Early retirement on savings, with or without a pension?

NorthernGuy

I'm planning to retire several years before I get my state pension.  This has become possible due to an inheritance, that amount being enough to last the intervening years before my state pension is available.  I also have two work pensions, a Final Salary one frozen since that scheme closed over a decade ago, and a Money Purchase one I've been contributing to since.

My work has a pension adviser, a very capable person it seems, who visits every few months and gives private advice sessions.  He suggested that I should draw one of my two work pensions when I retire early, so as to benefit from the tax allowance.  Whichever work pension I might draw would be less than the state pension so less than the personal tax allowance, so I would get it all untaxed.

But early drawing of any pension will reduce the monthly amount, which would otherwise be more if I left it alone and lived off the inheritance capital meanwhile.  So a lesser pension but more inheritance savings remaining, as I'd need less of the latter.

Mulling over his advice since seeing him, I'm a little puzzled why not paying tax on this small pension, if drawn early, is beneficial?  I wouldn't pay tax if just living off the inheritance savings for this period either.

molerat

Drawing on taxable funds paying £0 tax on it is often considered preferable to drawing non taxable money.  The former if left untouched could be subject to tax deductions later but the latter is not taxable whenever you take it so could be left till later, once at state pension age any other pension is likely to be taxed so access to tax free money could be useful.

Linton

If you take a DB pension early you receive less income spread over more years, it should roughly balance out, So the reduction in tax by ensuring you use as much of your tax allowance as possible is an extra gain.

NorthernGuy

molerat said:

Drawing on taxable funds paying £0 tax on it is often considered preferable to drawing non taxable money.  The former if left untouched could be subject to tax deductions later but the latter is not taxable whenever you take it so could be left till later, once at state pension age any other pension is likely to be taxed so access to tax free money could be useful.

So it's more protection against the risk that the pension funds could, if drawn later, perhaps be taxed?  So take them now whilst tax will be definitely zero?

Roger175

I am in a similar position, well sort of - I have retired age 60, so will have no taxable income until I hit SPA at age 67. This means I am able use my tax free band and draw £16,760 from my pension without paying a penny in tax (with my DC pension using UFPLS, I take £4,190 tax free and £12,570 taxable, but which I don't actually pay tax). Once I start drawing SP, this uses up pretty much all the tax-free band leaving me having to pay tax on future withdrawals. I have substantial cash savings and ISAs, so I don't actually need to take anything from my pension, but it would be silly not to take this whilst the opportunity is there. 

Notepad_Phil

NorthernGuy said:

molerat said:

Drawing on taxable funds paying £0 tax on it is often considered preferable to drawing non taxable money.  The former if left untouched could be subject to tax deductions later but the latter is not taxable whenever you take it so could be left till later, once at state pension age any other pension is likely to be taxed so access to tax free money could be useful.

So it's more protection against the risk that the pension funds could, if drawn later, perhaps be taxed?  So take them now whilst tax will be definitely zero?

Unless you have a very low state pension forecast, or the personal allowance is significantly increased, you'll likely find that you'll be paying tax on most of your other pension income once you get to state pension age. So it's not really a risk, it's more of a definite.

Also, don't forget that you could withdraw money from the Money Purchase pension and invest that cash into a similar fund in a Stocks & Shares ISA. That way you make that bit of money non-taxable when you eventually decide to withdraw it.

Marcon

NorthernGuy said:

I'm planning to retire several years before I get my state pension.  This has become possible due to an inheritance, that amount being enough to last the intervening years before my state pension is available.  I also have two work pensions, a Final Salary one frozen since that scheme closed over a decade ago, and a Money Purchase one I've been contributing to since.

My work has a pension adviser, a very capable person it seems, who visits every few months and gives private advice sessions.  He suggested that I should draw one of my two work pensions when I retire early, so as to benefit from the tax allowance.  Whichever work pension I might draw would be less than the state pension so less than the personal tax allowance, so I would get it all untaxed.

But early drawing of any pension will reduce the monthly amount, which would otherwise be more if I left it alone and lived off the inheritance capital meanwhile.  So a lesser pension but more inheritance savings remaining, as I'd need less of the latter.

Mulling over his advice since seeing him, I'm a little puzzled why not paying tax on this small pension, if drawn early, is beneficial?  I wouldn't pay tax if just living off the inheritance savings for this period either.

Maybe put the following scenario to the pension adviser (who has the relevant facts, so is better placed to comment than anyone here) to see how that might fit with the plan - there are timing issues which will be immediately obvious to an adviser. The figures can be adjusted to take account of your relevant earnings, the amount of your inheritance etc etc.

It might look complicated on paper, but the concept is straightforward, especially for an experienced and capable adviser. In brief (but he'll get the idea):

• invest £7,500** in each of 3 SIPPs. The SIPP provider(s) will then add basic rate relief, bringing each pot up to £9,375**. This assumes you have sufficient 'relevant earnings' (your inheritance doesn't count as 'relevant earnings') to do this. If not, you might need to scale back the idea and just put your cash into 1 or 2 SIPPs
• withdraw the whole of each pot under the 'small pots' regime. This means you can take 25% tax free from each pot, with tax payable at your marginal rate on the remaining 75% of each pot
• if you take one pot each tax year, that will utilise over £7,000 of your personal allowance, leaving you scope to earn interest on your other savings without having to pay tax on the interest.

**you need to ensure the pot is under £10K at the time you come to draw funds from it, so investing a bit less than £7,800 might make sense

ali_bear

Couple of things for you to check:

The normal retirement age for your frozen final salary pension? You probably don't want to draw it before then

Have you built up the full state pension entitlement?

If you draw income from your money purchase pension before the above two kick in, it is a way of paying less income tax overall, by making use of your tax free allowance in the intervening years. 

Sea_Shell

One aspect to bear on mind is that currently pension pots don't attract inheritance tax, but, this is planned to change in 2027 (I think), unless they change tack.

So there is potentially less benefit to leaving the pension funds untouched, compared to the current rules.

ETA - your annual personal allowance is "use it or lose it", so if you think of all your money as one big pot, then getting potentially taxable money out tax-free...why not?

NorthernGuy

Thanks for the above answers, very informative.  As I'll get a full state pension eventually, you are saying my private pensions will be clobbered for tax as that state one uses up almost all my tax allowance.  So getting some pension out now, untaxed, is a better deal over all.  Ideas of drawing out money purchase pension now and reinvesting in stocks & shares ISA sound complex, is the idea that pension growth is now taxable, unlike ISAs?

In terms of which of the two pensions I draw, would it be wise to draw the deferred Final Salary one, gaining extra protection that way against corporate collapse as those drawing the pension are a priority?  And leave the money purchase one to grow?

As an aside, I have an old AVC fund worth £20k, not growing very fast, and when I enquired no special terms were offered, like being able to draw that as a cash lump sum instead of the one in the Final Salary or Money Purchase schemes.  Would I be better off transferring that into the MP scheme?

Marcon

NorthernGuy said:

In terms of which of the two pensions I draw, would it be wise to draw the deferred Final Salary one, gaining extra protection that way against corporate collapse as those drawing the pension are a priority?  

If the employer suffers an insolvency event and the scheme is accepted into the Pension Protection Fund, you wouldn't get 'extra protection' if you have taken your pension early and not yet reached the scheme's normal retirement age.

NorthernGuy said:

As an aside, I have an old AVC fund worth £20k, not growing very fast, and when I enquired no special terms were offered, like being able to draw that as a cash lump sum instead of the one in the Final Salary or Money Purchase schemes.  Would I be better off transferring that into the MP scheme?

No means of knowing based on the information you've given (ie zero!). Surely this is one for discussion with the pension adviser, who actually has hard facts on which to comment?