Funding Retirement Until State Pension

magd36

I have sufficient income from an indexed linked DB pension and State Pension at 67.

I want to retire this year at 60.

To top up my DB pension until 67, I plan to use my crystallised DC Pension and cash ISA savings. The total money is split 60:40 between DC and cash ISA.

If I match inflation, I’ll need 50% of the DC/Cash ISA total over the next 7 years.

My DB pension from 60 will consume my Personal allowance.

With the main risks being stock market performance, inflation and tax, how would you generally structure in terms of investments and withdrawal?

Simplicity and low management is key.

I've asked various related questions on other post but my situation and requirement is now clear.

Thanks

Dazed_and_C0nfused

magd36 said:

I have sufficient income from an indexed linked DB pension and State Pension at 67.

I want to retire this year at 60.

To top up my DB pension until 67, I plan to use my crystallised DC Pension and cash ISA savings. The total money is split 60:40 between DC and cash ISA.

If I match inflation, I’ll need 50% of the DC/Cash ISA total over the next 7 years.

My DB pension from 60 will consume my Personal allowance.

With the main risks being stock market performance, inflation and tax, how would you generally structure in terms of investments and withdrawal?

Simplicity and low management is key.

I've asked various related questions on other post but my situation and requirement is now clear.

Thanks

Do you expect using the savings starter rate band to be relevant for you?

If so you should consider the 40% tax trap which can occur if you take extra funds from the DC pension which reduces your savings starter rate band.

If that isn't relevant i.e. minimal interest or DB pension amount already means you don't get any savings starter rate band then not really an issue for you.

QrizB

magd36 said:

... how would you generally structure in terms of investments and withdrawal?

Simplicity and low management is key.

Gilt ladder, spending from the DC pension sounds the obvious choice. Makes use of your personal allowance, which you'd miss out on if you spent from your ISA.

dunstonh

With the main risks being stock market performance, inflation and tax, how would you generally structure in terms of investments and withdrawal?

Either UFPLS, drawdown or fixed term annuity, depending on the scenario (or a combination).

DRS1

You'll need 50% of the DC/Cash ISA over the next 7 years.  The split between DC and Cash ISA is 60/40.

That suggests you could leave the Cash ISA alone and just use the DC pension.

Presumably you don't want to do that because with the DB pension paying out from 60 you may be paying some tax on the taxable drawings from the DC pension?  Are you trying to finesse those drawings so you stay under some tax threshold?

I take it starting the DB pension later than 60 is not an option?  It might allow you to get more out of the DC pension using the personal allowance or 20% band?  If you overdraw from the DC pension you could store the excess in an ISA for later.  Or if the figures are too high to get it all into an ISA then a gilt ladder outside an ISA  can be tax efficient (low coupon gilts with a clean price under 100, mind you)

magd36

Dazed_and_C0nfused said:

Do you expect using the savings starter rate band to be relevant for you?

If so you should consider the 40% tax trap which can occur if you take extra funds from the DC pension which reduces your savings starter rate band.

If that isn't relevant i.e. minimal interest or DB pension amount already means you don't get any savings starter rate band then not really an issue for you.

I'll try to control my DB + DC to be below 40% Tax. Thanks

magd36

QrizB said:

Gilt ladder, spending from the DC pension sounds the obvious choice. Makes use of your personal allowance, which you'd miss out on if you spent from your ISA.

I'm thinking of drawing from 50% Cash ISA and 50% Gilt Ladder in DC.

Hopefully leaving 50% Cash ISA and 50% Global Index in DC when 67.

My DB uses my PA.

Thanks

magd36

DRS1 said:

That suggests you could leave the Cash ISA alone and just use the DC pension.

Presumably you don't want to do that because with the DB pension paying out from 60 you may be paying some tax on the taxable drawings from the DC pension?  Are you trying to finesse those drawings so you stay under some tax threshold?

Yes on the tax threshold. Everything from DC would be at 20%. I would limit to be below 40% threshold. I could then split the Cash ISA into the Cash that I need for the next 7 years and a mix of Cash & S&S ISA for what I won't need for 7 years +.

For the DC portion I could put what I need over the next 7 years into a Gilt Ladder the rest into a fund with some exposure to equities? I need to look into a gilt ladder though.

DRS1 said:

I take it starting the DB pension later than 60 is not an option?  It might allow you to get more out of the DC pension using the personal allowance or 20% band?  If you overdraw from the DC pension you could store the excess in an ISA for later.  Or if the figures are too high to get it all into an ISA then a gilt ladder outside an ISA  can be tax efficient (low coupon gilts with a clean price under 100, mind you)

I want to take the Tax Free Lump Sum from my DB (£100k) as I don't have great health and want to maximise what would benefit my wife if the worst happens. Hence I want to take the pension early.

hara____

I'd agree with the idea of using the DC over the ISA, especially if you can do that while staying under the 40% tax threshold, because:

- fiscal drag policy seems set to continue
- it will be harder to use the DC tax efficiently once you have the state pension too
- the ISA has a clear advantage over the DC in terms of flexibility, so why not keep more of that for unexpected needs, whether before or after you reach state pension age
- and your wife could inherit the ISA wrapper if, as you say, the worst happens 

As for asset allocation, it's worth thinking about your entire mix as one portfolio.

For example, the index-linking rules for DB pensions vary. So whether yours is uncapped or not should influence your need for any further direct inflation cover (such as individual linkers or one of the shorter duration linker funds).

Dazed_and_C0nfused

magd36 said:

Dazed_and_C0nfused said:

Do you expect using the savings starter rate band to be relevant for you?

If so you should consider the 40% tax trap which can occur if you take extra funds from the DC pension which reduces your savings starter rate band.

If that isn't relevant i.e. minimal interest or DB pension amount already means you don't get any savings starter rate band then not really an issue for you.

I'll try to control my DB + DC to be below 40% Tax. Thanks

It's not the normal 40% threshold that is the issue though.

Pension £12,570 and interest of say £3,000.  All the interest is taxed at 0%.

Take an extra £5k from your pension and that gets taxed at 20%.  But only the first £1,000 of your interest then gets taxed at 0%, the remaining £2,000 is taxed at 20%.

magd36

Dazed_and_C0nfused said:

magd36 said:

Dazed_and_C0nfused said:

Do you expect using the savings starter rate band to be relevant for you?

If so you should consider the 40% tax trap which can occur if you take extra funds from the DC pension which reduces your savings starter rate band.

If that isn't relevant i.e. minimal interest or DB pension amount already means you don't get any savings starter rate band then not really an issue for you.

I'll try to control my DB + DC to be below 40% Tax. Thanks

It's not the normal 40% threshold that is the issue though.

Pension £12,570 and interest of say £3,000.  All the interest is taxed at 0%.

Take an extra £5k from your pension and that gets taxed at 20%.  But only the first £1,000 of your interest then gets taxed at 0%, the remaining £2,000 is taxed at 20%.

I’m a bit confused as I mentioned all the cash savings are in an ISA.

All non ISA savings are in my wife’s name who will earn under 12570 and gets up to 6000 of savings interest tax free. Furthermore, they won’t be used to fund the gap between 60 and state pension.

i think I only need to worry about ensuring not breaking the high rate tax threshold to protect my DC income from 40% tax.

I hope I’ve got that right.