Pension to savings ratio

stulaunch

Thank you all for your thoughts.

I realise now I have to work out a retirement strategy. Not finding that bit easy at all?

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82003339#Comment_82003339

First thing you need to do is work out your basic spend, then take it from there….

Fag packet calc - and I stress fag packet.

Full SP is @ 1000/month - conservatively and assuming you receive the full amount.

Annuity 390/month

Move 60K from savings to pension gives 190K - without contribution. Assume SWR (Safe Withdrawal Rate) of 3% so theoretically that could give you @ 475/month

Total available @ 1865/month or 22 380/ann gross: net @ 19 600/ann at basic rate.

Thus annual income @ 19 600, annual spend less, result happiness. Annual income @ 19 600, annual spend more, result misery….well not quite perhaps, but you get the drift…

You also need to think about how to bridge the (2 year?) absence of the SP/month until you receive it post retirement. If you work for 2 or 3 more years, then you may be able to mitigate the deficit somewhat and/or use some of the cash pot.

.

dunstonh

In the OP's case there is a potential future 20% tax saving on isa dividend and interest income stream, compared to the exact same income stream produced by a sipp. Seems to me, that even for 20% tax payers an ever growing ISA pot has more to commend it than a similar growing Sipp pot in terms of the value of the resulting income.

The SIPP has the same investment options as the ISA. So growth would be identical. Charges can be identical. The only difference is the taxation.

If the OP is going to be a basic rate taxpayer pre-retirement and a basic rate taxpayer in retirement, then the SIPP beats the pension by 6.25%.

This is because you get no tax relief on an ISA and pay no tax on withdrawals.

With the pension, you get 20% relief. And you pay 15% tax on withdrawals. 25% of your drawl is tax-free, 75% is taxable, so 75% of 20% is 15%. That 5% difference equates to a 6.25% increase.

So, for an example:

Investment returns and charges are the same on both. So you can disregard those in comparing.

£100 paid into the ISA is £100. And when you draw it out, it's £100.

£100 into the pension gets increased to £125. When you draw it out, 25% is tax-free. Which is £31.25. The remaining £93.75 is subject to 20% tax.Leaving you £75 after tax £75 + £31.25 = £106.25

106.25 is greater than 100.

If you retire early and have no other earned income, then you have your personal allowance, so drawing from the pension is even more tax efficient. Even if you are using some of your personal allowance, then having some of it available for the pension makes the benefits on the pension more beneficial.

To make matters worse in my case, whereas I can remove and deploy ISA funds towards IHT mitigation strategies, beyond the 25% TFC no such easy avenues exsist when my Sipp falls into 40% IHT terrority in its entirety next year.

It makes no difference whether it's in an Isa or a pension. The same inheritance rate tax applies to both.

As long as the amounts you draw from the pension remain within the personal allowance or basic rate band, then the pension has beaten ISA.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82003339#Comment_82003339

Spending some time reading through this forum would be a good place to start, as many of us improved our knowledge by doing just that.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82003391#Comment_82003391

Be careful about the "Move 60K from savings to pension" bit. If you are a basic rate taxpayer that may take you some time.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82003476#Comment_82003476

You missed my point re ease with which one can implement IHT mitigation strategies from ISA funds compared to the remnants of a Sipp after TFC taken.

Whereas I can encash the entirety of my substantial ISA tax free to reinvest ( for example ) in a Discounted Gift Scheme, the remaining 75% of value in the sipp cannot be accessed in the same way without incurring (in my case) a 45% income tax charge.

Probably of no real concern for the OP in their circumstances, but with the new SIPP IHT exposure looming in the near future, I was illustrating that the Sipp versus ISA debate is no longer quite as straightforward as it used to be now that IHT is a reality for both wrappers.

dunstonh

https://forums.moneysavingexpert.com/discussion/comment/82003739#Comment_82003739

Fair statement.

However, the option on the pension to increase the draw, which can then be gifted as excess income without the need to set up any trusts is a potential positive with the pension.

When you start getting into higher value areas there will be pros and cons of the different methods.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82003679#Comment_82003679

Out of interest - why?

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82004208#Comment_82004208

I think the point being made for the benefit of the OP is that you can not add more to a pension each tax year, than your gross salary . So if the OP earns say £40K, he can not add more than £32K + £8K tax relief.

In theory you can add more and not get tax relief, but not a sensible option normally.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/82004385#Comment_82004385

Isn't max contribution 60K gross?