Which wrappers to take income from in retirement

aroominyork

I am trying to work out the most tax-efficient way to draw pension income from SIPPs and ISAs (dividends and interest). Our situation is:

Me: £2k-£5k earned income (might take on more work but unlikely), SP in 2028

OH: £14k in pensions and £6k earned income. 

Our investments/cash are about 50% in SIPPs, 25% in ISAs, 25% unwrapped. We will feed into ISAs (and small amounts into SIPPs) each year. 

Given impending 2027 SIPP/IHT changes and assuming the tax-free lump sum is not abolished, is the best order to:

-          First, take crystallised SIPP income up to my personal allowance until SP kicks in

-          At the same time, use up starter rate for savings from unwrapped cash/bonds, currently £6k

-          Then take from PCLS to reduce chances of it being unused before death

-          When PCLS is exhausted, take from ISA to maintain the maximum total across SIPP and ISA, since 1) SIPP and ISA will be equally subject to IHT after 2027 and 2) if we die before 75, SIPP is taken tax-free by our kids/beneficiaries.

Dazed_and_C0nfused

aroominyork said:

I am trying to work out the most tax-efficient way to draw pension income from SIPPs and ISAs (dividends and interest). Our situation is:

Me: £2k-£5k earned income (might take on more work but unlikely), SP in 2028

OH: £14k in pensions and £6k earned income. 

Our investments/cash are about 50% in SIPPs, 25% in ISAs, 25% unwrapped. We will feed into ISAs (and small amounts into SIPPs) each year. 

Given impending 2027 SIPP/IHT changes and assuming the tax-free lump sum is not abolished, is the best order to:

-          First, take crystallised SIPP income up to my personal allowance until SP kicks in

-          At the same time, use up starter rate for savings from unwrapped cash/bonds, currently £6k

-          Then take from PCLS to reduce chances of it being unused before death

-          When PCLS is exhausted, take from ISA to maintain the maximum total across SIPP and ISA, since 1) SIPP and ISA will be equally subject to IHT after 2027 and 2) if we die before 75, SIPP is taken tax-free by our kids/beneficiaries.

You know you cannot take taxable money from a pension without first taking the relevant TFLS/PCLS?

Assuming the £268k(?) lump sum limit hasn't been reached yet.

aroominyork

Dazed_and_C0nfused said:

aroominyork said:

I am trying to work out the most tax-efficient way to draw pension income from SIPPs and ISAs (dividends and interest). Our situation is:

Me: £2k-£5k earned income (might take on more work but unlikely), SP in 2028

OH: £14k in pensions and £6k earned income. 

Our investments/cash are about 50% in SIPPs, 25% in ISAs, 25% unwrapped. We will feed into ISAs (and small amounts into SIPPs) each year. 

Given impending 2027 SIPP/IHT changes and assuming the tax-free lump sum is not abolished, is the best order to:

-          First, take crystallised SIPP income up to my personal allowance until SP kicks in

-          At the same time, use up starter rate for savings from unwrapped cash/bonds, currently £6k

-          Then take from PCLS to reduce chances of it being unused before death

-          When PCLS is exhausted, take from ISA to maintain the maximum total across SIPP and ISA, since 1) SIPP and ISA will be equally subject to IHT after 2027 and 2) if we die before 75, SIPP is taken tax-free by our kids/beneficiaries.

You know you cannot take taxable money from a pension without first taking the relevant TFLS/PCLS?

Assuming the £268k(?) lump sum limit hasn't been reached yet.

Yes, I do know that but thanks for mentioning it. I took £10k PCLS last week to test the process so I have about £30k crystallised. And I won't reach £268k lump sum (unfortunately!). 

The process I described seems too simple. If you die before 75 (after April 2027), all assets are subject to IHT: ISA, crystallised and uncrystallised (ie no lump sum taken) SIPPs. The legatee can draw from the SIPP tax-free at any age, which suggests it is better for the funds to be in a SIPP to guarantee tax-free growth (they might be able to tax-wrap funds which were in the legator’s ISA but are unwrapped when bequeathed, but leave that point aside). However, if the legator makes withdrawals during their lifetime, they need to draw more funds from the SIPP to allow for tax. Assume the legator has £100k in SIPP and £100k in ISA and needs to draw £17k.

-          £20k from SIPP attracts £3k tax (20% of £15k), leaving £80k. Total SIPP+ISA assets of £180k result in £108k after IHT.

-          £17k from ISA attracts no tax, leaving £83k. Total SIPP+ISA assets of £183k result in £109.8k after IHT. So the ISA wins from an inheritance perspective. 

If you die after 75, all assets are subject to IHT but the legatee now pays tax at their marginal rate on SIPP withdrawals. 

In both cases – assuming tax is always paid at the legatee’s marginal rate with no allowances to use – it seems better for the legator to have drained the SIPP and left the ISA intact. In the pre-75 scenario it is a close call and the benefit of inheriting tax-wrapped assets might swing the decision towards a SIPP, but post-75 it seems a clear cut decision. 

Is this correct? I am trying to fathom how best to divide between SIPP and ISA, assets from which I will take a natural yield (equity and bond Income units) and assets which I intend to leave to grow (Acc units).

tacpot12

Your analysis is correct, and is why I am withdrawing more from my SIPP to pay into my ISA. I currently have all my assets in income producing funds, but once I hit 67 (my state pension age), I will start to buy growth funds in my ISA as I won't need as much income. 

SVaz

You are normally able to get more out by using UFPLS.
If you use £5k as income, you have £7570 spare personal allowance from £12570.

So you take £10,000 as UFPLS ( (£2500 of which is tax free)  so you then have £15000 in untaxed income.

Or,  you crystalise £10k at a time,  have £2500 lump sum and then split/take the remaining £7500  monthly/quarterly etc. 

My Wife uses the latter method,  she takes £1400 lump sum plus £350 a month.  Which uses up her spare personal allowance (as she works for me part time).

aroominyork

aroominyork said:

Dazed_and_C0nfused said:

aroominyork said:

I am trying to work out the most tax-efficient way to draw pension income from SIPPs and ISAs (dividends and interest). Our situation is:

Me: £2k-£5k earned income (might take on more work but unlikely), SP in 2028

OH: £14k in pensions and £6k earned income. 

Our investments/cash are about 50% in SIPPs, 25% in ISAs, 25% unwrapped. We will feed into ISAs (and small amounts into SIPPs) each year. 

Given impending 2027 SIPP/IHT changes and assuming the tax-free lump sum is not abolished, is the best order to:

-          First, take crystallised SIPP income up to my personal allowance until SP kicks in

-          At the same time, use up starter rate for savings from unwrapped cash/bonds, currently £6k

-          Then take from PCLS to reduce chances of it being unused before death

-          When PCLS is exhausted, take from ISA to maintain the maximum total across SIPP and ISA, since 1) SIPP and ISA will be equally subject to IHT after 2027 and 2) if we die before 75, SIPP is taken tax-free by our kids/beneficiaries.

You know you cannot take taxable money from a pension without first taking the relevant TFLS/PCLS?

Assuming the £268k(?) lump sum limit hasn't been reached yet.

Yes, I do know that but thanks for mentioning it. I took £10k PCLS last week to test the process so I have about £30k crystallised. And I won't reach £268k lump sum (unfortunately!). 

The process I described seems too simple. If you die before 75 (after April 2027), all assets are subject to IHT: ISA, crystallised and uncrystallised (ie no lump sum taken) SIPPs. The legatee can draw from the SIPP tax-free at any age, which suggests it is better for the funds to be in a SIPP to guarantee tax-free growth (they might be able to tax-wrap funds which were in the legator’s ISA but are unwrapped when bequeathed, but leave that point aside). However, if the legator makes withdrawals during their lifetime, they need to draw more funds from the SIPP to allow for tax. Assume the legator has £100k in SIPP and £100k in ISA and needs to draw £17k.

-          £20k from SIPP attracts £3k tax (20% of £15k), leaving £80k. Total SIPP+ISA assets of £180k result in £108k after IHT.

-          £17k from ISA attracts no tax, leaving £83k. Total SIPP+ISA assets of £183k result in £109.8k after IHT. So the ISA wins from an inheritance perspective. 

If you die after 75, all assets are subject to IHT but the legatee now pays tax at their marginal rate on SIPP withdrawals. 

In both cases – assuming tax is always paid at the legatee’s marginal rate with no allowances to use – it seems better for the legator to have drained the SIPP and left the ISA intact. In the pre-75 scenario it is a close call and the benefit of inheriting tax-wrapped assets might swing the decision towards a SIPP, but post-75 it seems a clear cut decision. 

Is this correct? I am trying to fathom how best to divide between SIPP and ISA, assets from which I will take a natural yield (equity and bond Income units) and assets which I intend to leave to grow (Acc units).

Even if the calculation was correct, the conclusion I drew was wrong. For a legator who dies under 75, it is better they had taken income from their ISA, not from their SIPP. So I am back to square one (well, maybe square two) in deciding the best way to draw funds during the next decade (I am 64 and OH is 67). 

aroominyork

I am re-opening this thread about tax planning in retirement. My first step is to look at how SIPPs are taxed when first and second spouses die. Is this table correct please?

aroominyork

I’m adding this note in case yesterday’s grid was not clear. My workings are that:

-          the surviving spouse receives the SIPP with no IHT payable

-          the surviving spouse pays income tax on withdrawals from the inherited SIPP if the first spouse died aged 75+

-          IHT is payable on the death of the second spouse

-          legatees pay income tax on withdrawals from the inherited SIPP (both that built up by the second spouse and that inherited by the second spouse from the first spouse) if the second spouse died aged 75+; they pay no income on withdrawals if the second spouse was under 75 irrespective of the age at death of the first spouse.

I would appreciate endorsement/corrections etc.