Using savings or taking pension funds in early retirement.

In_for_a_pound

Hello,

I am 61 years old and have two pension pots. Both are Defined Contributions type.

One (personal pension) I do not pay into any more so is only growing through standard portfolio investment and time, current value approx.£185,000.

Whilst the other is a workplace group pension scheme which I contribute to via a salary sacrifice scheme. Current value approx.£250,000.

I also have an ISA lump sum saved of £100,000.

If I was to retire earlier than state retirement age, e.g. at 62, would it be better to begin taking an income from one (or both) pension pots and save the cash based savings until later or access my cash first and leave the pension pots invested?

My initial thinking is that if I was to commence taking an income from my pension pot(s), I would obviously pay income tax (at whatever rate). Then, some years later (when that money has been depleted), I would qualify for my full state pension and could then subside my income with savings, thus lowering my tax liability? Does that sound about right!?

Thanks in advance for any advice.

SVaz

You take £16900 UFPLS from a pension to use your personal allowance and a 25% tax free slice.
Hopefully in 2 years the PA will rise and a bit more can be taken.
It make no sense to wait to take pension income that will end up taxable.

Roger175

Agree with above. You can take £16,760 per year using UFPLS without paying any tax. 25% of this (£4,190) is the tax free bit and the remaining 75% (£12,570) is taxable, but is equal to your personal allowance, so no tax is actually payable. If you need more than this then either take from the ISA or opt to pay some tax on the pension. Once in receipt of your SP, this will more or less wipe out your personal allowance anyway, so you might as well get as much out tax free now.

QrizB

^ I'm going to echo this.

Your annual income tax allowance of £12570 doesn't roll over if you don't use it; you use it or you lose it.

It's generally (there are exceptions) in your own best interest to use it up each year by, in your case, taking some taxable pension income.

Examples of exceptions would include '

• if you intend to return to the workplace and want to.make further pension contributions in future that exceed £10k pa
• if you have other employment income (a part-time job or side hustle) that will use it
• if you have significant taxable earnings from savings or investments

You've not mentioned any of these things but that doesn't mean they don't exist.

Shadyocuk

I agree with the above , but would also add you could transfer at least some of the ISA funds from cash ISA to stocks and shares ISA if you want to have a larger proporion of your longer term funds invested.

fifeken

https://forums.moneysavingexpert.com/discussion/comment/82008753#Comment_82008753

Hopefully in 2 years the PA will rise and a bit more can be taken.

Currently frozen until April 2031 and I can't see that changing for the better.

In_for_a_pound

Thanks to all for responding. Appreciate your time and info. Very informative.

ali_bear

You're not in danger of paying higher rate tax after retirement. But you definitely want to make the most of the £12570 personal allowance every year. In practical terms this will only need paying attention to in the year you stop work and then until state pension age.

In the long term, inflation will erode the value of any cash savings, even in a cash ISA. Could you move the bulk of your ISA savings into a S&S-based ISA? Despite going up and down in the short term, equity funds provide the growth that should beat inflation long term.

Are you able to increase your pension contributions between now and retirement? Even if this means using some of your savings for living expenses.