To take TFLS maximum now or not?

logies

Retired 6 months - age 60, wife 59. DC pensions not activated.

Overview:
Pension pot £1,100,000
Wife’s pension pot £170,000
Cash £170,000
S&S ISAs £300,000

Main residence current value apx £2.2 million which we would like to live in for another 10-15 years then downsize.

Second home value apx £600,000 (90% in wife’s name, 10% in mine). Property not rented, intention to sell in 2-4 years and gift grown up children proceeds.

Any thoughts as to whether it’s a good idea to take the tax free cash now or leave it invested? I would like to work out how best to drawdown efficiently. Or purchase an annuity for the whole pensions value?

QrizB

There's a case to be made for taking the TFLS from the £1.1M pot, since any further growth will be taxable. Investing the TFLS elsewhere (eg. in ISAs) would probably give a better outcome, unless there's a significant increase in the £268k allowance.

With >£4M in assets, you might like to consider taking professional advice rather than asking a bunch of nobodies on the internet 🙂

MallyGirl

Your numbers are big enough that you may benefit from some professional advice

logies

Thanks both, yes I probably do need to take some
professional advice but that in itself is a minefield - ie where to find a good adviser. In the meantime I’ve found some of the advice on here very helpful. 

leosayer

Agree to take professional advice. 

There are a number of CGT, Higher Rate tax and Inheritance tax considerations there.

First step is to work out what level of income you need / would like in retirement and then estate planning can deal with the residual.

Uriziel

Money is very clearly not an issue for you making tax the real issue. I would take out any money you can tax free and just.. spend it. You have so much money that your children will be very well off one way or another so take that little amount of tax free money and just spend it on a holiday or something that will bring you joy.

MallyGirl

Taking the TFLS gives you the challenge of putting it somewhere if you don't have a use for it. ISA limit, even using both your allowances, would take a few years to house it tax free so you are into the realms of premium bonds (if they float your boat), plus paying CGT on investments and/or income tax on interest

Linton

Do you have a use for approx £200K cash?  Why would you want to withdraw the money?  Where would you put it?  It would take some time to get it squirreled away in a tax protected environment. Unless there are factors you have not mentioned it would be much less hassle and probably more lucrative to leave the money in the pension.

If your DC pensions are not yet activated are you currently a basic rate tax payer?  If so you should drawdown taxable money now up to the top of the basic rate band as you would be a higher rate taxpayer once you start significantly reducing your £1.1M DB pension and reach State Pension Age.

I believe you need a plan showing where the money will be coming from during retirement. That should give an answer as to whether to take the tax free lump sum now. For example you could use your S&S ISAs to generate tax free income.

If you buy an annuity with the pension pot you probably would not want to include the tax free portion. People normally dont as the tax free status would be lost.

ali_bear

For your big DC pot. I would use about half of it to buy an annuity to cover your basic living costs in perpetuity. This will involve taking about half of your TFLS allowance at the same time. Do with this what you will - invest, spend, gift to your children, whatever. 

Use UFPLS to withdraw from the remaining DC pot as and when needed. 

Triumph13

Other than taking enough to use your ISA allowance, it doesn't really make that much difference. Any growth on that 25% is going to be taxable whether you leave it in the pension or invest it in a GIA outside. In the GIA you pay the tax as the income is earned / when you realise gains. In the pension you pay the tax when you take the money out, as you are already going to be over the lifetime limit. GIA may win due to tax rates on dividends being lower.

DRS1

It may be worth splitting off three "small pots" from your main pension pot. HL are well known for allowing that if your current provider doesn't.  The benefit of the small pots rule is that the TFLS from the small pot does not count against the LSA and you are bumping up against that but only marginally.  So the small pots might get you to having a full 25%.

You don't say what income you have and whether you are using the starter rate to cover interest from the cash savings.  That may influence your decision on taking taxable income from the pension.  But you should certainly be using up your personal allowance even if you don't use all or any of the 20% band.