AVC Drawdown Thoughts On Future Thinking

swanny65

My wife and I retired a couple of years ago, her at 57 and me at 59. We both have final salary pensions that are tripple locked, her currently £16k and me £25k pa. The lump sums we received have dwindled; we cleared the mortgage, replaced our kitchen, changed a vehicle and had solar panels / heat pump installed. We top up our income up with approx £500 pcm from our savings. Our 2 children have just finished university but we still help them financially occasionally.

I paid AVC's and have a separate pot that I have left invested in various UK & worldwide funds. It is currently worth £120k. We dont have life insurance and this pot was/is being left in the event I die as, as I understand the current regulations, my wife would received the whole pot without any tax deduction. This would supplement her £16k income if widowed as she would recieve half my pension and this AVC pot. If she were to pass away first I am content I would be financially okay.

What is concerning us now is if I dont draw my AVC pot what will happen when I reach 67 and beyond and receive my state pension plus my final salary pension - if possible I dont want to be paying 40% income tax. I also wont need that extra income as I get older. Two years later my wife will also be 67 and get her state pension. Our income then will be £30k higher than now. We are thinking boosting our income now is our best option, but how do we do that ? As far as I see it we have a couple of choices drawing down the AVC pot.

1. I could take a £30k lump sum and drawdown say £12k pa on the remaining £90k.That would give us £800 pcm net. Even with zero fund this would cover me beyond age 67 when the state pension kicks in.
2. I could not take a lump sum and instead take a higher drawdown amount say £16k/£20k. I believe I am allowed to receive 25% of this amount as an untaxed ongoing lump sum withdrawal ? This would give us a tidy additional £1133/£1467 pcm net. Again with zero growth both options should be possible, £20k being the max.
3. Annuity's dont interest us as they dont seem good value - we are both healthy.

The bit I am strugging to get my head around is the maths ! If I take £16k pa in option 2 above and the AVC pot continues to grow at say 5% then at the end of the first year the remaining pot would be £111k - income that year £13600 net. Whereas with option 1 the remaining pot would be £82.5k - income would be interest on £30k and £9600.

Option 2 obviously keeps the pot alive a lot longer, the effect of the withdrawals is less impactful - how impactful I am not sure. I could then lower the income taken from option 2 at age 67 to keep me at but below the 40% tax threshold - I accept the threshold may increase.

Any errors in my thinking ?

Anything else I should consider e.g. de-risk the AVC pot into safer funds ?

Thanks very much

NoMore

You don't have to consider it as extra income to spend right now, you could always withdraw taxable income up to just below the higher rate band from the AVC paying 20% tax on it and put it in ISA, to use later to top up your income if required. You avoid higher rate tax due to the AVC withdrawals then.

Triumph13

You really have two separate things to think about:

1. How to get the AVC out of pensions and into ISAs with maximum tax efficiency; and
2. How to invest the AVCs now and once they are in the ISAs.

The first one is a simple maths problem and easy for us to help you with. The second no-one can help you with until you have worked out what the AVCs are actually for. Is it to bridge the period until your state pensions cut in? To try and give you an even income across your retirement? To save for a rainy day / care fees / inheritance? Some combination of the above?

If you decided you wanted to us part of them to up your income by say £10k (a full SP after tax) until your SP starts, then you could do something like:

• This year withdraw the full £30k TFLS and £24k taxable = £50.4k in total after tax. That fills an ISA for each of you, plus the £10k spending money and the odd £400 to savings
• Future years withdraw the £24k taxable, £19.2k post tax. That's £10k spending and £9.2k to the ISAs
• That should easily empty the AVC pot before your SP starts. Once the AVCs are empty, you withdraw your £10k pa from the AVCs until your SP starts.

swanny65

@Triumph13 cheers that is really helpful and TBH I had not thought deeply enough about the the first two bullet points.

I am thinking this means I could use the ISA's as a means of de-risking the current £120k by pretty much halfing the amount invested in UK & worldwide funds and put the £59.2k into an investment fund with less risk e.g. bonds? Assuming the return is better than plonking it in a cash ISA….

Created a few different spreadsheet scenerios using ChatGPT……….

Thanks again

mrklaw

one thing to consider would be life insurance. I’ve just taken out (while still young enough its not crazy expensive) 200k insurance through to 85. that is designed to still be enough (with estimated inflation) to cover the gap between me losing half my DB and my state pension if I go first. My wife can buy an annuity or if she’s closer to the end of that target perhaps just live off the payment and leave some to the kids. It also frees up our DC of around 150k to be a little more flexible while we’re enjoying retirement.

Aside from that as mentioned - consider maxing basic rate now to transfer into ISAs (S&S ISA potentially if you don’t have immediate needs - if it stays invested in the same funds it’ll return the same as the pension currently does). Not only avoids 40% later, but also gives you flexibility - need a large one-off for a car/gift - no worries about spiking income tax.

Wrapper - ISA vs Pension - is a potential income tax on drawdown mitigation. consider if you die before 75 it gets passed on entirely tax free, if after 75 then would be taxable as normal. It means nothing around funds.

asset allocation - can be the same in ISA vs pension - that can be done now if you want to derisk, and arguably you should be looking to mirror in your ISA so that all you’re doing is moving where the money is, not what the money is doing.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82135855#Comment_82135855

You can not assume anything about future returns. Bonds have not been a good investment in recent years and your current investments could be badly affected in a stock market crash, which could start tomorrow.

Cash savings are currently beating inflation and are 100% safe, so not an option to be totally dismissed, especially for any money needed in the next few years.

swanny65

Cheers @mrklaw @Albermarle

Yorkie1

You mentioned cash ISAs upthread - bear in mind that from April 2027, you will only be able to place £12K of new money into a cash ISA of the maximum annual £20K limit, until the tax year in which you become 65 - at which point the whole amount could be placed into a cash ISA again. And that for the same period, you can't transfer from a S&S ISA to a cash ISA.

Albermarle

Unless of course the whole idea of restricting cash ISAs is ditched in the budget by the new Chancellor.

swanny65

https://forums.moneysavingexpert.com/discussion/comment/82138873#Comment_82138873

Thanks, will okay with £12K as I also give £12K to my wife to invest, and I will be withdrawing less than £24K net per tax year from April 2027