension planning on speculative guesses about what might happen to legislation in future.
However personally I do not think pension pots will be 100% free of IHT forever, as it does not make a lot of logical sense, and could be one of the easier routes to raise more taxation.
So maybe saving paying 20% income tax today instead of 40% income tax later and risking paying more IHT, is a case of a bird in the hand is worth more than two in the bush ( or in the graveyard) .

jim8888

I did this in the last tax year, withdrawing to the max I could at the 20% level. I hummed and hawed for months over it because I didn't really need the money. I was only doing it as a safeguard against needing a larger lump sum some time in the future and getting stiffed for 40% on some of that. I'm not sure if I'll do the same again this year, probably depends on how my SIIPP grows (or doesn't)! But actually paying 20% on a fairly substantial withdrawal, when you don't really "need" to,  is still a painful process. 

lithosyork

To get £100 after tax out of your pension you need to withdraw:
- non-taxpayer: £100
- basic rate taxpayer: £125
- higher rate taxpayer: £167

possibly i am mistaken but  aren't those figure only if you've used up your LTA (268K) as its ignoring the 25% tax free part in which case the figures would be 100, 118, 144 ?  

lithosyork

[Deleted User] said:

You are right in that I've assumed that you've used the LSA so that the pension drawn is fully taxable. Your numbers are right if 25% is tax-free (although it 143 rather than 144 for a higher-rate taxpayer).   

thanks (yep 143 typo).  This has been a really well timed thread,  I've spent quite  a while building a spreadsheet to see how I can withdraw all my DC  (not worried about IHT) and avoiding HR . I am in the enviable position of  probably hitting HR when my state pension starts (in 5 years, assuming  some growth in DC, allowances and bands don't change, full  state pension will be 12K - but who knows!).   

This thread sort of confirms i am not being (too) daft in attempting this rather than leaving it  in DC to grow.

Pat38493

Makes sense as long as you can avoid paying too much tax on the surplus money after it's removed from pension.

I simulated a bunch of scenarios like this in software and this is what I am currently planning to do, but to be honest it didn't make that much difference to the long term result, so there will be other larger unknown factors that influence it a lot more.