Supplement retirement income until state pension age

[Plutus]

It's never too early to start thinking about it and you're being smart to do your research. I think that clearing the mortgage with the AVC fund is a great idea, and I think that withdrawing from the SIPP will be the most efficient way to supplement the £25k pension. You're right that you'll effectively be paying tax on any drawdown, but it sounds like you have a solid plan to exhaust the SIPP by age 67 and then withdraw from the ISA.

Good evening makemakeolaf, I’ve belatedly spotted your reply as I don’t login very often.

I might need to alter my plans as I know that life throws up surprises, but I haven’t enjoyed my job for a while and the most sensible option for me is to maximise the length of service in the LGPS. Or to find a job that I enjoy even if I work for longer!

Cheers, Plutus.

[hiriskpaul]

How long have you been in the scheme - pre 2008(?) service has a lump sum component. The later 60ths and the Career Average schemes have no TFLS, however AIUI if you make a SSAVC and take this at the same time you draw benefits, it counts as one pot so you can take 25% of the total notional pot. Currently the pension pot is a notional 20x pension, so you'll have used circa 50% of your LTA, so the AVC should be able to be taken tax free.

Check on this, as the (SS)AVC not only benefits from NI reduction, but might be better than adding to a SIPP due to taking it all tax free.

As for whether to take £5kpa from the ISA or SIPP, that depends on the tax rukes in 10 years, whether SIPPS are still passed IHT free if that concerns you, etc. but with £100k in total between them taking £5k would almost be done just from dividends.

I'm assuming inflation is factored in to your sums.

Paul

I would say this was very important advice. I am not familiar enough with the LGPS and AVCs, but if you can take your AVCs entirely free of tax, then it would be wise to concentrate your savings there until that hole is filled. As I understand it, AVCs, up to a limit of 25% of your pension value, will enable you to turn £80 into £100, so a 25% boost to your capital compounded with investment returns. Once you have cashed in the you can live off the capital and work it into ISAs and SIPPs.

After AVCs I would suggest concentrating on your SIPP rather than your ISA. That will boost your capital by 6.7% compared with an identical investment in an ISA.

When drawing, spend the AVC tax free cash first, then the ISAs and finally SIPPs. You might want to keep some money in the ISA though for rainy day purposes.

The reasons to draw from the SIPP last are 1) the SIPP is outside your estate and so free of inheritance tax; 2) should you die before you reach 75 the SIPP can be drawn by beneficiaries free of tax.

You should be cognisant of the pension Lifetime Allowance and changes to it, but it looks as though this will not present you with a problem.

Another option, should you want to boost your DB pension, is to look into making Additional Contributions, in addition to AVCs. These are usually much more generous than annuity purchases.

[DrFfybes]

I would say this was very important advice. I am not familiar enough with the LGPS and AVCs, but if you can take your AVCs entirely free of tax, then it would be wise to concentrate your savings there until that hole is filled. As I understand it, AVCs, up to a limit of 25% of your pension value, will enable you to turn £80 into £100, so a 25% boost to your capital compounded with investment returns.

There is a bigger gain, if the AVC is salary Sacrifice (as most LGPS allow) then you turn £67ish into £10o, or £57ish as a higher rate taxpayer. Or, if you take phased retirement so draw a reduced pension and continue to work which puts you into the higher tax bracket with the part time salary, £47 becomes £100, tax free.

Paul

[Plutus]

Thank you Paul and hiriskpaul, that’s very helpful.

I find that investing into pensions is more suitable for my temperament, I’ve always been tempted to withdraw from an ISA over the years, which has resulted in a relatively pitiful result. The AVC was a side bet that I started 10 years ago but because I don’t meddle with the account too much it’s the largest of my investment pots.

If anyone is interested then this is the AVC guide for the scheme (Nottinghamshire). Relevant points have been pasted below.

https://nottspf.org.uk/media/ac2nv4ob/a ... rguide.pdf

Get tax relief
Your LGPS and AVC contributions are deducted before your tax is worked out, so, if you pay tax, you receive tax relief automatically through the payroll.

What can I do with my AVC?
…
3) Take some or all of your AVC as a tax-free lump sum
You can take some or all of your AVC plan as a tax-free lump sum, provided that:
• The total tax-free lump sum is not more than 25 per cent of the overall value of the benefits you are taking. The total lump sum is any lump sum you take from your main LGPS benefits plus the AVC lump sum.
• The total tax-free lump sum is not more than 25 per cent of the lifetime allowance or 25 per cent of your remaining lifetime allowance3, if you have already taken payment of any pension benefits. From
6 April 2020, 25 per cent of the lifetime allowance is £268,275. It will stay the same until April 2026.

[vand]

If you are retiring at 60 then there is no reason at all you need the ISA, so I would gradually move all that into a SIPP and take the relief.

[swill453]

If you are retiring at 60 then there is no reason at all you need the ISA, so I would gradually move all that into a SIPP and take the relief.

You don't get any advantage from the relief, if it's taxed at the same rate on the way out, no matter how much growth there's been in the meantime.

A bit of tax will be saved on the 25% tax free lump sum, though.

Scott.

[vand]

If you are retiring at 60 then there is no reason at all you need the ISA, so I would gradually move all that into a SIPP and take the relief.

You don't get any advantage from the relief, if it's taxed at the same rate on the way out, no matter how much growth there's been in the meantime.

A bit of tax will be saved on the 25% tax free lump sum, though.

Scott.

Well yea, that's not insignificant is it? money going into your ISA is, in most cases taxed at 32% for standard rate payers and 42% for higher rate payer.

Compare that to a pension wrapper where in most cases you can contribute to your pension at 0% marginal rate, then when you take it out get 25% out tax-free and then pay 20% on however much above the personal allowance you withdraw (unless you living costs are >50.2kpa) .

£100 gross nets you £58 in your pension at higher rate or £68 at standard rate into an ISA (assuming you earn a taxable wage above the personal threshold, which anyone contributing to an ISA surely will be).

£100 gross nets you £100 up to the personal allowance limit and then £85 for amounts drawn between 12.5k-50.2k.

Pension wins by a very considerable margin.

[swill453]

If you are retiring at 60 then there is no reason at all you need the ISA, so I would gradually move all that into a SIPP and take the relief.

You don't get any advantage from the relief, if it's taxed at the same rate on the way out, no matter how much growth there's been in the meantime.

A bit of tax will be saved on the 25% tax free lump sum, though.

Scott.

Well yea, that's not insignificant is it? money going into your ISA is, in most cases taxed at 32% for standard rate payers and 42% for higher rate payer.

Compare that to a pension wrapper where in most cases you can contribute to your pension at 0% marginal rate, then when you take it out get 25% out tax-free and then pay 20% on however much above the personal allowance you withdraw (unless you living costs are >50.2kpa) .

£100 gross nets you £58 in your pension at higher rate or £68 at standard rate into an ISA (assuming you earn a taxable wage above the personal threshold, which anyone contributing to an ISA surely will be).

£100 gross nets you £100 up to the personal allowance limit and then £85 for amounts drawn between 12.5k-50.2k.

Pension wins by a very considerable margin.

Well I did state if the tax out was the same rate as the relief in. NI saving would only apply in a salary sacrifice scheme.

So in that case the only monetary advantage is tax on the PCLS, or 5% of gross.

Scott.