Should I take extra out of my pension in early retirement and pay into S&S ISA?

GenX0212

A question raised on another of my threads got me thinking about the implications if my pension started to drift into higher rate tax.

Planning to retire at 57 my target income is around £48k after tax. This is made up from £14k DB benefits plus UFPLS of roughly £41k from my DC pots. At this stage I could increase my DC withdrawals to about £49k before 40% tax starts to kick in.

It's different though when I get to SP age when I have £14k DB + £12k SP and only need £29k from the DC pots. At this stage because there is less tax free cash in the mix then I can only increase my DC withdrawals to about £33k before 40% tax starts to kick in. That's not a lot of headroom if I need to take more due to inflation or if the fiscal drag on tax allowances continues further.

So my question is: Does it make sense to plan to take the max £49k during early retirement and pay the difference into a Stocks&Shares ISA and maximise the use of the 20% allowance available now in order to reduce the risk of having to pay 40% rate later?

Hope the question/example makes sense.

MallyGirl

It is what I will be doing - drawing down the max I can to stay in 20% tax bracket and putting what I don't need in my S&S ISA

leosayer

I think the it does make sense to "fill your tax bracket" and I'm doing the same. Your investments could grow to extent that you'll need to pay the higher rate of tax to draw them down, particularly with the ongoing freeze of income tax thresholds.

I can only think of 2 scenarios where you may experience future regret if you do so:

1. The government reduces the basic rate of tax %
2. You want to use your DC pot to purchase an annuity but you have drained it too far to do what you need

Albermarle

leosayer said:

I think the it does make sense to "fill your tax bracket" and I'm doing the same. Your investments could grow to extent that you'll need to pay the higher rate of tax to draw them down, particularly with the ongoing freeze of income tax thresholds.

I can only think of 2 scenarios where you may experience future regret if you do so:

1. The government reduces the basic rate of tax %
2. You want to use your DC pot to purchase an annuity but you have drained it too far to do what you need

A third scenario is that if you die before 75, your beneficiaries can withdraw the pension tax free. So you will have paid income tax on withdrawals unnecessarily. However you will be dead so beyond caring and/ or that legislation may get changed at some point

GenX0212

Albermarle said:

leosayer said:

I think the it does make sense to "fill your tax bracket" and I'm doing the same. Your investments could grow to extent that you'll need to pay the higher rate of tax to draw them down, particularly with the ongoing freeze of income tax thresholds.

I can only think of 2 scenarios where you may experience future regret if you do so:

1. The government reduces the basic rate of tax %
2. You want to use your DC pot to purchase an annuity but you have drained it too far to do what you need

A third scenario is that if you die before 75, your beneficiaries can withdraw the pension tax free. So you will have paid income tax on withdrawals unnecessarily. However you will be dead so beyond caring and/ or that legislation may get changed at some point

Oh, I'm definitely planning on spending everything before I die 

leosayer

Incidentally, I'm having a lot of trouble explaining this concept to a friend who has a large SIPP, various DB pensions that pay £20k pa in total and a small ISA.

In the end I think he gets that all he is doing is shifting money from a taxable pot to a non-taxable pot. 

Johnnyboy11

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

Smudgeismydog

MallyGirl said:

It is what I will be doing - drawing down the max I can to stay in 20% tax bracket and putting what I don't need in my S&S ISA

Me too 🙋🏻‍♀️

Pat38493

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

Dazed_and_C0nfused

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

Pat38493

Dazed_and_C0nfused said:

Pat38493 said:

Johnnyboy11 said:

You could recycle £2880 (net) back into your pension each year to increase your higher rate income tax threshold. Every little helps.

I was meaning to check this - so this works does it?  I have a DB pension paying about £14K.  Are you saying that if I pay £2880 into a DC pension, I can withdraw £39150 from a DC pension and only pay 20% tax?  Isn't that double counting because I will already receive 20% tax relief back to the SIPP from HMRC?

You could take more than that, you seem to be forgetting that a net contribution of £2,880 into a pension using the relief at source pension method becomes £3,600 with the basic rate tax relief added.

This £3,600 increases your basic rate band from £37,700 to £41,300.

OK - so I just need to tell HMRC that I made the contribution and they will adjust my tax codes?

But there are no HMRC tax codes that “increases the basic rate band”?  The numbers in HMRC tax codes are the tax free amount as far as I know?

Are you saying that if I made a £2880 contribution to a pension and (for example) I have DB pension income of £16170 I won’t pay any tax if I don’t make any DC withdrawals, or do you literally mean that the £12570 says the same but the top end of the basic rate band goes up?