Newbie question - Tax efficient Drawdown

HibbyAndrew

kempiejon said:

Congrats on getting out ahead of the norm. Looking at the numbers and shelters I think, like @p00hsticks, the tax efficient method is preserve as much pensions tax free allowance; hopefully pensions will continue to grow for decades. One could max UFPLS his and hers each year to use personal allowance, draw from £300k savings/ISA/shares pot if needed. However this is limiting the available income to stay within tax allowances.

With 6 DC pensions I'd cast an eye over charges, flexiblity etc. I colleced 4 personal pensions into one SIPP and saved a meaninful amount over my expected timeframe.

Thanks. That makes perfect sense

HibbyAndrew

Plus once you start withdrawing taxable income from them, it can really confuse HMRC when you have multiple income streams, especially if they are irregular.
Worth noting also that consolidating pension pots after the tax fee cash has been taken is more complicated than doing it before.

Undeerstood. It makes sense

HibbyAndrew

Marcon said:

Why take more tax free cash than you need out of tax-favoured environment and put it in a 'fully taxable' destination? Phased drawdown might make more sense, unless you are especially keen on the simplicity of taking the £75K in one go.

Thanks. Understood. Glad I asked my Question as I now have a better understanding

HibbyAndrew

Have you drawn up a fully costed budget i.e. including how you'd like to spend your retirement time. As matters stand with personal tax allowances frozen (until April 2028).  Your household income will be £104 per week.  

Hi , Thanks for the reply. I'm trying to do a lot of research but this is new to me.

I'm interested. Hofw do you reach the £104 figure?

HibbyAndrew

dunstonh said:

Newbie Question - Are there any reasons why I would not take a 25% Tax free Lump Sum from Pension A immediately?

Yes.   Typically not taking it up front is more tax efficient.  However, it depends on what you do with the tax free cash.   Also some people just take the TFC and dump it in a savings account rather than leave it invested.
Thanks - The plan was to split it between annual expenditure and lump the rest into a Stocks & shares ISA

Year 1 - My intention would be to withdraw the £75k, Put £40k (2x£20k) into me and my wifes ISA then use the rest to partially fund our years expenditure

Year 2 - Repeat with pension E

That is wasteful.  You have personal allowances use to use up first and you should do that with the taxable element of the pension.  Not the tax free element.
Understood. Thanks

Upto age 74, you really don't want to take the TFC unless there is a justified reason for doing so.  Moving it into S&S ISAs can be a good reason (especially as you get closer to 75) but with no justifiable reason for doing so, you would take as little as required.    
e.g. £16,760 drawn out under UFPLS would be free of tax.  75% =  personal allowance and 25% is tax free cash.  Between you that is £33,520.  Then use your cash savings to utilise the £3600 contribution a year each.
So you would recommend still continuing to ontribute into the pension? I had considered that but didnt really see the advantage ? Is it purely the uplift provided by HMRC?

Me - DC Pension A - £300k
Me - DC Pension B - £120k
Wife - DC Pension C - £75k
Wife - DC Pension D - £25k
Wife - DC Pension E - £180k
Wife - DC Pension F - £35k
Wife - DB Pension G - £4.5k annually after 65
Savings/ISA/Shares - £300k

Some consolidation may be a good idea.
Agreed. On the 'to do ' list

molerat

So you would recommend still continuing to ontribute into the pension? I had considered that but didnt really see the advantage ? Is it purely the uplift provided by HMRC?

The advantage is that you can pay in £2880 this year, either from savings or if you think the annual £16760 is too much then from that, and draw £3600 next year as part of your normal annual withdrawal completely tax free.  What is there not to like about 25% uplift tax free !

HibbyAndrew

molerat said:

So you would recommend still continuing to ontribute into the pension? I had considered that but didnt really see the advantage ? Is it purely the uplift provided by HMRC?

The advantage is that you can pay in £2880 this year, either from savings or if you think the annual £16760 is too much then from that, and draw £3600 next year as part of your normal annual withdrawal completely tax free.  What is there not to like about 25% uplift tax free !

Hi Molerat, thanks - yes - I appreciated the uplift, but thought that the tax when taking it out would effectively minimise the uplift and therefore wouldnt make it worthwhile?

molerat

You take it out as part of your normal annual draw so there is no tax, it just keeps more money in the tax efficient pension.  You could always put £2880 into an ISA - which do you think will give the better return ?   Even if you do pay basic rate tax the uplift is still £180, 6.25%.  £2880 into a S&S ISA gives you £2880 + investment returns, £2880 into a pension and withdrawn at basic rate tax gives you £3060 + 85% of the investment returns.

HibbyAndrew

molerat said:

You take it out as part of your normal annual draw so there is no tax, it just keeps more money in the tax efficient pension.  You could always put £2880 into an ISA - which do you think will give the better return ?   Even if you do pay basic rate tax the uplift is still £180, 6.25%.  £2880 into a S&S ISA gives you £2880 + investment returns, £2880 into a pension and withdrawn at basic rate tax gives you £3060 + 85% of the investment returns.

Perfect explanation. Understood now.  Many thanks

Albermarle

HibbyAndrew said:

molerat said:

So you would recommend still continuing to ontribute into the pension? I had considered that but didnt really see the advantage ? Is it purely the uplift provided by HMRC?

The advantage is that you can pay in £2880 this year, either from savings or if you think the annual £16760 is too much then from that, and draw £3600 next year as part of your normal annual withdrawal completely tax free.  What is there not to like about 25% uplift tax free !

Hi Molerat, thanks - yes - I appreciated the uplift, but thought that the tax when taking it out would effectively minimise the uplift and therefore wouldnt make it worthwhile?

If you do not have to pay tax on the 75% that is taxable ( because your taxable income is below your personal allowance) then you gain the full £720 of tax relief added.
If you do have to pay tax on the 75% then the gain is only £180.
For many people the perceived hassle of opening a pension, adding to it, withdrawing from it and maybe having to claim a tax refund( because the pension provider will often take too much tax off as they do not have the right tax code) would make it not worthwhile. 
However if you have a pension already and are withdrawing from it already, then there is no extra work for the £180.