Lots of cash from TFLSs - what to do

arthur_fowler

I may retire next April age 60. I have 2 pots of DC that will total around £750k. I have two DB pensions as well. I will be entitled to full SP. 
Mrs F has two (smaller) DB pension and will be entitled to full SP.
Also have cash savings in ISAs
Without going into the detail of the figures, I have modelled many options (Drawdown/UFPLS vs annuity, TFLS vs not) and looked at the tax implications, especially for me where unless I am careful I will end up in higher rate band sooner rather than later.
My preferred option at the moment is to buy a lifetime annuity with the DC having taken the 25% TFLS (£190k) and a TFLS from one of my DB pensions (£45k). 
I will need to use some of that TFLS money each year as income (average of £27k per year).

Question is where should I put this cash in the meantime? I can put £40k into S&S ISAs each year. I'd rather avoid paying tax on it, but appreciate that may not be possible.

Dazed_and_C0nfused

arthur_fowler said:

I may retire next April age 60. I have 2 pots of DC that will total around £750k. I have two DB pensions as well. I will be entitled to full SP. 
Mrs F has two (smaller) DB pension and will be entitled to full SP.
Also have cash savings in ISAs
Without going into the detail of the figures, I have modelled many options (Drawdown/UFPLS vs annuity, TFLS vs not) and looked at the tax implications, especially for me where unless I am careful I will end up in higher rate band sooner rather than later.
My preferred option at the moment is to buy a lifetime annuity with the DC having taken the 25% TFLS (£190k) and a TFLS from one of my DB pensions (£45k). 
I will need to use some of that TFLS money each year as income (average of £27k per year).

Question is where should I put this cash in the meantime? I can put £40k into S&S ISAs each year. I'd rather avoid paying tax on it, but appreciate that may not be possible.

Unusual view on MSE!  Most would prefer the best net return, which may be after tax is payable.

arthur_fowler

Dazed_and_C0nfused said:

arthur_fowler said:

I may retire next April age 60. I have 2 pots of DC that will total around £750k. I have two DB pensions as well. I will be entitled to full SP. 
Mrs F has two (smaller) DB pension and will be entitled to full SP.
Also have cash savings in ISAs
Without going into the detail of the figures, I have modelled many options (Drawdown/UFPLS vs annuity, TFLS vs not) and looked at the tax implications, especially for me where unless I am careful I will end up in higher rate band sooner rather than later.
My preferred option at the moment is to buy a lifetime annuity with the DC having taken the 25% TFLS (£190k) and a TFLS from one of my DB pensions (£45k). 
I will need to use some of that TFLS money each year as income (average of £27k per year).

Question is where should I put this cash in the meantime? I can put £40k into S&S ISAs each year. I'd rather avoid paying tax on it, but appreciate that may not be possible.

Unusual view on MSE!  Most would prefer the best net return, which may be after tax is payable.

That's fair enough! Ok, so if we take a "best return" & low risk approach, what would be a good option?

kempiejon

Giving up the capital to buy an annuity gives an income tax liability that could be mitigated with alternative options but if that's a plan crack on. Certainty of income is handy planning. You could defer taking state pension but I'm not sure the returns are that attractive - they used to be OK.
There is an allowance for capital gains and dividends annually. Gilts are free from CGT so low coupon gilts trading under par come with a know redemption date and are a way of collecting tax free capital gains. Low coupon so should have trivial cash interest. Premium bonds are tax free £50k each.

Marcon

arthur_fowler said:

I may retire next April age 60. I have 2 pots of DC that will total around £750k. I have two DB pensions as well. I will be entitled to full SP. 
Mrs F has two (smaller) DB pension and will be entitled to full SP.
Also have cash savings in ISAs
Without going into the detail of the figures, I have modelled many options (Drawdown/UFPLS vs annuity, TFLS vs not) and looked at the tax implications, especially for me where unless I am careful I will end up in higher rate band sooner rather than later.
My preferred option at the moment is to buy a lifetime annuity with the DC having taken the 25% TFLS (£190k) and a TFLS from one of my DB pensions (£45k). 
I will need to use some of that TFLS money each year as income (average of £27k per year).

Question is where should I put this cash in the meantime? I can put £40k into S&S ISAs each year. I'd rather avoid paying tax on it, but appreciate that may not be possible.

Have you modelled the possibility of buying an annuity with the tax free cash you've taken from your DB scheme? Once the money is outside a pension scheme, and is 'yours', you can use it to buy an annuity, but the tax treatment is better than buying an annuity with money taken directly from a pension scheme (ie not becoming 'yours' in the interim!), because part of each payment is treated as a return of capital.

Alternatively, and depending on how good the commutation rate is from your DB scheme, have you modelled taking less/no cash from that, which would give you a bigger pension, and thus reduce the size of any annuity you needed to buy?

arthur_fowler

kempiejon said:

Giving up the capital to buy an annuity gives an income tax liability that could be mitigated with alternative options but if that's a plan crack on. Certainty of income is handy planning. You could defer taking state pension but I'm not sure the returns are that attractive - they used to be OK.
There is an allowance for capital gains and dividends annually. Gilts are free from CGT so low coupon gilts trading under par come with a know redemption date and are a way of collecting tax free capital gains. Low coupon so should have trivial cash interest. Premium bonds are tax free £50k each.

Thanks. I would have to look at the idea of Gilts. In terms of knowledge as an investor, I would say it isn't very high, so the terms you are using in that sentence I don't really understand.
I have considered Premium Bonds as an option.

arthur_fowler

Marcon said:

arthur_fowler said:

I may retire next April age 60. I have 2 pots of DC that will total around £750k. I have two DB pensions as well. I will be entitled to full SP. 
Mrs F has two (smaller) DB pension and will be entitled to full SP.
Also have cash savings in ISAs
Without going into the detail of the figures, I have modelled many options (Drawdown/UFPLS vs annuity, TFLS vs not) and looked at the tax implications, especially for me where unless I am careful I will end up in higher rate band sooner rather than later.
My preferred option at the moment is to buy a lifetime annuity with the DC having taken the 25% TFLS (£190k) and a TFLS from one of my DB pensions (£45k). 
I will need to use some of that TFLS money each year as income (average of £27k per year).

Question is where should I put this cash in the meantime? I can put £40k into S&S ISAs each year. I'd rather avoid paying tax on it, but appreciate that may not be possible.

Have you modelled the possibility of buying an annuity with the tax free cash you've taken from your DB scheme? Once the money is outside a pension scheme, and is 'yours', you can use it to buy an annuity, but the tax treatment is better than buying an annuity with money taken directly from a pension scheme (ie not becoming 'yours' in the interim!), because part of each payment is treated as a return of capital.

Alternatively, and depending on how good the commutation rate is from your DB scheme, have you modelled taking less/no cash from that, which would give you a bigger pension, and thus reduce the size of any annuity you needed to buy?

I haven't modelled buying an annuity with the cash, no, that's an interesting idea if I were to buy a fixed term one. 

As our discretionary spend in retirement will largely be on travel; my challenge is to substantially boost our income for the first 7-10 years of retirement. After that we expect to travel less and and some of our DBs (& SP) will kick in so we won't need to boost much beyond what we will get from DBs+SP+Annuity.
So yes, I have modelled taking less/no cash but it isn't really effective for our goals.

kempiejon

arthur_fowler said:

kempiejon said:

Giving up the capital to buy an annuity gives an income tax liability that could be mitigated with alternative options but if that's a plan crack on. Certainty of income is handy planning. You could defer taking state pension but I'm not sure the returns are that attractive - they used to be OK.
There is an allowance for capital gains and dividends annually. Gilts are free from CGT so low coupon gilts trading under par come with a know redemption date and are a way of collecting tax free capital gains. Low coupon so should have trivial cash interest. Premium bonds are tax free £50k each.

Thanks. I would have to look at the idea of Gilts. In terms of knowledge as an investor, I would say it isn't very high, so the terms you are using in that sentence I don't really understand.
I have considered Premium Bonds as an option.

Sorry bit technical. Gilts are fairly new to me, I have been buying shares online for a decade. First time I looked at them was when tax on savings interest became an issue. Not quite as straight forward as just buying share online so if you're not comfortable doing that might be a bit of learning. I spotted this quick guide. https://www.morningstar.co.uk/uk/news/247229/want-to-buy-uk-government-bonds-be-careful.aspx

RogerPensionGuy

I looked at buying gilts and purchased annuties just lately.

Reference gilts, ensure they are treasury gilts neat, not gilts sitting in other investments whereby they are subject to CGT, Pension Craft on YouTube has a nice episode on gilts and talks about gilt ladders and is good.

I think gilts work very well and if CGT goes up to a personal income tax rate, more people will use gilts to mitigate 40 & 45% income tax, so maybe gilts will be less attractive for 20% tax payers.

Reference purchased annuties, they are also good if a person likes the deal, reference the untaxed component of the monthly payment, as I see seen it, live long and that part of the payment has good long-term value as that X amount of payment is locked as capital returns and not taxed.

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https://m.youtube.com/watch?v=eNdYgB0pqwM

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https://www.mandg.com/wealth/adviser-services/tech-matters/investments-and-taxation/purchased-life-annuities/purchased-life-annuities#:~:text=A PLA provides a guaranteed,ascertainable by reference to life.

badmemory

Please be careful when saying once we stop having the big holidays we won't need as much income.  It is certainly easier if there are 2 of you as if one can't do something then the other can often take up the slack.  But what happens if you both get bad arthritis & neither can mow the lawn, or vacuum or clean the bath.  Cleaners & gardeners etc do not come cheap.

arthur_fowler

badmemory said:

Please be careful when saying once we stop having the big holidays we won't need as much income.  It is certainly easier if there are 2 of you as if one can't do something then the other can often take up the slack.  But what happens if you both get bad arthritis & neither can mow the lawn, or vacuum or clean the bath.  Cleaners & gardeners etc do not come cheap.

It's a good point. We should still have £10k PA discretionary spend without cutting back on other luxuries (that could easily also be described as discretionary).