How to draw the most tax efficient income in retirement

wiltshiregirl69

We have a mixture of ISA's (£500k b/w us), DB pension (£60k/year for husband who is fully retired), £800k SIPP, and a fairly healthy investment account invested in a mixture of asset classes and managed by a wealth manager.  I work part-time and earn around £25k/year which I invest into my pension atm.
I am due to give up work next year and we want to make the most of the next 10 years of retirement - so we'd like to draw a healthy net income from our investments in the most tax efficient way.  

I don't feel comfortable paying a financial advisor up to 1% a year for a plan and also have trust issues with financial advisors.  I was wondering what/how people decide how to arrange their income from these various pots (i.e.dividends/draw down/interest).  I know that come gets taxed first but not sure the order of the next tax...OR would most of you recommend a financial advisor to draw up a plan..

kempiejon

I think with a bit of research and making a plan it shouldn't be too hard to make a tax plan for ones self. Are you the sort of person who would enjoy that and be confided that you got it right? If yes then you probably don't need professional help, for others that might not be the case.

Well your ISAs will be tax free so you could run that down over the next 10 years, is half a mill going to keep you in posies and pancakes?
I looked at taking my SIPP as a number of lump sums of which 25% is tax free which can be used to stay within income tax thresholds. I currently plan to take the full 25% out but I have changed my mind with my circumstance changes.

Does the whole £25k salary get added to your SIPP? There's no time to make much redirection of investments but perhaps this year fill the ISA before the SIPP, Yu can then take it out without a tax bill though you miss some tax deferral which has advantages? Your ages, time to state pension, health, inheritance plans etc will push the strategy a bit but you look fairly set so it's a question of extracting the most efficiently.
. 

wiltshiregirl69

kempiejon said:

I think with a bit of research and making a plan it shouldn't be too hard to make a tax plan for ones self. Are you the sort of person who would enjoy that and be confided that you got it right? If yes then you probably don't need professional help, for others that might not be the case.

Well your ISAs will be tax free so you could run that down over the next 10 years, is half a mill going to keep you in posies and pancakes?
I looked at taking my SIPP as a number of lump sums of which 25% is tax free which can be used to stay within income tax thresholds. I currently plan to take the full 25% out but I have changed my mind with my circumstance changes.

Does the whole £25k salary get added to your SIPP? There's no time to make much redirection of investments but perhaps this year fill the ISA before the SIPP, Yu can then take it out without a tax bill though you miss some tax deferral which has advantages? Your ages, time to state pension, health, inheritance plans etc will push the strategy a bit but you look fairly set so it's a question of extracting the most efficiently.
. 

Thanks - yes.  I transfer from our non isa investments each year into the ISAs and do the same into my sipp (matching my earned income).  Its just more about whether it is better to reinvest divs into the ISAS and grow that tax free for later years - living off buying and selling investments to fulfil the cap gains limit etc - and then whether to keep the SIPP untouched for IHT tax reasons.  Even if I go to an advisor I would still need to let him know what our preferred option is for the SIPP re IHT.  I am 55 and my husband is 58.

At the moment we live off the tax free ISA divs, cash and husband's pension.  But I feel the tail is wagging the dog - i.e. that our non ISA wrapped investment pot is untouchable as it is with the wealth manager - so is the SIPP as it is IHT efficient - and therefore our 'spending' (eg a big family holiday to a bucket list destination) aren't being planned as I 'feel' like I am spending cash rather than income - I think maybe it is a mindset thing.

squirrelpie

All money is money. There's no distinction between capital and income. (Except for tax treatment etc). Generally what you're doing sounds sensible. Moving your general savings into tax-protected environments like ISAs and pensions is a good idea. Dividends from an ISA should be kept inside the the ISA, not withdrawn (as long as you have other sources). It sounds like you should talk with your wealth manager and arrange that they manage your non-protected funds to suit you rather than them. i.e. transfer money into ISAs and pensions to the amount permitted each year, and provide whatever income you require, including 'capital' ideas like big holidays or cars etc. Obviously you need to manage the overall total but I suspect you can do that.

Linton

tbh I think you and especially your husband should have thought about tax planning many years ago with the help of an IFA. It now seems rather late to avoid paying 40% tax on much of your husband's income. There is not a lot you can do, income tax is perhaps the most difficult tax to avoid.

Of the £800K in SIPPS how much is in your name and how much in your husband's? 

In order to comment on which is the best option for you one really needs to know what your aims are.  You surely would find it difficult to spend £60K /year + 2X State Pensions + £1.3M in SIPPs and ISAs before you die.  How much do you need?   At the moment the tax treatment of SIPPs on death can be generous, especially if you die before 75.  So taking the long term view if you wish to bequeath life-changing amounts of money and minimise tax one good solution is not to touch your SIPPs at all  However the tax rules could be very different by then especially as the noises from the think tanks are that pensions should be used for paying for retirement, not for tax avoidance down the generations.

leosayer

It's a tricky decision to make as there are so many future unknowns such as the taxation regime, inflation, investment performance and changes to your personal circumstances. 

These are the immediate steps as I see them:

1. Identify how much you expect to spend each year during retirement plus any contingency. Don't forget later life things like care needs.
2. Identify how much you would like to leave as an inheritance and how much you would like to to transfer before death
3. Identify the optimum order for selling and transferring assets (between spouses) to minimise taxation over your whole retirement
4. Adjust investments based on the expected time horizon 
5. Run some models and adjust 1-4 as necessary

In practice, the best approach is likely to be selling your investment account assets first whilst avoiding straying into higher income tax bands. This will likely mean paying CGT but better less now than more later. If that doesn't give enough income to meet your spending requirement then top up by selling from your ISAs. 

I find this video quite helpful but you may be too far down the road for it to work for you. you: https://www.youtube.com/watch?v=10mC6XXChZI

Albermarle

and then whether to keep the SIPP untouched for IHT tax reasons.

Not sure if you are aware but it seems the issue of DC pension pots being exempt from IHT, is slowly but surely coming more under the political spotlight. Rightly or wrongly you could call it a loophole.

Now nothing may happen, or it may happen in a as yet undefined way. Also the usual advice is not to take any action based on speculation on future legislation. However worth at least keeping in the back of your mind. 

wiltshiregirl69

Linton said:

tbh I think you and especially your husband should have thought about tax planning many years ago with the help of an IFA. It now seems rather late to avoid paying 40% tax on much of your husband's income. There is not a lot you can do, income tax is perhaps the most difficult tax to avoid.

Of the £800K in SIPPS how much is in your name and how much in your husband's? 

In order to comment on which is the best option for you one really needs to know what your aims are.  You surely would find it difficult to spend £60K /year + 2X State Pensions + £1.3M in SIPPs and ISAs before you die.  How much do you need?   At the moment the tax treatment of SIPPs on death can be generous, especially if you die before 75.  So taking the long term view if you wish to bequeath life-changing amounts of money and minimise tax one good solution is not to touch your SIPPs at all  However the tax rules could be very different by then especially as the noises from the think tanks are that pensions should be used for paying for retirement, not for tax avoidance down the generations.

Thanks Linton. 

 I don’t think we could have done anything tax planning wise to  avoid my husband paying 40% tax as it is a government pension.  He had no choice but to draw it on retirement at 55.  It is index linked to rpi and I receive half on his death.

All of the £800k in a sip is in my name with the children named as beneficiaries - so using it as a trust atm.

I think there is a strong possibility that state pensions for us might be means tested by the time I am 67 and might not be available for me..

i would like to help my children buy a property and would like to draw £450k to do this but worry I won’t have enough to live on.  I think we would like to have £10k/month metro live on which includes all living and property maintenance etc but not one off big holidays for the family.

thanks

Albermarle

I think there is a strong possibility that state pensions for us might be means tested by the time I am 67 and might not be available for me..

This is one of the less likely changes for the future and even if it was ever means tested it would not be down to zero.
In an in indirect way the SP is already means tested, as poorer pensioners get other benefits and rich pensioners pay 40% tax on it.

Linton

wiltshiregirl69 said:

Linton said:

tbh I think you and especially your husband should have thought about tax planning many years ago with the help of an IFA. It now seems rather late to avoid paying 40% tax on much of your husband's income. There is not a lot you can do, income tax is perhaps the most difficult tax to avoid.

Of the £800K in SIPPS how much is in your name and how much in your husband's? 

In order to comment on which is the best option for you one really needs to know what your aims are.  You surely would find it difficult to spend £60K /year + 2X State Pensions + £1.3M in SIPPs and ISAs before you die.  How much do you need?   At the moment the tax treatment of SIPPs on death can be generous, especially if you die before 75.  So taking the long term view if you wish to bequeath life-changing amounts of money and minimise tax one good solution is not to touch your SIPPs at all  However the tax rules could be very different by then especially as the noises from the think tanks are that pensions should be used for paying for retirement, not for tax avoidance down the generations.

Thanks Linton. 

 I don’t think we could have done anything tax planning wise to  avoid my husband paying 40% tax as it is a government pension.  He had no choice but to draw it on retirement at 55.  It is index linked to rpi and I receive half on his death.

All of the £800k in a sip is in my name with the children named as beneficiaries - so using it as a trust atm.

I think there is a strong possibility that state pensions for us might be means tested by the time I am 67 and might not be available for me..

i would like to help my children buy a property and would like to draw £450k to do this but worry I won’t have enough to live on.  I think we would like to have £10k/month metro live on which includes all living and property maintenance etc but not one off big holidays for the family.

thanks

Just checked,,,

There are 6.7M people receiving UC at the moment.  There are 12.6M people receiving State Pension. Is means testing SP practicable bearing in mind that rich pensioners' circumstances are likely to be far more complex than for those people claiming UC?

There are much easier ways of raising any money needed.

JoeCrystal

Albermarle said:

I think there is a strong possibility that state pensions for us might be means tested by the time I am 67 and might not be available for me..

This is one of the less likely changes for the future and even if it was ever means tested it would not be down to zero.
In an in indirect way the SP is already means tested, as poorer pensioners get other benefits and rich pensioners pay 40% tax on it.

I worked out that for someone on a full new rate state pension (£11,500 per year), one will very roughly pay enough income taxes to pay back the entire state pension at £60,200. So, if you have a private pension income of £48,700 on top of £11,500 state pension, you will be paying enough taxes to pay back the state pension effectively.