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

lithosyork

Pat38493 said:

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

yeah that might be an issue (paid at 20%), but it's not a bad problem to have. i'll be over max isa

lithosyork

If you think you will definitely be a higher rate taxpayer on retirement, I think it will be hard (*) to pay too much tax:

1. SIPP: £100 now double to £200, take out at 40% is £120 in your pocket.

2. GIA: £100 from SIPP at basic rate is £80 in your pocket.  Doubles to £160.  So a gain or income of £80 with tax of between 0% (if covered by CGT exemption/dividend allowance) to 20% (current highest CGT rate for normal gains) to 45% (current highest rate for income).

In this made up example, you would need a tax rate of more than 50% on your gain in the future (and no change to the 40% rate on pension withdrawal) to be worse off.

(*) I say hard but it is very possible.  For example, if the investment doubles, a taxable dividend is paid (and you pay the tax out of your other funds) that you reinvest and then the investment collapses in value. Here you would have paid more tax than if the investment had simply collapsed in the value in the SIPP. 

to be clear (for me) ...

you are comparing  (1) leaving the money in the SIPP and taking it out when paying HR (120) to (2) withdrawing now investing in GIA and taking it out when paying HR  (ignoring 3K GCT allowance). (eg 80 + 80 *.8 = 144) . 

If there is remaining LSA (unlikely) could 
(3) put back in SIPP  (subject to 10K MPAA) but that would result in 140 ((200*.25 )+ (150 *.6))  ie less than GIA.  Similarly for (1) 120->140 with LSA.

That's useful thank you. 

saucer

To add my bit, I am still adding to my SIPP to minimise paying higher rate tax, even though I can see that I will be paying at least some higher rate tax on it on the way out. The plan is to take my DB pension, subject to actuarial reduction at 58 (or a bit before), and lumps out of the SIPP at the same time, at least up to, if not above, the higher rate threshold. There is likely to be a chunk left by the time I get SRA (not taking anything for granted). 

Either way I’m going to be paying higher rate tax unless the thresholds go up a great deal, which is very unlikely. I’m relaxed about that as it’s certainly a 1st world problem and should result in a net benefit even after higher rate tax (7.5% net assuming 25% is tax free). 

Going back to the original question taking as much out at basic rate seems an obviously good idea.

Albermarle

Pat38493 said:

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.

As Donald Rumsfield said .

“There are known knowns, things we know that we know; and there are known unknowns, things that we know we don't know. But there are also unknown unknowns, things we do not know we don't know.”

lithosyork

saucer said:

To add my bit, I am still adding to my SIPP to minimise paying higher rate tax, even though I can see that I will be paying at least some higher rate tax on it on the way out. The plan is to take my DB pension, subject to actuarial reduction at 58 (or a bit before), and lumps out of the SIPP at the same time, at least up to, if not above, the higher rate threshold. There is likely to be a chunk left by the time I get SRA (not taking anything for granted). 

Either way I’m going to be paying higher rate tax unless the thresholds go up a great deal, which is very unlikely. I’m relaxed about that as it’s certainly a 1st world problem and should result in a net benefit even after higher rate tax (7.5% net assuming 25% is tax free). 

Going back to the original question taking as much out at basic rate seems an obviously good idea.

what i did when i stopped working, was take UFPLS from DC (sub HR) and leave my DB for a few years to mitigate the actuarial reductions and reduce the DC so i could then take DB and remaining DC and keep below HR.  When i get state pension as well as DB i'll likely be into HR.   this may or may not have been wise !

YMMV  (sorry for all the initials)

ader42

lithosyork said:

If there is remaining LSA (unlikely) could  
(3) put back in SIPP  (subject to 10K MPAA) but that would result in 140 ((200*.25 )+ (150 *.6))  ie less than GIA.  Similarly for (1) 120->140 with LSA.

also be mindful of the recycling rules, so possibly more likely the £7.5k recycling limit than the £10k mpaa limit?

and of course if you have a spouse whom you can gift funds to - they can keep contributing to their SIPP; this can mean net zero taxation (taxed at 20% but then 25% tax relief added into spouses SIPP). This can mean 2x Personal Allowances to be used +2x 25% Tax Free Cash, so 2x £16,760 (£33,520 ) for a couple if no other income between their pension access age (55, 57 etc) and state retirement age.

If the spouse is not working then the £3,600 they can contribute also gets the free £720 per annum. 

Same applies if gifting to children for their junior sipps upto the same £3,600 annual limit (£720 tax relief). 

michaels

lithosyork said:

saucer said:

To add my bit, I am still adding to my SIPP to minimise paying higher rate tax, even though I can see that I will be paying at least some higher rate tax on it on the way out. The plan is to take my DB pension, subject to actuarial reduction at 58 (or a bit before), and lumps out of the SIPP at the same time, at least up to, if not above, the higher rate threshold. There is likely to be a chunk left by the time I get SRA (not taking anything for granted). 

Either way I’m going to be paying higher rate tax unless the thresholds go up a great deal, which is very unlikely. I’m relaxed about that as it’s certainly a 1st world problem and should result in a net benefit even after higher rate tax (7.5% net assuming 25% is tax free). 

Going back to the original question taking as much out at basic rate seems an obviously good idea.

what i did when i stopped working, was take UFPLS from DC (sub HR) and leave my DB for a few years to mitigate the actuarial reductions and reduce the DC so i could then take DB and remaining DC and keep below HR.  When i get state pension as well as DB i'll likely be into HR.   this may or may not have been wise !

YMMV  (sorry for all the initials)

My plan was to wait on the DB and use the DC to bridge but that will now depend on what form Labour reintroduce the Lifetime Allowance as taking the DB as early as possible may well be the win as it can mean the same overall withdrawals but no LA charge.

hugheskevi

michaels said:

lithosyork said:

saucer said:

To add my bit, I am still adding to my SIPP to minimise paying higher rate tax, even though I can see that I will be paying at least some higher rate tax on it on the way out. The plan is to take my DB pension, subject to actuarial reduction at 58 (or a bit before), and lumps out of the SIPP at the same time, at least up to, if not above, the higher rate threshold. There is likely to be a chunk left by the time I get SRA (not taking anything for granted). 

Either way I’m going to be paying higher rate tax unless the thresholds go up a great deal, which is very unlikely. I’m relaxed about that as it’s certainly a 1st world problem and should result in a net benefit even after higher rate tax (7.5% net assuming 25% is tax free). 

Going back to the original question taking as much out at basic rate seems an obviously good idea.

what i did when i stopped working, was take UFPLS from DC (sub HR) and leave my DB for a few years to mitigate the actuarial reductions and reduce the DC so i could then take DB and remaining DC and keep below HR.  When i get state pension as well as DB i'll likely be into HR.   this may or may not have been wise !

YMMV  (sorry for all the initials)

My plan was to wait on the DB and use the DC to bridge but that will now depend on what form Labour reintroduce the Lifetime Allowance as taking the DB as early as possible may well be the win as it can mean the same overall withdrawals but no LA charge.

A reintroduction of LTA at the old rate could affect my plans too. Based on taking my DB pensions at Normal Pension age of 60 I would currently be at 91.43% of LTA and the combination of DB and State Pension would be pretty much at higher rate threshold. Taking them at age 55 would reduce that to 77.6%.

I think I could get a bit more headroom by using a protected minimum pension age of 50. The reduction for that would be poor value, but I could access my pension just before I turn 55 so that it crystallises at a much lower rate (due to the way final pensionable earnings are calculated for pre age 55 period). It would then be uplifted at age 55 to the normal amount, which I think would trigger BCE 3 From memory, I think part of the increase would be ignored, effectively increasing my LTA - I can't remember details, it was just one possible mitigation I noted. Use of small pots from DC pension would extract another £30K.

If fiscal drag and political change were so bad that both higher rate and LTA charges applied, lump sum commutation might even become worth considering, as well as possibly allocating some pension to enhance survivor benefits for my wife.

But my expectation is that both my wife and I leave employment with DB pensions from age 55 of about £31K p/a and £28K p/a respectively (and DC pensions of around £265,000), and that should be fine without a need to play tax games. With State Pensions, that gives £42K and £40K respectively, so there is a bit of headroom to higher rate tax. We'll probably delay taking my wife's DB pension slightly, so as to equalise pensions and survivor benefits.

I'll still have another 8 years before I need to decide if I want to delay commencing DB pensions at age 55 to increase their value. That decision will depend on higher-rate tax risk. For now, it doesn't change our behavior greatly - I will prioritise my wife contributing higher rate tax to DC pension, and probably still put all my higher rate tax into a pension too, but as that is less clear-cut I'll wait until closer to the end of the tax year to commit.

I am glad our plan all along was to retire in our 40s and we only have another 18 months-ish of work to go - that has allowed good optimisation, and working longer would result in much higher taxation.

michaels

I will be allocating to DW as her provision is minimal.  Had dismissed commutation as it was 12x but perhaps 12x tax free becomes more attractive compared to 40% tax paid?!  Has anyone done the maths?

Is it as simple as 12x TFLS commutation is the same as:
12 years tax free
15 years @ 20% tax
20 years @ 40% tax

I wonder how lifetime allowance might work with these numbers?

lithosyork

hugheskevi said:

But my expectation is that both my wife and I leave employment with DB pensions from age 55 of about £31K p/a and £28K p/a respectively (and DC pensions of around £265,000), and that should be fine without a need to play tax games. With State Pensions, that gives £42K and £40K respectively, so there is a bit of headroom to higher rate tax. We'll probably delay taking my wife's DB pension slightly, so as to equalise pensions and survivor benefits.

if you start your pension at 55  of say 31K, by the time you reach SPA of 68 (13 years!) that will be much higher (40K at 2%) and state pension will be much higher (15K at 2%)-  so very likely an HR payer.

Of course i dont know what will happen to growth rates if any, the state pension, allowance, LTA or anything else but at todays rules ....