Effective Tax rate withdrawals

SpeedSouth

Thinking on my position along similar lines to this thread.

https://forums.moneysavingexpert.com/discussion/6668088/close-to-lsa-and-likely-higher-rate-in-retirement-am-i-overlooking-anything

Current Situation - Still a long way from retirement in age, if not money.
44 Married.
Me - £750K in SIPPS - Contributing circa £30k a year to get down to BRT
Missus - £150k in SIPPS - Contributing £3.6k a year. Salary £32k so could be a lot more
Combined ISAs - £140k

Up until last year 25/26 we had been pumping SIPPS, to the point I was paying in from BRT but taking account of sal sac so effective 32% relief plus half the employers so I guess around 36% effective relief at that point.

Family of 5 annual spend is circa £45k which includes small mortgage payment. In retirement I see it being around the same, as the savings made on kids would be spent on us.

The question comes around tax rates and where best to prioritise. Retiring as early as possible is the goal. Last tax year we put £30k in ISA and would aim for the same hopefully this year.

Current theory is keeping my contributions to avoid paying any 40% tax on the way in. At present with current HRT threshold I don't see I'll ever need to pay 40% in retirement. The plan when pumping the SIPPS originally was to gift it all IHT free to the kids, clearly that has changed since. As fiscal drag continues maybe I will end up as "needing" to be HRT payer in retirement.

The bridge pot will build with ISA contributions, and one thought I had was if the SIPPS get really big we could take an advance on the mortgage to retire earlier if the ISAs are not sufficient to go when I want to. I've always looked at 55 being the goal, but currently it feels like I could probably advance that, but the money is in the wrong place.

Would you prioritise the ISA and accept the 40% tax earlier in life or continue as we are? If we "only" leave £10k on the table between now and 55, then assuming no real growth that could be circa 3 years of bridge pot. Which is probably unnecessary at that point given we already have circa 3 years.

We could balance our SIPPS better to allow for both of us to maxmise our BRT in drawdown, but I already feel the SIPPS are larger than necessary at this stage.

Interested to get others thoughts, and anything I might have missed.

Marcon

With those sort of amounts maybe invest in proper professional advice?

SpeedSouth

https://forums.moneysavingexpert.com/discussion/comment/82004194#Comment_82004194

That is certainly something I am looking into as well. I did look at professional advice 10 years or so back, but at that point decided against it. The amounts were far less and the goals not so refined so didn't proceed with any at the time.

In hindsight that was a good call I believe, given this has all been about simple accumulation to this point.

Marcon

https://forums.moneysavingexpert.com/discussion/comment/82004275#Comment_82004275

Although had you taken advice 10 years ago you might now be in an even better place financially! If your assets are predominantly (possibly exclusively) in SIPPs and ISAs, getting a bit more adventurous might be worth considering?

kermchem

I agree that you probably need to seek professional advice not least to really think through the numbers and implications.

Congratulations, you are millionaires, plus a house. As a dose of realism, on the second death you (or the kids) will be 40% tax-payers anyway. There is a lot of politics to happen between now and when you can access SIPP or claim state pension, but all you can do is plan with the current tax and pension rules. With a £750K SIPP and years to grow, plus adding £30K per year you will be hitting maximum tax-free lump sum territory. If state pension grows at double lock or just inflation, but tax thresholds don't have a big uplift then you are in danger of paying 40% tax on state pension.

Presumably, your £30K into SIPP means your missus is still claiming child benefit for 3 kids. I failed to convince my OH that I was putting all "her" child benefit into my pension to avoid it all being taxed away.

I will throw in the question of whether you should add to your SIPP with 40% tax relief (plus child benefit) only to perhaps pay some 40% on the way back out when SP kicks in, or you should put all of her salary into wife's SIPP and get more tax relief than she pays in tax and perhaps pay 0% tax on the way back out before SP kicks in. The maths might be interesting.

Get the kids Junior ISAs.

SpeedSouth

https://forums.moneysavingexpert.com/discussion/comment/82004286#Comment_82004286

I am certainly in a better place now. 10 years ago the pensions totaled £26k total for both of us, with circa £50k in savings and ISAs. That was before my first meeting with the advisors.

There is a rental property and a small DB pension for the missus, but other than emergency cash pot the rest is fully in SIPPs and ISAs. Currently it's all 100% equity hence the massive growth in that 10 years. I did post a while back, wondering if I should pull back that risk given I have nominally achieved my goals already. The original amount I was aiming for 10 years ago was £825k. Based on a retiring at 60, with 2 x Full state pensions and a 3% withdrawal rate

Storcko14

Sounds like you're in a great position. If you've already reached 'enough' then I would be starting to think about preservation even at 44. Given that there's not been a significant and prolonged equity drawdown really since the GFC and that recent sharp drawdowns have been followed by sharp bouncebacks, it's tempting to think the future will be similar. A 40-50% equity drawdown lasting a decade could easily de-rail things.

One caution I would have is that kids can bring unpredictable expenses after they finish school - post-grad education, maybe struggling to fly solo etc. so possibly have a contingency for that. We reached 'enough' about the time our youngest left school but built a small contingency which turned out not to be needed. The easiest thing in the world is to change an Excel category from 'kids' to 'bikes', 'holidays' or whatever.

af1963

750k in the SIPP now, plus 30k per year contributions, and at least 13 years before being able to take it. Even at zero growth, if you keep these payments up, you will go over the maximum tax free cash amount, which makes further contributions less beneficial.

On the idea of lower risk investments: putting the whole 750k into an indexed gilt, you could buy TG39 and guarantee about £1m in 13 years, with a little income along the way. ( with no future contributions at all). Not suggesting this as an actual strategy, but it shows how little growth and risk you actually now need in order to get to that maximum level for taking TFC.

( that's assuming no future government raises the tax free cash amount, but since keeping it frozen is a fairly easy stealth tax increase, I think that's a fair assumption.)

I'd be looking at whether I could cut my working hours and get more time now to spend on things I choose to do. That would bring the salary down in a different way, if you want to get to basic rate tax band.

kempiejon

@SpeedSouth The question comes around tax rates and where best to prioritise. Retiring as early as possible is the goal. Last tax year we put £30k in ISA and would aim for the same hopefully this year.

You've highlighted before 55 and the money in the wrong place. How early do you really want to retire? At 44 there's not enough outside your pension to get out in the next couple of years without some dramatic changes. Here's some musings, There's 2 of you? Why not £40k to ISAs now to fill the pre pension years?

A £750k SIPP with an equity bias and a decade to go will likely hit limits. So redirecting everything ex-employer matching to ISA and then unsheltered is a good way to get the ex pension provision big enough to fund that ~£45k (nett?) required income pre 57. redirect £60k away from pensions you could have a big enough chunk in 5, 6, 7 years to fill the gap, especially if you can delay some gratification in the short term.

In the meantime your SIPP pot could easily grow to exceed the lump sum allowance.

That might lose your max tax leverage advantage on the 40% band but getting out is more important than keeping a few quid away from the treasury. Similarly over paying the mortgage might drop your required spend alternatively allowing a lower requirement or if your investing is more profitable than mortgage rate perhaps keep at the minimum payments.

SpeedSouth

Useful comments all. Thank you.

Derisking/Moving to Gilts is certainly a thought. Like you say last 10 years the sun has been shining. Ive taken the risks with what was relatively small amounts for the vast majority of that time. Its really only last couple of years the amounts have been anywhere near the amount ther are that Ive started to think about the preservation point.

Older kids. 100% that could have a large impact. At the moment given their ages and when SIPPs would be paid, they'd all be past Uni age at that point. So then it becomes house deposits/help etc. Not modelled in any way. Given my frugal ish needs, I want to set them up as best I can, but still get out early.

When to get out. The amount its grown to has only increased my desire to get out earlier. How early.. in all honesty if I can achieve 50 id be very happy. Im not in a hugely stressful role but it doesn't bring gratification like it used to.

Going to part time, maybe! I'd not really considered yet seems to be cheating and doing my kids out of money but the missus is PT so an extra day off now I think about it sounds great. We've certainly let the handbrake off noticeably in last couple of years with holidays and nice to have expenses. I dont think there would be the appetite from her to reverse that, so maybe a PT solution rather than ealrier with the frugality that goes with that would hit both marks.

In terms of mortgage, the family home i could clear tomorrow from cash if I wanted and is on a very low rate still for 10 months. Switching to interest only was a thought for when that deal expires, but will likley only contribute £3k a year to the bridge pot so not a massive swing. The rental I'd look to leave as interest only for as long as the banks let us.

Food for thought, but I do feel im at the point to engage a professional to consider the options.

SpeedSouth

https://forums.moneysavingexpert.com/discussion/comment/82004320#Comment_82004320

I'd missed this reply when reading on my phone.

Yeah the SIPP contributions are two fold, they bring me under the £60k threshold so we get all of that, plus the additional amount from there to £50,270 gets the 40% relief.

I need to look at the math's on where that 40% sits and that was the initial crux of the post, with the get out time

Kids have JISAs. Nominal amounts currently which we only put £1k in each per year currently, we've focused on "our" needs first till this point.