plan to FIRE - how to draw down

Lu999

Hi
I have been thinking about FIRE in a year time and how best to be tax efficient


Situation is:
40s married with kids

Total pot = 1.68m (round up)

Tax-sheltered
ISA stocks: 52k 
ISA2 : 106
Pension- 159k 
Pension2 - 137k

Non-sheltered
Stock broker - 740k (most are vanguard index fund, VT and VRWL, ISF)
Stock broker2 - 226k
Pension (Asia) - 262k   [likely considered to be non-tax sheltered] 

* No state pension due to working overseas
House - paid off, no mortgage 
Emergency cash for 1.5 years 

4% SWR - 67k
Annual expenses - 60k
Split between me and partner - would a drawdown of 33k each gives 30k , thus 60k expenses?
The drawdown would be from non-sheltered pot

Using this year as dividend and interest as an example

	Income	Allowance	Taxable	Tax Rate	Tax
Dividend	13000	500	12500	8.75%	1093.75
Sell shares (CGT)	16000	1500	14500	10%	1450
Interest from savings	4000	12570	0	0%	0	personal allowance?
	33000				2543.75
Net	30456.25

Questions 
1) do I have to pay dividend or CGT tax for the portion still under personal allowance (12,570)
2) do I have to pay income tax(20%) on top of dividend/capital gain that is over the personal allowance?
3) Is my interest tax free if under personal allowance of 12570?
4) If I drawdown from my stock broker and move 20k to ISA each year, would that need to pay CGT as well ?   Does the +20k push me into higher rate tax payer?

Thank you very much!
L

 

Lu999

This is an update to the previous thread, based on the questions asked. I am opening a new thread because I noted that I put "single" in the first post, as we have managed our finances separately over the years and contributed roughly half. However, after reading the posts, I think we need to combine our finances to show the complete picture.

The example is based on my 23/24 tax year filings, rounded up, except for earnings (as I am planning to retire early, so that will go down to zero), which I will replace with selling shares.

Thank you.

Linton

Lu999 said:

Hi
I have been thinking about FIRE in a year time and how best to be tax efficient


Situation is:
40s married with kids

Total pot = 1.68m (round up)

Tax-sheltered
ISA stocks: 52k 
ISA2 : 106
Pension- 159k 
Pension2 - 137k

Non-sheltered
Stock broker - 740k (most are vanguard index fund, VT and VRWL, ISF)
Stock broker2 - 226k
Pension (Asia) - 262k   [likely considered to be non-tax sheltered] 

* No state pension due to working overseas
House - paid off, no mortgage 
Emergency cash for 1.5 years 

4% SWR - 67k
Annual expenses - 60k
Split between me and partner - would a drawdown of 33k each gives 30k , thus 60k expenses?
The drawdown would be from non-sheltered pot

Using this year as dividend and interest as an example

	Income	Allowance	Taxable	Tax Rate	Tax
Dividend	13000	500	12500	8.75%	1093.75
Sell shares (CGT)	16000	1500	14500	10%	1450
Interest from savings	4000	12570	0	0%	0	personal allowance?
	33000				2543.75
Net	30456.25

Questions 
1) do I have to pay dividend or CGT tax for the portion still under personal allowance (12,570)
2) do I have to pay income tax(20%) on top of dividend/capital gain that is over the personal allowance?
3) Is my interest tax free if under personal allowance of 12570?
4) If I drawdown from my stock broker and move 20k to ISA each year, would that need to pay CGT as well ?   Does the +20k push me into higher rate tax payer?

Thank you very much!
L

 

The is no tax on paying money into an ISA.  All withdrawals from an ISA are completely free of all taxes as is all income and investment growth..  

(PS though ISAs can only accept cash so you may  need to sell existing investments and pay CGT to raise the cash)

So it seems obvious to me that S&S (Stocks and Shares )  ISAs should form a significant part of your tax management and that you should withdraw as much income as possible through a large portfolio of tax protected rather than unsheltered investments.

I suggest you contact an IFA to advise on  your finances. Their advice on tax planning alone could easily justify their fees.

OldScientist

Lu999 said:

Hi
I have been thinking about FIRE in a year time and how best to be tax efficient



4% SWR - 67k
Annual expenses - 60k
Split between me and partner - would a drawdown of 33k each gives 30k , thus 60k expenses?
The drawdown would be from non-sheltered pot


 

Leaving aside all the other details, I note that 4% SWR (i.e. a withdrawal of 4% of the initial pot and subsequently adjusted for inflation) is a figure based on historical data for a US retiree over 30 years (i.e., for a conventional retiree).

For a Uk retiree expecting a 30 year retirement, the figure is considered to be closer to 3.5% (or a shade below).

If you are considering retirement at 50, your planning horizon (given a reasonable chance of living to 100yo) is more like 50 years. This will have some effect on the SWR. A quick look (using my own backtesting code) gives an outcome of about 3% for 70% stocks (mixed UK/US) and 30% UK bonds.

Others will chip in, but it may be worth seeing whether you can pay enough national insurance contributions to at least get part of a state pension to act as a floor to your portfolio income.

hugheskevi

You might want to watch this YouTube clip from a financial planner, about a couple in a somewhat similar position.

m_c_s

With only 1 year until you want to FIRE and with a lot of your financial resources outside sheltered accounts time is probably one of your biggest challenges so worth getting some tax planning specialist advice. Just keep an eye on fees.

Linton

To answer some of the other questions..

1) CGT does not benefit from the income tax allowance.

4) selling an unsheltered investment only makes you liable to CGT. It does not incur any income tax nor count against your income tax allowances.

Your need to ask such basic questions strengthens my suggestion to buy advice from a suitably qualified and regulated advisor (ie IFA). With >£1M in unshetered investments you will need much greater knowledge.

Lu999

@hugheskevi This is really useful and answers most of my questions in one video for a dummy.  

@OldScientist, thanks. I know 4% is tight, but this should go down a lot once the kids leave the nest in 10 years (hopefully). 3% would be around +0.5m if my investment grows (it has grown 50% over the last 5 years). I will also see how long I can hang on to my job, or find a part-time job to add to my savings and move it to a tax-sheltered account.

Thanks, Linton and m_c_s, for suggesting an IFA or tax advisor, but if it means moving it to an offshore account, I doubt I would pursue it.  However, it seems I does need some advice, I wonder what the fees range would be for initial consultation

Bostonerimus1

Things are rarely taxed twice so you won't pay "income tax" on investments in addition to any CGT or dividend tax due. Assuming you are in the UK then your ISAs are tax free. So you have a nice mix to generate income and manage your tax. Pensions withdrawals will be taxed as income and you should use your different investments to maximize your allowances. As you need around 60k and the basic rate band goes up to about 50k I would keep your income within the basic rate band and use a combo of ISA, dividends and capital gains to get you up to your annual requirement. You should end up paying basic rate tax on something well below 60k with allowances.

I would check the UK tax status of your "Asian pension" referring to any double tax treaty in place.

The OP mentions "no State Pension" because of working overseas, but they should look into the possibility of making catch up contributions and if there is a reciprocal social security agreement with where they worked so they can use contributions made to an overseas system to qualify for a minimum UK state pension. There might also be the possibility of getting a state pension from the overseas country where they worked. Also for anyone working overseas they should think about paying Class 2 voluntary NI.

Pat38493

Lu999 said:

@hugheskevi This is really useful and answers most of my questions in one video for a dummy.  

@OldScientist, thanks. I know 4% is tight, but this should go down a lot once the kids leave the nest in 10 years (hopefully). 3% would be around +0.5m if my investment grows (it has grown 50% over the last 5 years). I will also see how long I can hang on to my job, or find a part-time job to add to my savings and move it to a tax-sheltered account.

Thanks, Linton and m_c_s, for suggesting an IFA or tax advisor, but if it means moving it to an offshore account, I doubt I would pursue it.  However, it seems I does need some advice, I wonder what the fees range would be for initial consultation

Make sure you look for an IFA (certified Independent).  Don't go with any FA especially ones who are selling an approach that locks you in to exit fees (very few of them do that these days anyway).

Also - look for an IFA who will set a maximum amount on the fees they will charge, as many will want to charge a % of your pot which could be a large amount based on the size of your assets. 

Also consider whether you want to just hire an IFA for a fixed fee to give you some one off advice that you will then manage yourself, or an IFA to basically take on your portfolio and manage it (for which they will charge an ongoing  % of your pot).  Some IFA are reluctant to do the former operation but there are many that will.

If I was hiring an IFA for a one off review of my retirement plan and some recommendations, I would expect to pay £3-4K for it.

However you might have to pay a bit more when they find out that you have a lot of assets outside tax wrappers and pensions in Asia etc.

As others have said, one obvious thing is that you should be utilizing your ISA allowances every year to move your money into non taxable wrappers if you are not already doing that.  

Also if you have employment income or anything that counts as earned income, you should be maxing out your pension contributions according to available allowances as pensions are extremely tax efficient. especially if you are a higher rate taxpayer.

With that size of portfolio and a lot in taxable accounts, it looks like you might well benefit from advice as they will probably end up saving you more than the cost.

Linton

Lu999 said:

@hugheskevi This is really useful and answers most of my questions in one video for a dummy.  

@OldScientist, thanks. I know 4% is tight, but this should go down a lot once the kids leave the nest in 10 years (hopefully). 3% would be around +0.5m if my investment grows (it has grown 50% over the last 5 years). I will also see how long I can hang on to my job, or find a part-time job to add to my savings and move it to a tax-sheltered account.

Thanks, Linton and m_c_s, for suggesting an IFA or tax advisor, but if it means moving it to an offshore account, I doubt I would pursue it.  However, it seems I does need some advice, I wonder what the fees range would be for initial consultation

Why should using an IFA have anything to do with whether you use offshore accounts? Any regulated UK advisor will propose investments  and financial management strategies that meet your objectives and wishes.