Reducing window to draw pension income at basic rate

Qyburn

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

zagfles

Qyburn said:

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

The state pension is not increasing much in real terms. The main issue is the 40% threshold is reducing in real terms, so to maintain the 2021 net equivalent of around £50k in real terms you'd need to draw more from the DC because you're getting taxed at 40% on more and more of it. So it's not a "good thing". 

zagfles

Alexland said:

Thanks, no terror, but you guys have confirmed I'm probably not missing anything.

Agree it's a first world problem. If I reduce my contributions to only enough to get employer matching then with 2% growth above inflation (and half my pensions are now in IL gilts delivering that) then the 25% £268k cap at pension access ages will apply.

So additional contributions are only offering a 2% NI saving, until that's capped in a few years, which is not really enough compensation for the risk of adverse future pension policy changes. The £2k cap is so low even some of my contributions to get matching will be subject to NI.

End of an era of me pension stuffing sadly. I had hoped for a few more years.

You could get 8% NI relief on a lot of it by making lumpy sal sac conts 

BikingBud

zagfles said:

Qyburn said:

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

The state pension is not increasing much in real terms. The main issue is the 40% threshold is reducing in real terms, so to maintain the 2021 net equivalent of around £50k in real terms you'd need to draw more from the DC because you're getting taxed at 40% on more and more of it. So it's not a "good thing". 

My reckoning is that for £50270 from 2021 you now need to pull approximately £63k for the same spend. How is that managed within the SWR calculations, especially if growth is also poor?

I have a column for HR threshold in my spreadsheet that I was aiming to stay below as I draw from a DC pension but as it has frozen for another 3 years my headroom later in the model has been squeezed.

Given everything else going on I will likely go sooner rather than later as I value my free time more than working to see so much taken in tax.

Pat38493

In the end it’s still better to a bit of tax on dividends or capital gains in a GIA, than to end up paying 40% on withdrawals from pension for the same spending requirement.

I am still not seeing a better option for me than just pulling money out up to the 20% band as much as possible every year.

The bigger decision now with these factors is how much risk I dare to carry outside of the pension wrappers.  At the moment I have roughly similar asset mixes inside and outside the pension.  I am quite tempted to carry more risk outside the pension in equities and keep my cash buffers mainly in the pension.  Also looking at carrying some value / dividend equity investments which should be less volatile but still significantly better average gains than cash.

I am not remotely surprised by the extension to the freezing of tax bands - I was more surprised that they didn’t do it already last year.  However if things carry on like this, I think they will be forced to look at the jump from 20% to 40% and introduce some kind of intermediate tax rate, otherwise it will end up with people on median wage paying 40% tax.

zagfles

BikingBud said:

zagfles said:

Qyburn said:

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

The state pension is not increasing much in real terms. The main issue is the 40% threshold is reducing in real terms, so to maintain the 2021 net equivalent of around £50k in real terms you'd need to draw more from the DC because you're getting taxed at 40% on more and more of it. So it's not a "good thing". 

My reckoning is that for £50270 from 2021 you now need to pull approximately £63k for the same spend. How is that managed within the SWR calculations, especially if growth is also poor?

I have a column for HR threshold in my spreadsheet that I was aiming to stay below as I draw from a DC pension but as it has frozen for another 3 years my headroom later in the model has been squeezed.

Given everything else going on I will likely go sooner rather than later as I value my free time more than working to see so much taken in tax.

I make it a bit less. 

State pension in 2021 was £9339pa, in 2026 £12548.

CPI inflation over 5 years (Sept 2020 to Sept 2025) was 27.7%

So in 2021 if you got the full NSP and drew up to the HRT you'd draw £40931 and get a net income of £42730. 

In 2026 if you did the same you'd only need to draw £37722 for the same £42730 net. However that's a 22% drop in real net income. 

If you wanted the real terms equivalent of your 2021 net income, then you'd need £54566 net. To get that additional £11836 you'd need to draw an additional £19727, ie a total DD of £57449. 

So your drawdown in 2026 would have to increase by around 40% over the 2021 drawdown to get the same net income, in real terms around 10% 

So despite the state pension increasing in real terms, fiscal drag is much more significant and overall both together are effectively a 10% hit on your pension pot. And that's only the first 5 years of the freeze. 

GenX0212

zagfles said:

BikingBud said:

zagfles said:

Qyburn said:

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

The state pension is not increasing much in real terms. The main issue is the 40% threshold is reducing in real terms, so to maintain the 2021 net equivalent of around £50k in real terms you'd need to draw more from the DC because you're getting taxed at 40% on more and more of it. So it's not a "good thing". 

My reckoning is that for £50270 from 2021 you now need to pull approximately £63k for the same spend. How is that managed within the SWR calculations, especially if growth is also poor?

I have a column for HR threshold in my spreadsheet that I was aiming to stay below as I draw from a DC pension but as it has frozen for another 3 years my headroom later in the model has been squeezed.

Given everything else going on I will likely go sooner rather than later as I value my free time more than working to see so much taken in tax.

I make it a bit less. 

State pension in 2021 was £9339pa, in 2026 £12548.

CPI inflation over 5 years (Sept 2020 to Sept 2025) was 27.7%

So in 2021 if you got the full NSP and drew up to the HRT you'd draw £40931 and get a net income of £42730. 

In 2026 if you did the same you'd only need to draw £37722 for the same £42730 net. However that's a 22% drop in real net income. 

If you wanted the real terms equivalent of your 2021 net income, then you'd need £54566 net. To get that additional £11836 you'd need to draw an additional £19727, ie a total DD of £57449. 

So your drawdown in 2026 would have to increase by around 40% over the 2021 drawdown to get the same net income, in real terms around 10% 

So despite the state pension increasing in real terms, fiscal drag is much more significant and overall both together are effectively a 10% hit on your pension pot. And that's only the first 5 years of the freeze. 

It's eye opening when looked at in those terms. I think it increases the need to think about pulling the max out of your SIPP at basic rate each year and push any unspent monies into a S&S ISA each year, especially if you are a couple with one person having a significantly larger pot than the other as you can then 'protect' up to £40k a year between you.

Qyburn

zagfles said:

Qyburn said:

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

The state pension is not increasing much in real terms. The main issue is the 40% threshold is reducing in real terms, so to maintain the 2021 net equivalent of around £50k in real terms you'd need to draw more from the DC because you're getting taxed at 40% on more and more of it. So it's not a "good thing". 

So you'd rather your State Pension didn't increase? Each to his own I guess.

zagfles

Qyburn said:

zagfles said:

Qyburn said:

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

The state pension is not increasing much in real terms. The main issue is the 40% threshold is reducing in real terms, so to maintain the 2021 net equivalent of around £50k in real terms you'd need to draw more from the DC because you're getting taxed at 40% on more and more of it. So it's not a "good thing". 

So you'd rather your State Pension didn't increase? Each to his own I guess.

Seem to be a lot of strawmen in this thread. Each to their own I guess.

zagfles

GenX0212 said:

zagfles said:

BikingBud said:

zagfles said:

Qyburn said:

OP was complaining that the increase in State Pension was preventing him drawing more from his DC pension. I'd look at it the other way, an increase in SP means I don't need to draw so much from DC. Which is a good thing.

The state pension is not increasing much in real terms. The main issue is the 40% threshold is reducing in real terms, so to maintain the 2021 net equivalent of around £50k in real terms you'd need to draw more from the DC because you're getting taxed at 40% on more and more of it. So it's not a "good thing". 

My reckoning is that for £50270 from 2021 you now need to pull approximately £63k for the same spend. How is that managed within the SWR calculations, especially if growth is also poor?

I have a column for HR threshold in my spreadsheet that I was aiming to stay below as I draw from a DC pension but as it has frozen for another 3 years my headroom later in the model has been squeezed.

Given everything else going on I will likely go sooner rather than later as I value my free time more than working to see so much taken in tax.

I make it a bit less. 

State pension in 2021 was £9339pa, in 2026 £12548.

CPI inflation over 5 years (Sept 2020 to Sept 2025) was 27.7%

So in 2021 if you got the full NSP and drew up to the HRT you'd draw £40931 and get a net income of £42730. 

In 2026 if you did the same you'd only need to draw £37722 for the same £42730 net. However that's a 22% drop in real net income. 

If you wanted the real terms equivalent of your 2021 net income, then you'd need £54566 net. To get that additional £11836 you'd need to draw an additional £19727, ie a total DD of £57449. 

So your drawdown in 2026 would have to increase by around 40% over the 2021 drawdown to get the same net income, in real terms around 10% 

So despite the state pension increasing in real terms, fiscal drag is much more significant and overall both together are effectively a 10% hit on your pension pot. And that's only the first 5 years of the freeze. 

It's eye opening when looked at in those terms. I think it increases the need to think about pulling the max out of your SIPP at basic rate each year and push any unspent monies into a S&S ISA each year, especially if you are a couple with one person having a significantly larger pot than the other as you can then 'protect' up to £40k a year between you.

Yup would make sense to try to use the basic rate band even if you don't need it all now, as it's shrinking in real terms.