Avoiding 40% Tax

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82178374#Comment_82178374

If fiscal drag carries on it soon will be! 10 years ago a lot of people who thought they'd never have to worry about higher rate tax in retirement are now realising they will.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82178367#Comment_82178367

What good would deferring the state pension be? The extra state pension when taken will be taxed at 40% unless the HRT threshold increases faster than the DB & state pension. Which seems unlikely.

Being in a position to pay 40% tax is not good news when you thought you'd only have to pay 20%, and the reason you're paying twice as much tax is nothing to do with your pension being more than expected, but fiscal drag reducing the HRT threshold massively in real terms.

poseidon1

This ever recurring theme of being 'shocked ' at becoming a 40% tax payer in retirement baffles me.

As already indicated in this thread becoming the beneficiary of 60 % of the income exceeding the 20% band, has always got to be a favourable outcome, unless one is labouring under the misapprehension that the entire income ( above the personal allowance) is being taxed at 40% rather than the marginal top slice.

One can rightly be a little aggrieved at beginning to lose personal allowances once £100k+ has been attained, but strikes me as perverse and counterproductive to deliberately limit one's ability to create surplus income solely because of the supposed 'pain' at paying tax at 40%.

I would supggest if more individuals were to strive to attain ever increasing levels of appreciable retirement incomes, both they and the country as a whole would achieve a higher degree of financial resilience.

tacpot12

https://forums.moneysavingexpert.com/discussion/comment/82178592#Comment_82178592

Thank you for confirming that. I'm sure it will help others faced with the same dilema to consider the important point you make, that you don't want to lose out on your state pension either.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82179314#Comment_82179314

You clearly have no grasp of the concept of inflation then.

Someone retiring with an index linked pension(s) will naturally expect their pension to maintain their spending power over their retirement. If say they retired with an index linked pension just below the HRT threshold in 2021, by 2031 that same after tax pension will have gone down 13% in real terms [1]. That's 13% less spending power. It would be equivalent to an increase in the basic rate of tax to 37% for them. Would you understand someone being 'aggrieved' or 'shocked' by that?

Shows how easy it is for people to get fooled by the effect of fiscal drag.

[1] Based on actual and OBR forecasted inflation 2021-31.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/82179366#Comment_82179366

I have a very acute sense of the inflation rate and the adverse affects of fiscal drag especially since I have no index linked pension ( other than the state).

Furthermore my discretionary spending probably higher than many due to my abiding interest in purchasing art and antiques.

Accordingly my solution when retired 10 years ago was to strive to grow my capital base and resulting income to try and outpace what has become rampant inflation especially since the pandemic.

Intial target was to get back to my pre retirement 6 figure income, having retired on half that amount. Currently 3/4 quarters of the way to meeting that target, with increasing tax free ISA income picking up more of the slack.

To hit £100k+ retirement income I consider a necessity for my personal medium to long term resilience.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82179391#Comment_82179391

So why are you 'baffled' when people are shocked at the equivalent of a 17% rise in the basic rate of tax?

DRS1

Going back to the OP's original question.

OP what would happen to the pension if you just left the money in there until you died - is there a spouse or child who would inherit it and could maybe draw that money at a lower rate of tax?

Or are you thinking you might want the money to spend on something while you are alive?

If that is the case I do wonder if 40% is that bad a rate - pension income does not attract NICs and that was the excuse used to slap an extra 2% on the tax rate for savings income dividends and rent. Who is to say pensions won't be next? I know "pure speculation" and shouldn't be allowed.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82179457#Comment_82179457

Pension conts (apart from employer conts) don't get NI relief so the same excuse can't be used.

prowla

https://forums.moneysavingexpert.com/discussion/comment/82179531#Comment_82179531

If you're drawing the SP you're not paying NI.