Maximising BR headroom while you can, vs mortality risk pre-75.

mrklaw

playing with optimisation strategies at the moment. Planning to retire at 58. If things go well, we should hopefully have some excess we can use to gift to kids while we’re still here and while they’re not too old. Some can be likely left to inheritance but with pensions going into the estate we want to avoid any massive balances.

My focus at the moment is : do we leverage available basic rate headroom and extract additional (excess) funds from the DC into ISAs as soon as possible. This has a couple of benefits

• generally easier access to funds from ISAs
• Ability to make gifts that would exceed basic rate tax and be taxed partially at 40% - eg house deposit help

Basically shifting all excess funds into tax free at a 15% effective rate and providing more flexibility.

The risk I can see is primarily one of early mortality. If I die prior to 75, my DC can be inherited tax free. so in that case, anything I’ve already withdrawn was paying 15% too much tax. But if I don’t die prior to 75, the entire pot will be taxable at marginal rate (potentially only 15% moving up to 20% but there is a risk of 40% if the kids inherit).

If I hedge my bets and wait until 75 to start transferring I won’t have enough headroom to move large amounts out quickly, and even if I could I won’t have the ISA capacity to do so.

How are people approaching this? my feeling is having a building fund of tax free cash in an ISA for flexiblity that has only ‘cost’ 15% is worth the limited risk of pre-75 mortality

GunJack

It's been said on this forum many times, don't let the tax tail wag the dog....yes do what you can within reason, but don't think about tax to the detriment of anything else.

If you can Syphon off pension into ISA you can always invest in the same funds as your pension so the growth will be similar so you won't feel like you're "losing out"

mrklaw

I have an ‘insurance’ fund that covers income loss so excess is still excess. I guess the equation then becomes ‘is it better to have flexibility and liquidity with excess funds now’ vs ‘someone else might get a bit less if I pop my clogs early’ but none of it is ‘needed’ funds?

seacaitch

I guess the equation then becomes ‘is it better to have flexibility and liquidity with excess funds now’ vs ‘someone else might get a bit less if I pop my clogs early’ but none of it is ‘needed’ funds?

Since there's no no optimal answer, as it depends upon unknowable future events, then the "right" answer is probably just to find a balance between the approaches that "feels right" for you: finger-in-the-air individual judgement.

hugheskevi

My approach is to focus on the most likely scenario, which is where both myself and wife live beyond age 75, and optimise for that.

My wife should be able to draw all her DC pension by age 68 at basic rate tax, and that is what she will do. At age 68 she will be a higher rate taxpayer from DB and State Pension. For her, all consideration is about exactly when in the 55-68 period she will take her DC, but that will only be decided close to age 55 based on the tax system at that time. If fiscal drag continues or inflation is high in coming years, so is not going to be able to get it all out at basic rate, so that might become a moot point.

I won't be able to draw all my DC out at basic rate, so I will access my DC by UFPLS to fully use basic rate each year prior to State Pension age. At State Pension age I will be a higher rate taxpayer from DB and State Pension, so whatever uncrystallised DC remains will be left to age 75. I may have left it uncrystalled beyond 75 if my wife was a basic rate taxpayer, as then it could eventually be taken at a lower rate if I predeceased her.

In the meantime, I am using our full ISA allowances each year, either with proper investments, or just moving some cash in there briefly at the end of tax year from a mortgage offset savings account to build up flexible contribution limits. We now have well over £200,000 of flexible deposits available, so along with £40K each year extra (£24,000 if using cash ISAs) that will be plenty to absorb whatever funds are available from DB, DC and State Pension. Under current arrangements, I shouldn't need anything like that much, but who knows what changes might happen, so I'll preserve the flexible balance until all DC is exhausted.