Drawdown and Income Tax

fifeken · 19 March 2019 at 2:05PM

I will be starting drawdown shortly and part of my planning has been to minimise Income Tax as much as possible, mainly by keeping my taxable income within the personal allowance and topping it up with tax free income.

However, even if doing this every year (12) until I can take the State Pension, I will be have come nowhere near withdrawing it all. After State Pension becomes payable and uses up most of my allowance I'll have no chance to draw it all down without paying Income Tax unless I do something different, so looking for suggestions of other methods to help do this.

I've seen VCTs mentioned here which could provide one avenue, but what other options are there?

I'm in Scotland so able to use the Starter Rate of 19% for a bit of it.

Mnd · 19 March 2019 at 2:16PM

Possibly paying some tax might be a plan, services have to be paid somehow

fifeken · 19 March 2019 at 2:20PM

Indeed, hence my aim to minimise and not eliminate. Thanks.

Albermarle · 19 March 2019 at 4:35PM

The normal advice on this forum is not to let minimising tax influence your retirement investment plans too much .
For example VCT's are only for experienced and normally rich investors , so to go down a potentially very riskyroute just to avoid paying some tax, would probably not be a good decision.
With a pension you have already beneffited a lot from tax breaks anyway.

shinytop · 19 March 2019 at 7:24PM

I think you are going to have to pay some tax. There's no point in ending up having paid no tax if you're dead or dribbling in a wheelchair. It's only 20%.

Mr.Saver · 19 March 2019 at 9:58PM

You can defer your state pension if you want to. See: https://www.gov.uk/deferring-state-pension

Dazed_and_confused · 19 March 2019 at 10:16PM

Are you married?

If so could your spouse apply for Marriage Allowance without incurring the same or greater tax liability than you would benefit by receiving the Marriage Allowance tax credit?

jamesd · 20 March 2019 at 6:13AM

fifeken wrote: »

I've seen VCTs mentioned here which could provide one avenue, but what other options are there?

EIS and SEIS are available but far riskier than the late stage company end of the VCT spectrum, which is roughly equivalent to a smaller company fund.

If using VCTs you'd take your total taxable income close to the edge of the higher tax rate. Then invest in several VCTs that primarily invest in later stage companies. For the next few years the Albion VCT with its history of asset backed investing that's no longer allowed for new investments should be at the lower risk end.

You'll get back 30% of the purchase price from HMRC no later than a few weeks after your tax return, directly into your bank account. This is capped at the tax due for the year so don't invest more than 30% of your taxable income. Purchases are commonly in £1,000 increments.

After no less than five years you can sell and not have to repay the 30%. Do high buys early in the twelve years and all should be available, plus or minus investment performance, when desired. That also allows longer holding times that might be desirable anyway.

Selling shouldn't necessarily be done. VCT dividends are tax exempt, not using the dividends allowance, and I get about £3,000 a year this way at the moment. Many VCTs, particularly towards the lower risk end, look to pay out most gains in dividends instead of share price growth.

So far I've received pretty much what I expected from my VCT investing and my first five year period ends next year. Because of the dividends I'm not likely to sell much or any.

Drawdown and Income Tax

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