Balancing pension and S&S ISA

Alexland

El_Torro said:

Fair point from both of you about making more use of the pension now. I don't want to be a 40% taxpayer in retirement, but my pension would need to be worth £2M or more before worrying too much about that I suppose. 

At current ILG yields for £1m a lifetime inflation linked annuity would pay out around £44k pa from age 57 and you could phase it using a fixed term annuity that pays out a bit more until SP age and then (if still in good health) a lifetime annuity that pays a bit less to as you should have the SP income. Overall you would be retiring on an index linked circa £50k pa assuming you have a full SP and that rises with inflation too. So once your pensions get to around £1.3m (in today's money) to include the tax free lump sum you are at risk of paying higher rate tax in retirement.

Of course it depends on how much growth above inflation you get, yields at the time, if tax bands rise with inflation, etc the only thing that seems certain is that the cap on the tax free lump sum is unlikely to increase.

scoobyjones1

If I were you I would definitely use the max ISA allowance from now on until you retire.
When you retire at age 58 you could actually live tax free quite easily....until you get your taxable, state pension of course....that would then put you into the 20% bracket as things stand.

Your pension (you can easily transfer into a different pension) would have to give you flexi access drawdown but then, when retired, you could withdraw the income tax allowance (currently £12,570) plus the 25% tax free allowance on top of that, so I think that gives you at today's money, £16,760 tax free income. Than just sell a few shares in your SandS ISA every year to top up your income to your £36 k. With these numbers that would be approx £20k a year out of the ISA (but it can still grow) and you should have way more than 570k in there by then...more than likely 7-800k if the stock market behaves. That would keep you going nicely, tax free, until you get the state pension (probably at about 70!). 

I would not take the lump sum,,,unless it's for a specific reason (take some out of the ISA if required). It can be better to let the uncrystallised money in your pension grow for as long as possible...then your tax free cash in there increases all the time. Once you draw it, it's crystallised, subject to income tax when you access it...but still investible. Only draw the minimum each month / year from your main pension pot, if I were you.
Again, if the stock market does ok then your main pension will keep going up even when you are drawing down! You should have a lot of money in there by then. Congrats!

You should be able to live very well, for the rest of your life. Enjoy it!!

El_Torro

scoobyjones1 said:

If I were you I would definitely use the max ISA allowance from now on until you retire.
When you retire at age 58 you could actually live tax free quite easily....until you get your taxable, state pension of course....that would then put you into the 20% bracket as things stand.

Your pension (you can easily transfer into a different pension) would have to give you flexi access drawdown but then, when retired, you could withdraw the income tax allowance (currently £12,570) plus the 25% tax free allowance on top of that, so I think that gives you at today's money, £15,712 tax free income. Than just sell a few shares in your SandS ISA every year to top up your income to your £36 k. With these numbers that would be approx £21k a year out of the ISA (but it can still grow) and you should have way more than 570k in there by then...more than likely 7-800k if the stock market behaves. That would keep you going nicely, tax free, until you get the state pension (probably at about 70!). 

I would not take the lump sum,,,unless it's for a specific reason (take some out of the ISA if required). It can be better to let the uncrystallised money in your pension grow for as long as possible...then your tax free cash in there increases all the time. Once you draw it, it's crystallised, subject to income tax when you access it...but still investible. Only draw the minimum each month / year from your main pension pot, if I were you.
Again, if the stock market does ok then your main pension will keep going up even when you are drawing down! You should have a lot of money in there by then. Congrats!

You should be able to live very well, for the rest of your life. Enjoy it!!

With my current plan I would be withdrawing £60k from my pension per year from 58 to 68 and paying £6,486 per year in tax. So a tax rate of 10.81%. Not bad, though as you say if I make more use of my ISA I could get that even lower, potentially 0%. 

If I'm bored one day I might run the numbers a bit more to see what is more beneficial. On the face of it if I go from being a 40% tax payer to a 10.81% tax payer that's already a massive benefit, so leans more towards the pension route.

scoobyjones1

El_Torro said:

scoobyjones1 said:

If I were you I would definitely use the max ISA allowance from now on until you retire.
When you retire at age 58 you could actually live tax free quite easily....until you get your taxable, state pension of course....that would then put you into the 20% bracket as things stand.

Your pension (you can easily transfer into a different pension) would have to give you flexi access drawdown but then, when retired, you could withdraw the income tax allowance (currently £12,570) plus the 25% tax free allowance on top of that, so I think that gives you at today's money, £15,712 tax free income. Than just sell a few shares in your SandS ISA every year to top up your income to your £36 k. With these numbers that would be approx £21k a year out of the ISA (but it can still grow) and you should have way more than 570k in there by then...more than likely 7-800k if the stock market behaves. That would keep you going nicely, tax free, until you get the state pension (probably at about 70!). 

I would not take the lump sum,,,unless it's for a specific reason (take some out of the ISA if required). It can be better to let the uncrystallised money in your pension grow for as long as possible...then your tax free cash in there increases all the time. Once you draw it, it's crystallised, subject to income tax when you access it...but still investible. Only draw the minimum each month / year from your main pension pot, if I were you.
Again, if the stock market does ok then your main pension will keep going up even when you are drawing down! You should have a lot of money in there by then. Congrats!

You should be able to live very well, for the rest of your life. Enjoy it!!

With my current plan I would be withdrawing £60k from my pension per year from 58 to 68 and paying £6,486 per year in tax. So a tax rate of 10.81%. Not bad, though as you say if I make more use of my ISA I could get that even lower, potentially 0%. 

If I'm bored one day I might run the numbers a bit more to see what is more beneficial. On the face of it if I go from being a 40% tax payer to a 10.81% tax payer that's already a massive benefit, so leans more towards the pension route.

Yeah, not bad...but why pay it at all? Surely that's why you have the ISA and the pension, to minimise tax and to live well in retirement?
I was like you, most people...I thought I would take a lump sum, buy an annuity...that's the simplest way but the more you look into it you realise that is not the smartest thing to do. Fine if you just want things to be straightforward I suppose but I'm not a fan of annuities. They stop when you die, right?
I don't know your situation but for me I also have kids / family I can leave the remainder of my SIPP / ISA too...after IHT of course.
You certainly have time, things will likely change in various budgets anyway but you sure have a few options.
Look into the benefits of leaving your main pension pot invested as long as poss...your tax free cash will grow in there...you should get at least some of it out, before you get your state pension and then you get hit more by income tax. However, don't dive in and take money out that could continue to work for you for the rest of your life.
Lot's of good vids on youtube...here's one :
https://www.youtube.com/watch?v=1gTlVRVr8xQ

scoobyjones1

and my numbers were wrong, at today's allowance, £12,570 plus your 25% tax free taken from your SIPP would give you £16,760 tax free...so you would only need to take £20k a year out of your ISA...which will be a lot bigger then and still growing.

Alexland

scoobyjones1 said:

I would not take the lump sum,,,unless it's for a specific reason (take some out of the ISA if required). It can be better to let the uncrystallised money in your pension grow for as long as possible...then your tax free cash in there increases all the time. Once you draw it, it's crystallised, subject to income tax when you access it...but still investible. Only draw the minimum each month / year from your main pension pot, if I were you.

Once you hit the maximum £268,275 lump sum then if it's still in the pension wrapper any further growth on it would be subject to income tax if you later withdrew it. My plan is to withdraw the tax free as fast as I can S&S ISA wrap it and/or pay down any mortgage that I have deliberately not overpaid and run long. With the cap I don't see any benefit in leaving it in the pension.

scoobyjones1 said:

I thought I would take a lump sum, buy an annuity...that's the simplest way but the more you look into it you realise that is not the smartest thing to do. Fine if you just want things to be straightforward I suppose but I'm not a fan of annuities. They stop when you die, right?

You can get fixed term annuities for the early years of retirement and then later buy a lifetime annuity to cover the longevity risk in the final period. Annuity rates are a lot better than they used to be as IL gilt yields have massively improved so you might find you can have a higher income than a drawdown SWR on a traditional 60/40 portfolio especially if you were to retire early and have increased sequence of return risk. I also like the idea of just doing drawdown from a IL gilt ladder which is all an annuity is doing anyway in the early years.
.

scoobyjones1

well yes, I forgot about the cap..but the OP is not at that level yet? He should max that out..get a million into his pension and then see what the rules are...that could all change by then as he is talking 10 years or more I think.
In my plan he would be drawing out over 165k from it, before he gets the state pension...so he may not hit the cap level?

As for your plan to get the tax free element out asap...for every 25k you do get out tax free, then 75k would be subject to income tax when you take it from your SIPP...and you can only put 20k per year into an ISA at the moment. That could easily change soon...may go even lower. I really hope not!
Pay off your mortgage...yes, I paid mine off long ago...makes sense to me.
Annuity...not for me, even if they may be better now. Each to his own of course. The OP may well have the option to take an annuity as well as any combo of the other options.
It will come down to a sliding scale of how much his tax free cash will grow inside the SIPP...up to the cap, vs how much to take from his ISA. Of course the ISA in shares can still grow, tax free as well.
Nice problems to have!!

Personally if I was in his situation I would retire much sooner than 58. I would say 55...or even 50! But of course you have to do all the sums before you do that! 
Live your life while you hopefully have good health and energy.

El_Torro

scoobyjones1 said:

Yeah, not bad...but why pay it at all? Surely that's why you have the ISA and the pension, to minimise tax and to live well in retirement?

Minimising tax is good, though you need to look at it on the way in as well as the way out. 

If I pay 10.81% tax when drawing on my pension as planned then for every £1,000 I salary sacrifice into my pension today I get £891.90 back when retired. 

If I instead take that £1,000 as salary I get £580 in my ISA after paying 40% Income Tax and 2% National Insurance. 

So the pension is the more cost effective option in this scenario. Investment growth is a factor, though since I can access the same investments in my pension as in my ISA we can assume investment growth to be the same.


It's often said on MSE to not let the tax tail wag the dog. It's the net return that matters, not minimising tax.


You may have misunderstood some of my opening post. The idea isn't to take the tax free lump sum at 58. I might take it at 68 but not before. 

Alexland

scoobyjones1 said:

As for your plan to get the tax free element out asap...for every 25k you do get out tax free, then 75k would be subject to income tax when you take it from your SIPP...and you can only put 20k per year into an ISA at the moment. That could easily change soon...may go even lower. I really hope not!

Whenever you take the tax free lump sum it's unavoidable that the rest of the pension will be taxable if it's drawn as income before death. The longer it's left in the pension the more likely it is to hit the cap after which the growth would become taxable if withdrawn. Limitations on the future rate of ISA stuffing even if the £20kpa is unchanged is why I am now running a bigger mortgage than I need so I have something to match it against.

scoobyjones1

El_Torro said:

scoobyjones1 said:

Yeah, not bad...but why pay it at all? Surely that's why you have the ISA and the pension, to minimise tax and to live well in retirement?

Minimising tax is good, though you need to look at it on the way in as well as the way out. 

If I pay 10.81% tax when drawing on my pension as planned then for every £1,000 I salary sacrifice into my pension today I get £891.90 back when retired. 

If I instead take that £1,000 as salary I get £580 in my ISA after paying 40% Income Tax and 2% National Insurance. 

So the pension is the more cost effective option in this scenario. Investment growth is a factor, though since I can access the same investments in my pension as in my ISA we can assume investment growth to be the same.


It's often said on MSE to not let the tax tail wag the dog. It's the net return that matters, not minimising tax.


You may have misunderstood some of my opening post. The idea isn't to take the tax free lump sum at 58. I might take it at 68 but not before. 

Ah, ok. I thought we were just talking about the retirement plan side of things. Only you will know what your salary / sacrifice / pension contribution options are at the moment. 
I see your retirement age is flexible. The sooner the better, IMO!