strategy for withdrawing pension / reinvesting

TJ666

I'm in the early stages of early retirement with my husband (ages 56, 57).  At age 67 we will get the full SP plus about £2k p.a. DB pensions.  I have a £940k DC pension, mostly in a SIPP, plus a £690 k ISA pot and about £160k in a GIA.  My husband has a £1,280k SIPP, so he would have breached the old lifetime allowance threshold, plus £500k ISA pot and £83k GIA.

We have no kids,so apart from leaving money to each other have no IHT concerns. I am expecting a long life, but not sure about the husband (no blood relatives).
We are free to optimise our withdrawal strategy, our base level spending is low, ie. we could live on our SP if needed.

My question is regarding the strategy for withdrawing money. After you have used up your tax free allowances (income, dividends, CGT, yearly ISA), is it  worth withdrawing money from a SIPP to maximise the 20% tax band, purely to put the money in a GIA ?   I wonder if we withdraw very little from our pensions in our early years, we will end up paying 40% income tax from pension withdrawals in later years, so we might be better off paying the dividend tax (8.75%) and CGT on a GIA instead ?  

Is there ever an advantage of letting your money grow OUTSIDE of a pension, rather than inside to avoid a higher tax band ?  Or is the CGT outside of a pension / ISA always a killer, even if invested in income bearing investments in a GIA ?
Obviously tax rules will change, but I can't imagine tax thresholds or rates will be loosened anytime soon, so we might find ourselves in a 40% tax band in a few years time if fiscal drag continues.
Thanks in advance for your thoughts

ali_bear

With that much pensions and savings many on here would recommend you take professional advice. 

I think you will both just get away with a pension income without paying 40% tax, but you may end up paying some. You should probably both be making full use of the 20% income tax band every year. But do some planning of your own, or better still consult an IFA. 

Enjoy your retirements 

kempiejon

Is there ever an advantage of letting your money grow OUTSIDE of a pension, rather than inside to avoid a higher tax band ?
perhaps, might be time to make a spreadsheet.
If one has plenty of taxable income then shuffling cash from pension, to ISA, GIA, gold sovereigns and gilts particularly if one might move to 40% income tax at state pension age using UFPLSs up to that level might get more of the pension extracted tax free over those earlier years. There's also £2880 back into a SIPP
Dividend tax at 8.75% isn't the most onerous tax rate, long may it continue but reading the mood music I'm not sure if it's time to be optimistic.
In GIA one should do some unsheltered equity manipulation to harvest and reset capital gains every year.

Linton

The strategy I use which could well make sense for you is to withdraw from the SIPPs up to the basic rate limit each year and put the money into income generating funds in S&S ISAs.  The income can be automatically moved into your current accounts.  This will give you ongoing tax free income hence providing more flexibility with accessing the SIPPs at basic rate tax. Holding cash in ISAs whilst investments are held in GIAs with the resultant  CGT and admin hassle seems a real waste of tax reduction opportunities to me.

What are you going to do with the amount of money invested?  With low living costs and no obvious beneficiaries  you risk dying leaving most of your hard-earned savings untouched.  Under those circumstances does it really matter whether you pay higher rate tax or not?

 I would agree that talking to an IFA could be useful but you need to have clear objectives before doing so.

NoMore

Linton said:

What are you going to do with the amount of money invested?  With low living costs and no obvious beneficiaries  you risk dying leaving most of your hard-earned savings untouched.  Under those circumstances does it really matter whether you pay higher rate tax or not?

I agree with this, maybe you should think about spending some of it, instead of keeping accumulating it. 

kempiejon

In the early stages of retirement following decades of delayed gratification, frugal living and intense accumulation spending is a tricky thing to do learn how to do. It's the antithesis of how we got here.
Getting a handle on how much your total wealth grows year on year can offer a pointer as how much more money can be de-accumulated, indulging ourselves perhaps to friends and family or preferred not for profits.

Albermarle

NoMore said:

Linton said:

What are you going to do with the amount of money invested?  With low living costs and no obvious beneficiaries  you risk dying leaving most of your hard-earned savings untouched.  Under those circumstances does it really matter whether you pay higher rate tax or not?

I agree with this, maybe you should think about spending some of it, instead of keeping accumulating it. 

I think the OP is similar to many contributors to this forum, who have built up more assets than they are ever likely to spend .

However with £3.5 Million + state pensions and 'our base level spending is low, ie. we could live on our SP if needed' they have taken this to a much more extreme level than we normally see.

DRS1

Maybe set yourselves the target of spending everything you have in your GIAs over the next 12 months.  Income from GIAs is taxable while income in the ISA or the SIPP is not.  Capital Gains Tax is going to bite into more of your gains than it would have done 3 or 4 years ago.

Then do what @Linton suggests drawing from the SIPPs to top up the ISAs and spend the rest of the draw.  EG if you have no other income draw £50k put £20k in the ISA pay maybe £10k in tax (it'll be less as I have ignored TFC and personal allowances) and spend the other £20+k.   At that rate your SIPP will last 19 years if it doesn't grow or reduce thanks to investment returns.

You say you are at the early stages of early retirement.  Have you a plan for what you will do and have you costed that out?  Maybe the SP won't cover those plans?  You might want to buy an ocean going yacht and sail the seven seas for example.

If you really have no family that might inherit when you both die then you should know that it is possible to nominate charities as beneficiaries under the SIPPs

Triumph13

Given that your big problems seem to be around allowing yourself to spend money, would you find that easier if you used the DC pensions to buy annuities?  You'd be looking at >£5k a month after tax, rising nearly £7k once state pensions are online.  You'd only need a fraction of the tax free cash to fill in for the gap until state pension.  That would be a guaranteed income turns up every month, requires no thought and it might be easier to convince yourselves it should be spent.

I have no suggestions for the other nearly £2M.

poseidon1

Seems you and your husband are lifetime capital builders/accumulators with no particular end objective or bucket list of spending in mind. 

This habit  is now  so engrained that even in retirement the advice you seek is to how to accumulate even more, tax efficiently.

Unlike others who have suggested seeing an IFA, if your current objective is tax free  or low tax capital accumulation, I would suggest consult a wealth manager authorised to invest direct in stock market securities and establish a portfolio of low coupon UK government gilts for relatively risk free capital gains. 

From my perspective the paltry £3000 annual CGT exemption ( a 75% reduction compared to 2022/23) has rendered building capital gains via a GIA unappealing.

With no family to worry about, you both have enviably freedom of choice in what kind of retirement you can enjoy, but seem ( at the moment ) to choose an extremely modest lifestyle if your future state pensions alone would support your current spending requirements.

My own interests run to art and antiques, and the financial freedom to now scratch that itch has been liberating. Hopefully you both will discover your respective avenues to chip away at your ever accumulating wealth.

sgx2000

Omg... just pay for pro advice