Lump-sum allowance and pension growth

MallyGirl

it probably comes down to how much you can squirrel away in ISAs - at £20k per year it might take a while for larger sums

BobR64

https://forums.moneysavingexpert.com/discussion/comment/82123981#Comment_82123981

I think the point is that if you are already at the maximum tax free amount in your SIPP, any further growth on that amount cannot be withdrawn without paying income tax on it.

If you take it out now and put it in a GIA, your growth is taxed at CGT rates, or you pay dividend tax depending on how you organise things. Those tax rates - especially CGT - are lower than the income tax rate you'd probably pay on withdrawal from your SIPP if you had left it there.

At the same time, yes, you try to get as much as you can into ISAs but even without that it is probably advantageous.

I must admit that I hadn't really thought about this before now. I might be asking some questions before too long.

leosayer

If their (and spouse's?) ISA allowance isn't already being used then it's almost certainly the right thing to do.

However I don't see the point in taking PCLS for amounts above that each year until the full £268,275 to becomes available depending on how the pot is invested.

The other consideration is that the pot probably can't be fully drained in their lifetime without paying higher rate rate.

mrklaw

take the lot and put it in lowest coupon gilts you can find? Better than no return but putting in equities may be higher net yield even after tax

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82123981#Comment_82123981

The OP already mentioned putting £50K in Premium Bonds as well.

There is a large area and options between just taking £20K pa, and taking all of it at once. They could always spend some of it - an option that seems to be a low priority for many on these forums !

Triumph13

https://forums.moneysavingexpert.com/discussion/comment/82124317#Comment_82124317

Spend it! Someone bring me some smelling salts.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82124329#Comment_82124329

I was shaking as I was typing the word out 😅

FatherAbraham

https://forums.moneysavingexpert.com/discussion/comment/82124317#Comment_82124317

You are quite right to talk about spending and consumption as an important aspect.

However, the technical dimension of interest in this thread was avoiding an unfortunate and punishing rapid collision with the lump sum allowance.

In the broader context, there is also the matter of withdrawing the full 20% tax-band level each year, in an effort to prevent future withdrawals from going into the 40% band (or for a higher spender, filling the 40% tax band each withdrawal year, to avoid paying 45% tax in the future). Just as the tax-free lump sum can be disconnected from the taxable withdrawal, so the taxable withdrawal can be disconnected from what the investor actually needs to live on.

I 'm often surprised by the number of people who gleefully explain how they're just taking in the 0%-band's worth (£12,570 in the date of posting, and possibly forevermore), plus another 1/3 tax free, and "paying no income tax", while rapidly consuming their ISAs. Reducing the income tax right now is not the rational thing to do: It's sensible to reduce the overall income tax paid over many years.

FatherAbraham

https://forums.moneysavingexpert.com/discussion/comment/82124133#Comment_82124133

Short-term, low-coupon gilts provide most of their return via (UK-tax-exempt) capital gains.

Overview here (sadly now paywalled): https://monevator.com/reduce-tax-on-savings-with-gilts/

Original source, upon which the Monevator article is based: https://simplelivingsomerset.wordpress.com/2023/10/27/no-more-income-tax-cuts/#comment-41867

Triumph13

https://forums.moneysavingexpert.com/discussion/comment/82124352#Comment_82124352

I too am horrified by the number of people jumping through hoops to avoid paying tax now, only to pay it later. I'd take it one step further and stress that the real aim of the game is to maximise lifetime post-tax income, not to minimise tax paid.

Unless it impacts things like the savings allowance, the sweet spot is often a few hundred pounds into the next tax band each year. If you are going to pay that band one day anyway, it's generally just not worth the stress and hassle trying to use up the lower band exactly, with the risk of leaving some unused if you get it wrong. I know I wasted hours agonising over such things. Life got much simpler once I accepted I was going to hit the 40% band come what may.