Question on siphoning from Pension into S&S ISA

nkb21

Wasn't sure if this question should be on here or the Cutting Tax board but opted for this one. Apologies if this wasn't correct.

I’m 58 years old, retired, currently in receipt of a DB pension worth c.£32k p.a gross.  No other regular income at present.  Also have workplace DC pension and SIPP currently worth c.£220k as well as c.£150k in S&S ISA’s.  I’m due full SP of c.£12k p.a in 9 years time.

Wife is 55 years old, self-employed, gross annual income of c.£5k (employment income and share dividends – so paying no income tax). Paying min £3.6k p.a gross into SIPP, currently valued at c.£50k.  She has S&S ISA’s currently valued at c.£120k and is due full SP when she reaches 68.

Our joint current value of pensions, savings and property, indicate we will slightly exceed today’s c.£1m joint IHT thresholds.

With increases to my DB and SP, by the time I reach SP age, I anticipate my gross income (assuming I take the SP as soon as its due) will likely be around the current higher rate income tax bracket.  

To minimise what I’d have to pay 40% income tax on re any withdrawals I take from my WP pension and SIPP from the age of 67, until then (so for the next 9 years) I am considering taking whatever TFC and drawdown withdrawals that I’d pay 20% income tax on from my pensions, and moving this, subject to annual £20k per person limits, into my and my wife’s S&S ISA’s.   

I will look to get some dedicated independent financial advice soon but as members on here are so incredibly knowledgeable and have been so helpful to me in the past, I thought I’d seek opinion here first to see if there’s something glaringly obvious that I’m missing.   

bjorn_toby_wilde

Seems sensible to me. In fact I’ll be doing the same from next year up to the ISA limit.

You can probably hold the same investments in the ISA as you had in the pension if you want to.

Albermarle

Currently unused DC pension pots on death are not included in IHT calculations, but a change to this was announced in the last budget to become law in 2027. However the exact way it will work is still not known/under consultation. 
Apart from that taking out taxable income from a DC scheme at 20% , to avoid paying 40% later, would seem sensible. However you would have to take a corresponding amount of TFC at the same time, which could have been used later when you were a 40% taxpayer.

Wife is 55 years old, self-employed, gross annual income of c.£5k (employment income and share dividends – so paying no income tax). Paying min £3.6k p.a gross into SIPP,

How much income tax you pay, is unrelated to how much pension tax relief you can get.
If your wife earns more than £3.6K ( dividend income does not count) she could pay that amount into a pension gross

leosayer

Sounds like a good plan to me - it's what I am doing.

One thing to note is that if you make charitable donations then you can claim higher rate tax relief on these so you could effectively extended your basic rate tax threshold by the amount you donate after gift aid.

Yorkie1

If your wife is already 55 years old, her state pension age is also likely to be 67, not 68 (under current rules).

Dazed_and_C0nfused

Wife is 55 years old, self-employed, gross annual income of c.£5k (employment income and share dividends – so paying no income tax). Paying min £3.6k p.a gross into SIPP, currently valued at c.£50k. She has S&S ISA’s currently valued at c.£120k and is due full SP when she reaches 68

Is there a typo there?  If not what is expected self employment profit?

Are you confusing the non earners limit of £3,600 with what you wife may be able to contribute if her earnings/profit for pension purposes exceed £3,600?

nkb21

Thanks for your comments.

Albermarle/Dazed_and_Confused – Wife is self-employed with profits of less than £3k p.a.  The rest of her annual income is via share dividends. 

Albermarle – Not sure I understand your point re having “to take a corresponding amount of TFC”.  Are you saying I am obliged or sensible to take TFC as part of any withdrawals (if I hadn’t already taken any TFC)?  Can you clarify for me please?

Yorkie1 – Apologies, you’re spot on.

One potential downside I’ve just thought of with my siphoning approach would be if I died before 75.  If I did, I think I’m right in saying that my DC pension pot would pass to my wife tax free?  If so, she’ll effectively have lost out to the tune of the value of the 20% tax I’d have paid out on any withdrawals I’d made up until that point (noting that I'd hope she'd feel the loss of me, a tad more important!!).

On that note further, if I did die before 75 and I hadn’t taken any TFC from my DC pots, would that entitlement (to take 25% TFC from my DC pots), be inherited by her too, before she had to pay tax on any other withdrawals from them?  At that point, having inherited 50% of my DB pension on my death, her annual income would immediately be over the personal tax allowance.  

Dazed_and_C0nfused

Unless you have no TFLS allowance left you cannot take taxable income out of your DC pension without taking the relevant TFLS.

You can take the TFLS first, crystallizing the 75% taxable element to be taken at a later date (and whatever growth that 75% has will all be taxable).

Or you could take the TFLS at the same time as the taxable element.

What you can't do is take taxable income and leave the 25% TFLS associated with it in the pension.

Roger175

Having been part-time retired for two years and now fully retired (current age 61), I have started taking the max out of my pension to mop-up the personal allowance. I do this using UFPLS by taking £16,760 (= no tax to pay).
But with the inevitable (?) inheritance tax changes, I'm thinking I might be better taking more and paying the 20% tax. This is obviously preferable to the possibility of 40% tax once SP kicks in, but more importantly it will be hugely better than if I die with a large pension surplus, all subject to IHT and leaving it to my children who might well have to pay HR tax on the money. I'm considering gifting out of surplus income to avoid this.

In conclusion, I think your plan is very sensible and arguably you should take more than just £20k to fill the S&S ISA.