Provide income after retirement and minimise tax

diveleader

Good afternoon all.

Sorry, long post!

Myself and Mrs Beano have now been retired for 10+ years.

I'm working out my strategy for the next phase of our retirement and would welcome your comments and thoughts on our plans.

Our aim is to make our income requirements (approx 35k PA between us) and minimise, or pay zero tax to HMRC.

Our investments are split 50:50, so we can both fully take advantage of the current tax thresholds.

Our spend rate is less than 3% of our assets. We're looking to increase our spending, but, after a couple of decades of accumulation, it's hard to open the taps!

We are 57 / 56 years old.

With that all out of the way, here is our strategy (based on current tax rules!!)

- We both receive £12570 as income from our pensions. This uses up our personnel allowance, so no tax to be paid. We are crystallising portions of our SIPPS to do this. The tax free amount of this will probably be going to future ISA contributions / top up cash buffer.

As our incomes are 'low' we can take advantage of the starter rate for savings, meaning that any cash we hold (currently 3 years burn) earns interest free of tax. (up to 6k interest each - not that it would ever earn that much).

- We have GIA's. These have been running down over the years(approx 3 years left). These are used to :
- Fund the full ISA contribution for us both
- Top up the pension income to reach our annual income requirement
- Make an annual payment to our SIPP's (£2880 each, but the grossing up is free!)

The GIA have been churned over the years, so the above can, currently be achieved by utilising our CGT allowances. So no tax to pay on this income stream

The aim for the GIA is to run them down to approx 10k each. They can then pay an approx 5% dividend (VHYL or similar) to utilise the annual dividend allowance

- ISA's. We are currently still increasing the ISA's each year and do not take any income from them. This should continue for the next three years or so, until the GIA's are down to 10k.

The next bit, is where I would appreciate your input!

Once the GIA's are at 10k each, do I?

- Begin to run the ISA's down to bridge the income gap? SIPP still being taken to the utilise the personal allowance (I'm thinking that we should run them down until there is approx 150k in each and then stop. The logic for this is the ISA is fully accessible, without tax considerations. This would allow for unplanned large expenditure (Cars, health, bailing the children out etc) to be made.

Once we hit this point, we begin to access the SIPPS more.

OR

- Maintain the ISA's and bridge the income gap by accessing more of the tax free lump sum. (still no tax to pay in this scenario). Continue with this until the tax free portion has gone and then access ISA's or increase monthly income from SIPP's (with the resultant increase in tax).

I understand that IHT is going to rear its evil head at some time (if we don't spend it all, that is).

My thoughts are, if IHT is going to be paid (especially since SIPP's are going to be bundled into the pot from 2027), then tax paid after we are gone would be a better choice over paying tax whilst alive on income (and possibly still IHT when we've pegged it).

I suppose, IHT can be avoided with planning, whilst income tax whilst alive cannot!

Linton

I use income and dividend funds with an average yield of 6% in an S&S ISA to pay 30% of normal expenditure.

The objective is to avoid higher rate income tax,  IHT is irrelevent.

ColdIron

diveleader said:

The aim for the GIA is to run them down to approx 10k each. They can then pay an approx 5% dividend (VHYL or similar) to utilise the annual dividend allowance

There was no tax payable on dividends for basic rate taxpayer prior to 2016 when they were taxed at 7.50% with a £5,000 allowance

Since then the allowance has decreased 90% and the rate increased to 8.75%. The allowance saves you £43.75

I wouldn't rely on that £500 remaining in my short-term, let alone mid-term, planning

poseidon1

diveleader said:

Good afternoon all.

Sorry, long post!

Myself and Mrs Beano have now been retired for 10+ years.

I'm working out my strategy for the next phase of our retirement and would welcome your comments and thoughts on our plans.

Our aim is to make our income requirements (approx 35k PA between us) and minimise, or pay zero tax to HMRC.

Our investments are split 50:50, so we can both fully take advantage of the current tax thresholds.

Our spend rate is less than 3% of our assets. We're looking to increase our spending, but, after a couple of decades of accumulation, it's hard to open the taps!

We are 57 / 56 years old.

With that all out of the way, here is our strategy (based on current tax rules!!)

- We both receive £12570 as income from our pensions. This uses up our personnel allowance, so no tax to be paid. We are crystallising portions of our SIPPS to do this. The tax free amount of this will probably be going to future ISA contributions / top up cash buffer.

As our incomes are 'low' we can take advantage of the starter rate for savings, meaning that any cash we hold (currently 3 years burn) earns interest free of tax. (up to 6k interest each - not that it would ever earn that much).

- We have GIA's. These have been running down over the years(approx 3 years left). These are used to :
- Fund the full ISA contribution for us both
- Top up the pension income to reach our annual income requirement
- Make an annual payment to our SIPP's (£2880 each, but the grossing up is free!)

The GIA have been churned over the years, so the above can, currently be achieved by utilising our CGT allowances. So no tax to pay on this income stream

The aim for the GIA is to run them down to approx 10k each. They can then pay an approx 5% dividend (VHYL or similar) to utilise the annual dividend allowance

- ISA's. We are currently still increasing the ISA's each year and do not take any income from them. This should continue for the next three years or so, until the GIA's are down to 10k.

The next bit, is where I would appreciate your input!

Once the GIA's are at 10k each, do I?

- Begin to run the ISA's down to bridge the income gap? SIPP still being taken to the utilise the personal allowance (I'm thinking that we should run them down until there is approx 150k in each and then stop. The logic for this is the ISA is fully accessible, without tax considerations. This would allow for unplanned large expenditure (Cars, health, bailing the children out etc) to be made.

Once we hit this point, we begin to access the SIPPS more.

OR

- Maintain the ISA's and bridge the income gap by accessing more of the tax free lump sum. (still no tax to pay in this scenario). Continue with this until the tax free portion has gone and then access ISA's or increase monthly income from SIPP's (with the resultant increase in tax).

I understand that IHT is going to rear its evil head at some time (if we don't spend it all, that is).

My thoughts are, if IHT is going to be paid (especially since SIPP's are going to be bundled into the pot from 2027), then tax paid after we are gone would be a better choice over paying tax whilst alive on income (and possibly still IHT when we've pegged it).

I suppose, IHT can be avoided with planning, whilst income tax whilst alive cannot!

I would definitely concentrate on continuing to maximise your respective ISA pots to generate future tax free income if the primary objective is avoiding income tax.

Since 2018 ( your earlier post on these matters) you should have been able to stash £280k between you  and your wife, assuming maximum £20k annual contributions, ignoring what may have previously been accumulated prior to.

Generating a steady 5% interest/dividend  income yield from substantial and growing  ISAs pots would seem to make a great deal of sense, especially since they can be inherited by the  surviving spouse on first death.

Smudgeismydog

You noted your spend rate is less than 3%, which would suggest you are still accumulating wealth. I’m interested in why you feel tax paid after death is better than paying tax while alive. 

My thought process has changed since the announcement that my SIPP would form part of my estate, and I now plan to withdraw sufficient taxable income to sit just below the higher rate bracket and then make a concerted effort to spend. I say that because, like you, that would be a higher income than I need to meet my expenditure, and I’ve also found it’s a big shift to move from accumulation to decumulation. 

I reasoned that it was better to pay 20% income tax rather than my estate paying IHT 40%, and whilst it is important for me to be able to help the kids if they need it, I would also like to have the opportunity to spend my hard saved pots before they do 🤣

af1963

Smudgeismydog said:

I reasoned that it was better to pay 20% income tax rather than my estate paying IHT 40%, and whilst it is important for me to be able to help the kids if they need it, I would also like to have the opportunity to spend my hard saved pots before they do 🤣

Everyone's calculation of this could be different.  Depends how confident you are that each chunk of money would end up actually incurring tax under IHT. 

For many (most) people, DC pensions added to their estate will still leave them below the IHT threshold.  And the amount left over from a SIPP will depend partly on how long the owner lives and needs to withdraw from it, so a large SIPP today might be a much smaller one by the time the owner dies..

For those who do end up paying IHT on pensions, under the rules as they seem to be written today, once the IHT change takes effect, and if you live past 75, some of your pension may end up taxed twice - IHT and then income tax by the recipient. But withdrawing it earlier ( if not spent)  doesn't really reduce this - it incurs income tax, and then IHT. Different sequence, same result. ( assuming you'd taken the full tax free sum by that point)

It does tilt the balance further towards drawing the pension and spending it.  Which seems fair enough, as that's the point of a pension and the reason why it got all the tax breaks along the way.

Juno_Moneta

I agree with Smudgie about drawing up to the higher rate bracket - for anyone able to - which would depend on factors such as starting pot size, income eg from dividends and therefore overall what your safe withdrawal rate is to maintain an income throughout retirement. 

So currently my thoughts are that a drawdown per year of 50270 is the current optimal drawdown amount for me personally (then reducing this by the annual state pension amount from 67), and my SIPP currently brings in just over this amount in dividends, yes these are not guaranteed but you have to start somewhere. 

There are plenty of articles that explore the optimal drawdown (pension factors above permitting). 

The point is to get the most out my pension while still alive paying tax only at the 20% rate. 

If I needed to in any retirement year for any reason my next limit would be the top of the higher rate band. 

This just makes sense to me, the alternative of only limiting yourself to drawing up to the personal allowance 12570 limit and paying no tax is fine for some people, but if you are fortunate enough to have a larger pension then, thanks to the IHT changes, there is no incentive anymore for those with children to draw as little as possible leaving them the maximum possible to inherit.

In summary I think most people should draw the most they can while alive at whatever they feel is the optimal taxation level for them. So study the current income tax bands when deciding your drawdown per year. Simple. 

But here’s a couple of more general advice articles from HL and unbiased - which I think echo some of the other posters comments here…

https://www.hl.co.uk/pensions/insights/maximising-retirement-income-a-guide-to-tax-efficient-withdrawals,-including-state-pension

https://www.unbiased.co.uk/discover/pensions-retirement/managing-a-pension/tax-on-pensions

Nick_Dr1

I thought you could draw just over £16k pa tax free with the right pensions (25% tax free) and a full allowance?

Albermarle

Nick_Dr1 said:

I thought you could draw just over £16k pa tax free with the right pensions (25% tax free) and a full allowance?

You can do this.

Albermarle

Three of four years of care home fees, would reduce any IHT liability significantly.

Hal17

Albermarle said:

Three of four years of care home fees, would reduce any IHT liability significantly.

That's so true!