Planning ahead how to take tax free cash

af1963

I'm planning on stopping work this year (at around 61) and looking ahead at potential income sources, one of which may be tax free cash.  Considering how best to use this - writing it down to clarify my own ideas, and also interested in other people's thoughts.

I have DC funds/SIPPs adding up to around £950k, so potential TFC of approaching £250k, and a full state pension from 67. Also ISA savings worth around £400k. Partner has her own pensions and savings, different mix but similar value.

My current thinking is: I could either "front-load" the taking of tax free cash into early years ( after having taken enough taxable income to use up each year's annual allowance), or could take it more gradually as regular UFPLS payments, both before and after state pension begins.

The argument for taking it sooner, for me,  is essentially John Maynard Keynes : "In the long run, we are all dead ... ".  After SP starts I'd expect to spend around £15-20k on top, which would include about £4k-£5k per year of tax free cash if taking it as partially tax free UFPLS drawdowns.  But at £5k per year, that's 50 years of payments, which I almost certainly won't be around to see, and what's the point of having a tax free lump sum available if you never actually spend it ?

My understanding is that if there's money left in the SIPP when I die, it (currently) makes no difference to the inheritor whether it has or hasn't had the tax free cash taken already ? Correct ? If I die before 75 it's all tax free and if I die from 75 onwards it's all taxable?

Alternative ways to fund the £15-20k :  spend from the ISA ? or take more standalone tax free cash each year ?  Is there any functional difference between these, apart from the (currently) different inheritance and IHT treatment ? They are both (again, currently) invested similarly. A bit of re-balancing and de-risking is also needed but that's another topic ...

If I end up having used up the full limit of TFC and spent the ISA - at that point I'd need to start taking fully taxable payments from the crystallised SIPP.  But as far as I can see, that just starts to build up to paying the tax that I'd have been paying earlier with each UFPLS anyway.

Only potential drawback I can see is if I needed a large lump sum to be available at some later stage, and if I'd already spent the TFC and ISA, taking it from the crystallised SIPP would be heavily taxed.  Don't envisage needing this anyway, and on these figures it seems like there would still be cash available for 20+ years.

Interested to hear if anyone thinks I'm missing any options/drawbacks, or misunderstanding anything ?

wjr4

How much income you do actually need? 

Do you have an IHT issue currently? 

af1963

Need ?  Depends on spending plans. Could get by on £20k total ( as an individual) quite comfortably, but aiming to do more things and probably spend more. At least in initial years, currently budgeting for £30k.

IHT? No children. so after both of us are gone, what's left will probably go to more distant relatives and to charities. We'd be likely to incur some IHT on current figures, but we'll both be spending from savings so that may reduce in future, and leaving some to charity reduces it further.  Don't actually mind incurring some IHT or doing charity donations - I'd sooner have the money taxed at the point when neither of us need it any more.

Pat38493

You don’t have to do one or the other you can do a mix, so you could start with UFPLS for a few years, but then take all the remaining tax free cash in one go.  The general thought is to use UFPLS unless there is a solid reason against it E.g. needing the TFC for a specific reason like paying off a mortgage or because you have unevenly high spending in the first few years.

Give the amount of money you have, if your spend requirement is really not much more than 20k you will be fine no matter what approach.

If you take all the TFC up front but then don’t spend it, keep in mind that you will that you will then have a headache trying to minimise your tax exposure on savings interest or investment gains.

Keep_pedalling

Will your partner inherit? If so are you married or in a civil partnership?

af1963

Keep_pedalling said:

Will your partner inherit? If so are you married or in a civil partnership?

Yes to both questions.  ( Or, more accurately:  my partner will *partially* inherit if I die first, with other people and charities also getting something).  For age and health reasons, it's probably more likely to be the other way round though, although you never know really.

Wasn't really considering taking out the whole lump sum in one go, rather using it each year as the source of extra income, and maybe also moving a chunk into ISA, although again I'm not sure there's any benefit in doing the latter. But there shouldn't be any large amounts held as taxable savings.

Linton

It seems you and your spouse have far more wealth than you both could reasonably use in your lifetimes given your assets, expenditure estimates,  and your statement that your invested assets amount to about £1.4M with your spouse having a similar amount, so a total of £2.8M.  £2.8M could could reasonably generate about £100K/year gross,  inflation linked with SP adding a further £22K for the rest of your lives.

Why worry about taking tax free cash when you wont be spending it anyway? Taking it out of your pensions would be increasing the eventual IHT on your estates with no benefit to you.

Or have I missed something?

Pat38493

To put it another way - why haven't you stopped working already  

MX5huggy

Seems to me you should up your spending plans or give more away early. There is a good chance you will die with more than you retire with. £1.4m gives £56k per year at 4%. 

af1963

Pat38493 said:

To put it another way - why haven't you stopped working already  

Enjoying my job ( but definitely stopping very soon, notice is in already    )

Also probably a bit of over-caution. I've lived through various big plunges in investment values, so never quite taken the current values as certain. Always seems like funny money. And these SIPP/ISA figures have both gone up quite a lot over the past few years. Wasn't looking quite so healthy at the depths of the Covid pessimism.  

Spouse's pension provision is smaller cash/investments, but made up with a couple of old private sector DBs so will have about £20k annually post-tax, plus what she chooses to draw from ISA/SIPP. Pension have some (but not unlimited) inflation increases.  Less to include in inheritance, more regular income.

Points all taken though. No need for any immediate decisions or do do it all at once, so we can ponder this, and also wait to see if any of the speculated changes to pensions/IHT materialise in the near future.

Pat38493

How much attention do you pay to your investment mix?  Once you stop working, you should take a view on how to adjust your investments in order to feel secure in the shorter term whilst still having growth potential.  Lots of useful stuff on Youtube or here about it.

Fundamentally a lot of people will go with either a particular mix of bonds and equities in %, and rebalance regularly.

Others might construct a cash flow ladder using their spending estimates for future years and keep first 2-3 years in cash, next 3 years in a fairly safe asset mix, next 5 in something a bit riskier and anything over 10 years in 100% equities, or something along those lines.

With the amounts you have, I'm sure you can find an approach that makes you feel secure on the day to day / month to month basis whilst still keeping a decent amount invested in growth assets. (or as others have said you could even give some away as you arguably have too much already - nice problem to have!).

Edit:  Also - with the amount of assets you have in play as a couple, you might want to consider consulting an IFA or a financial coach - with that amount of money, unless you are really interested in money management and learn how to do it yourself, it's probably that using an IFA will end up saving you more than it costs.  Make sure they are an independent financial adviser rather than just an FA tied to a particular brand or company.