Fiscal drag and withdrawal strategies

cloud_dog

My personal retirement income was not going to hit the HRT threshold, so not a consideration for me / us. Drawing as tax efficiently as possible against our income requirements was.

Prior to retirement I ran numerous modelling of taking the DB at NRA with / without PCLS, taking it early (with / without PCLS again), and my original intent was to take it at NRA and allow our DC pots to bridge the early years until both SP were in play.

The main DB has a mix of indexation caps, with most of it being 2.5% and some capped at 3.25% (if memory is working).

Since retiring March 2025 I continued playing with the modelling, and in the end (by December) I had decide that with the modelling being fairly neutral, to take the main DB early with the PCLS. Part of my thought process for taking the PCLS was around the extension to the PA freeze. And when modelling the net numbers (for us) it was slightly better to take the PCLS / DB early.

WillC999

https://forums.moneysavingexpert.com/discussion/comment/82012246#Comment_82012246

Not a bad week to retire! Bravo to you, and look forward to hearing how the money stuff works out.

MetaPhysical

Fiscal drag is a real pain and I have just had to acknowledge that some of my income will need to be taxed at 40% to fund the lifestyle I want. I am by no means "rich".

NormalNorman

Fiscal drag or more like life drag…

Council Tax = £368 pm [paid over 12 months]

FT job - Income Tax = £373 pm / NI = £151 pm - Plan on quitting at 60.

PT job - Income Tax = £168 pm / NI = £0 PT Job - Plan on keeping this on/similar role to 67.

Despite a personal allowance of £13k atm. Making good use of pension salary sacrifice for the FT Job. The default 5.5% DB contribution on the PT job. HMRC/Council help themselves to £1060 pm.

So what can be done to reduce this in retirement assuming we would like similar net income? Personal allowance is easily used up by DB/PT earnings from age 60. Imagine the equivalent of gross annual earnings of £13,500 needed to just to pay tax of £906 pm - no NI !

Downsize house? Drop a council tax band to a smaller house would save ~£60+ pm and free up some capital. No mortgage currently.

No NI to pay in retirement? Another £151 pm saved.

Recently allowed my gross take home pay to drift up to the Scottish BRT limit, £43,662, to make more use of the BRT tax band and pay a bit more into ISA. I already get the max employer contribution etc. Besides I don't want all income sources to have a PAYE code.

Pension tax free lump sums - One of the DB schemes has a commutation rate of the low 20s so that will definitely be pocketed. The rest are 12 so no way. Think I'd just go for the DC lump sum too as I don't really want to get embroiled with UFPLS having DB/SP as a base. I see the DC as something to drain for the life I never had time for whilst working.

Reduce outgoings to make living in the 20% band easier esp in three years when I quit as fiscal drag will really biting then? Having no mortgage helps but two years left of uni costs until 2028. Of course in retirement we'll no longer save 50% salary too.

With four DB schemes/SP as well as the SIPP/Workplace pension the older we get the more income comes online. It would be crazy to pay HRT on pension money that only got BRT relief for a chunk of my working life. It's supposed to be the other way around init but I guess that's fiscal drag…

Enough rambling for now.

Fermion

I retired 10 years ago (at 67) with a large DC pension pot. After crystalising and taking my 25% , for 9 years I only took the natural income yield from the pot(about 4% keeping myself within basic rate tax) as we had planned to pass the pot onto our 2 children as inheritance but I'm afraid Rachel Reeves has forced a total rethink.

Last year I transferred £300K of my pot into a joint life annuity (paying circa 8.6%/annum), but the performance of the funds left in the pot (particularly over the last 12 months) has been such that it has still grown to over £750K.

So the plan now is to take 7.1% income/annum from the pot and increase that figure annually to provide inflation cover. Paying 40% higher rate tax is better than our children paying close to 70% tax on the inherited pot. ( if you include IHT, loss of RNRB and income tax at marginal rate). The plan is to reduce the pot to no more than £500K at 2nd death to avoid loss of RNRB and make significant gifts out of surplus income. Although all my funds are income I still decided to hold about 10% in cash as a hedge against a US crash

Just sad that I'm paying the penalty for being a prudent manager of my DC pension.

af1963

Sounds like you are now using the pension for what it, and the associated tax relief that probably makes up a big part of it, were always intended for.

I've never heard a good justification for giving tax relief to increase the amount well-off people can leave tax free to their families.

Time4T_Accounts

it used to be 40% relief on the way in, 20% tax on the way out. It’s looking the other way around, now …!

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82015025#Comment_82015025

it used to be a 55% tax on pensions on death. its only been relatively recent that they fell out of being taxed. they weren’t in the estate for IHT but still got hammered.

cfw1994

https://forums.moneysavingexpert.com/discussion/comment/82014558#Comment_82014558

Indeed.

Actually having the DC pots in for IHT makes decisions on where to draw from a bit easier, IMHO. Our earlier plan to not touch much of it for as possible has flipped to “use it for the reason we saved into it”. Mustn’t grumble 🤷‍♂️

Having had some time with high growth means we are now considering “gifting from excess income” to pass more money down today, “giving with warm hands”….that 40% HRT band gets lower all the time with fiscal drag, I doubt we will limbo under it much longer 🫣

NormalNorman

https://forums.moneysavingexpert.com/discussion/comment/82015231#Comment_82015231

Yeah, I listened to a podcast on that very topic recently. Think it was Meaningful Money. Putting the right, wrongs and opinions aside the pension is now definitely for withdrawing at the most favourable tax band esp in the gogo years. Wonder what the unforeseen implications are for the economy, possible care, people quitting work sooner than originally planned etc?