Frozen tax thresholds – should I over-withdraw from my pension at 40% now to fill our ISAs?

JamTomorrow

With the freezing of tax thresholds and potential that this will continue beyond 2028 I expect that at some point in the future that in order to meet my target income in retirement I will need to withdraw from my pension at a level that will incur the higher rate of tax at 40%.  Previously I had always assumed I would be able to get money out of my pension without ever drifting into the 40% rate.

Assuming that will happen but I have unfunded ISA each year in retirement for me and my Wife, then is there an argument to say I should withdraw more than I need each year as long as that withdrawal (taxed at 40%) is to be invested in our ISAs?  That would give me freedom to access more tax free cash if needed for emergencies and logically would make sense if on average I only expect my marginal tax rate to increase over time.  The alternative would be to just withdraw from my pension what I need, when I need it.

I am wondering if anyone is in a similar position and put some thought to this that they could share.

Time2Go_25

and if in 4 years time there is a new government and they increase the tax thresholds, you will have paid 40% unnecessarily.

MallyGirl

I intend to withdraw just up to the 40% threshold even though I don't need quite that much so will add the excess to my ISA. I wouldn't unnecessarily pay 40% now when the rules could change in the future 

DRS1

Well I can imagine a scenario where it might make sense - eg if you knew that the 40% band was going to be taxed at 45% in the future.  But that would be acting on speculation (not recommended).  And doing it now exchanges the possibility of 40% tax for the certainty of 40% tax.  So I wouldn't do it if I were you.

greatkingrat

DRS1 said:

Well I can imagine a scenario where it might make sense - eg if you knew that the 40% band was going to be taxed at 45% in the future.  But that would be acting on speculation (not recommended).  And doing it now exchanges the possibility of 40% tax for the certainty of 40% tax.  So I wouldn't do it if I were you.

Although on the other hand there is the potential growth to consider.

Take £10k now, pay £4k tax, stick rest in ISA, all growth tax-free
or leave in pension, it grows to say £12k, then you pay £4.8k tax to get it out.

DRS1

greatkingrat said:

DRS1 said:

Well I can imagine a scenario where it might make sense - eg if you knew that the 40% band was going to be taxed at 45% in the future.  But that would be acting on speculation (not recommended).  And doing it now exchanges the possibility of 40% tax for the certainty of 40% tax.  So I wouldn't do it if I were you.

Although on the other hand there is the potential growth to consider.

Take £10k now, pay £4k tax, stick rest in ISA, all growth tax-free
or leave in pension, it grows to say £12k, then you pay £4.8k tax to get it out.

Or maybe £2.4k tax or maybe a melded rate if you cross the threshold.  The point is you don't know now what the tax will be by the time you actually draw it out.

Martico

greatkingrat said:

DRS1 said:

Well I can imagine a scenario where it might make sense - eg if you knew that the 40% band was going to be taxed at 45% in the future.  But that would be acting on speculation (not recommended).  And doing it now exchanges the possibility of 40% tax for the certainty of 40% tax.  So I wouldn't do it if I were you.

Although on the other hand there is the potential growth to consider.

Take £10k now, pay £4k tax, stick rest in ISA, all growth tax-free
or leave in pension, it grows to say £12k, then you pay £4.8k tax to get it out.

In both scenarios you end up keeping 7.2K, so no difference to you personally

leosayer

Aside from making guesses about future income tax rates, I can't see this making sense unless your non-pensions savings are too small to allow for the kind of emergencies that would require you to draw more than £100k of income per year and be impacted by the personal allowance taper.

Once you have used the basic rate tax bracket, you can currently draw £49,730 gross from a pension at 40% the higher rate before the taper kicks in. This will leave you with £29,838 net which is quite a lot of money for emergencies.

born_again

JamTomorrow said:

With the freezing of tax thresholds and potential that this will continue beyond 2028 I expect that at some point in the future that in order to meet my target income in retirement I will need to withdraw from my pension at a level that will incur the higher rate of tax at 40%.  Previously I had always assumed I would be able to get money out of my pension without ever drifting into the 40% rate.

Assuming that will happen but I have unfunded ISA each year in retirement for me and my Wife, then is there an argument to say I should withdraw more than I need each year as long as that withdrawal (taxed at 40%) is to be invested in our ISAs?  That would give me freedom to access more tax free cash if needed for emergencies and logically would make sense if on average I only expect my marginal tax rate to increase over time.  The alternative would be to just withdraw from my pension what I need, when I need it.

I am wondering if anyone is in a similar position and put some thought to this that they could share.

To throw a spanner in the works. If you started the process now, & Annual ISA levels were reduced. Where would that leave you.

So many leaks & a good comment today. That chancellors have been forced to resign over single leaks in the past. Yet this year we seems to have more than Thames Water do.
It's like a consultation process this year 🤣

fizio

I did a thread a couple of weeks ago asking the same question and am going to withdraw from sipp to put into isa which will def get me into 40%

Though will leave till after the budget 

jim8888

I've been thinking about this too, withdrawing from my SIPP at 40% tax to fill ISA allowances going forward. The alternative seems to be not touching it and then my family paying the 40% inheritance tax on the SIPP further down the line (a lot further, I hope!) Of course I could always withdraw £40k a year and spend it, so maybe parking it in an ISA while I learn how to spend money is a potential compromise.