Pension tax free cash to ISA

fuelcrusher

leosayer said:

The article linked explains how you can build up an ISA entitlement in the financial years before you can actually fill it. 

Might be of help.

https://monevator.com/should-you-borrow-to-fill-your-isa-each-year/

An interesting read thank you. Having had an offset mortgage for many many years, one of the first 'Virgin One' accounts, I could have 'banked' past years ISA allowances quite easily. Well maybe not easily but I certainly could have built it up. Looking back I've probably biased too much toward pension but using the full allowance at HR tax relief was just too enticing.
The article though has given me an idea that I'd not considered for some reason. Next years ISA allowance will be the last one while still under 55, I can do what the article suggests or probably easier just make sure to move some of our cash savings into ISAs to bank that years allowance then just repay that back with an extra £40k tax free amount soon as I turn 55. This will take planned tax free withdrawal to £138k + the UFPLS during that short period before the age change. 

EdSwippet

NoMore said:

EdSwippet said:

fuelcrusher said:

I can't see any advantage in moving it to a GIA first, ...

A slightly better tax outcome? For a given tax bracket, the current CGT and dividend tax rates that you would pay on gains that occur inside a GIA are lower than the income tax rates you would pay on withdrawal of those same gains from within a pension.

They are talking about the tax free cash, When has that been subject to income tax ? Fuelcrusher was working under the assumption it was a DC pension ...

Nobody said anything about TFLS being subject to tax. What is subject to tax, though is the investment growth on any TFLS left inside the pension once past the £268k TFLS limit. And this is where you can gain an edge.

Perhaps an example will help. Rounded numbers. Today you have a £1,073k pension, and have not taken the £268k tax free lump sum. Investments return 10% over a year. Your pension is now worth £1,180k. You take the full £268k tax free, leaving you £912k taxable on withdrawal. Assuming basic rate tax, this would give you a net £730k. Add your £268k tax free for a total £998k in your pocket.

Or, today you have a £1,073k pension, and you take your £268k tax free lump sum now and invest it in a GIA. Investments again return 10% over a year, 4% from dividends and 6% from capital growth. Your pension is now worth £886k, and your GIA is worth £295k. Assuming basic rate tax, you pay 8.75% on £11k of dividends and 18% tax on £16k of capital gains on your GIA, total £3.84k leaving you £291k. Add the net £709k available from the remaining pension gives you a total £1,000k in your pocket.

You gain because the tax you pay on the growth in the TFLS once outside the pension is less than the tax you would pay on the growth in the TFLS that remains in the pension. The example above ignores the CGT and dividend allowances. Factor those in and the numbers are even more in favour of taking the TFLS and reinvesting it now in a GIA.

Note that this all applies only when you are at or above the TFLS limit.

pterri

NoMore said:

I think pterri's problem might be because its with a DB pension, they get all the tax free cash at the same time, they can't choose to draw it over a number of years.

Yep, it’s from the AVC and have to decide what I want to do at the point I claim the DB. I assume I can take part as TFLS and some into a SIPP but I’m erring toward 20k into an isa and the Remainder into a GIA then transfer into an the isa over a few years

NoMore

EdSwippet said:

NoMore said:

EdSwippet said:

fuelcrusher said:

I can't see any advantage in moving it to a GIA first, ...

A slightly better tax outcome? For a given tax bracket, the current CGT and dividend tax rates that you would pay on gains that occur inside a GIA are lower than the income tax rates you would pay on withdrawal of those same gains from within a pension.

They are talking about the tax free cash, When has that been subject to income tax ? Fuelcrusher was working under the assumption it was a DC pension ...

Nobody said anything about TFLS being subject to tax. What is subject to tax, though is the investment growth on any TFLS left inside the pension once past the £268k TFLS limit. And this is where you can gain an edge.

Perhaps an example will help. Rounded numbers. Today you have a £1,073k pension, and have not taken the £268k tax free lump sum. Investments return 10% over a year. Your pension is now worth £1,180k. You take the full £268k tax free, leaving you £912k taxable on withdrawal. Assuming basic rate tax, this would give you a net £730k. Add your £268k tax free for a total £998k in your pocket.

Or, today you have a £1,073k pension, and you take your £268k tax free lump sum now and invest it in a GIA. Investments again return 10% over a year, 4% from dividends and 6% from capital growth. Your pension is now worth £886k, and your GIA is worth £295k. Assuming basic rate tax, you pay 8.75% on £11k of dividends and 18% tax on £16k of capital gains on your GIA, total £3.84k leaving you £291k. Add the net £709k available from the remaining pension gives you a total £1,000k in your pocket.

You gain because the tax you pay on the growth in the TFLS once outside the pension is less than the tax you would pay on the growth in the TFLS that remains in the pension. The example above ignores the CGT and dividend allowances. Factor those in and the numbers are even more in favour of taking the TFLS and reinvesting it now in a GIA.

Note that this all applies only when you are at or above the TFLS limit.

Fuelcrushers plan is to move Tax free cash from Pension to ISA over several years. Pterri has a large DB PCLS which he is going to get into an ISA via GIA.

Yes your right for a DC pension a GIA can be more tax efficient in certain circumstances and for Fuelcrusher, perhaps this could become a tactic for him, as he has a large DC pension ( >£1m) and still not yet at access age). 

However the original mention in this thread of a GIA was for Pterri's DB PCLS, which your method doesn't apply to.

EdSwippet

NoMore said:

Fuelcrushers plan is to move Tax free cash from Pension to ISA over several years.

It is possible they can do better. As demonstrated, moving the tax free cash to GIA now, and then on from there into ISAs over several years may give a better outcome.

NoMore said:

However the original mention in this thread of a GIA was for Pterri's DB PCLS, which your method doesn't apply to.

Indeed. However, Fuelcrusher replied to that mention with: "I can't see any advantage in moving it to a GIA first, not saying there isn't. I'll be leaving it in the pension and just moving it in batches over the years."

For him (or her), there is a potential advantage in moving it to a GIA first. "Potential" because any number of things could intervene to mess up any plans. Change of tax rates, inheritance tax, and any number of goalpost-moves by the government. Nevertheless, worth considering.

fuelcrusher

EdSwippet said:

NoMore said:

Fuelcrushers plan is to move Tax free cash from Pension to ISA over several years.

It is possible they can do better. As demonstrated, moving the tax free cash to GIA now, and then on from there into ISAs over several years may give a better outcome.

NoMore said:

However the original mention in this thread of a GIA was for Pterri's DB PCLS, which your method doesn't apply to.

Indeed. However, Fuelcrusher replied to that mention with: "I can't see any advantage in moving it to a GIA first, not saying there isn't. I'll be leaving it in the pension and just moving it in batches over the years."

For him (or her), there is a potential advantage in moving it to a GIA first. "Potential" because any number of things could intervene to mess up any plans. Change of tax rates, inheritance tax, and any number of goalpost-moves by the government. Nevertheless, worth considering.

Thank you EdSwippet. I'm pretty sure I follow your explanation, I'd need to really study it through though to consider it.

However, I may have found a downside to the tax free withdrawal plan as follows....

fuelcrusher

So hopefully this thread hasn't gotten long enough that forum users are passing it by because I'm wondering if I've found a downside to withdrawing tax free cash out of the pension early (whether to ISA or not):

Part of my plan is to hopefully reduce potential IHT by giving some money away earlier to the kids. I was planning to do this via the gifts out of regular income method.

My understanding is that one of the tests for the gifts to be classified this way and hence not to fall under the 7 year rule, is that they need to come out of regular income.

Using UFPLS I could withdraw circa £58k out of my pension giving me circa £52k net (Scottish rates  ). This is much more than we need for our current lifestyle (£40k). This leaves a nice £12k that would very obviously tick the box for use in this way.

If I moved the tax free cash out of the pension then once it's all out then to still avoid higher rate tax I'd only be able to withdraw £43,600 odd, giving me £37,300 net. Now, we'd have no problem continuing our current lifestyle because we'd pull from the ISAs etc. But would this now prevent the regular gifts from income being valid. Because here the gifts would now have to come from either ISAs, or we'd have to pull more from ISAs due to the gifts. I believe the rule is that the gifts must come from 'income' not capital. So I guess it hedges of whether ISAs are condsidered 'capital'.

Anyone know?

EdSwippet

fuelcrusher said:

I believe the rule is that the gifts must come from 'income' not capital. So I guess it hedges of whether ISAs are considered 'capital'.

The money you contribute to an ISA may or may not be "capital". However, any interest, dividends, or capital gains that occur within that ISA are potentially "surplus income". Also, the TFLS itself. From abrdn:

Certain income which isn’t subject to income tax, such as income from ISAs, may still be covered by the exemption. Also pension drawdown withdrawals, including any tax free cash element, are also treated as income for this purpose.
...

Some examples of allowable income include:

...
- regular withdrawals from flexible pensions, including any tax free cash element

- ISA income
...

gm0

Gifting out of regular income.  Needs to demonstrate that there is excess income to gift from.  There is a whole and not pleasant IHT form about this very thing which drives ongoing record keeping on income and costs, bank statements etc. (IHT403).

Gifts of capital/savings as a one off such as 20k to a child for a house deposit - are subject to the 7 year taper rule to fall outside the estate.  But can just be done. (Potentially Exempt Transfer) and live 7 years and run down the clock.

PET not abolished yet.

Ciprico

Be very careful using the 7-year rule. Any gifts eat into your personal iht allowance of £325k before they become tax free.

Meaning you have to gift £325k first, (exhausting your iht allowance) then subsequent gifts are applicable to the 7 year rule.

Just making a gift and surviving 7 more years won't do it...!