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SIPP vs DB Pension Strategy

Pheidippides
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SIPP vs DB Pension Strategy

#27265

Postby Pheidippides » January 29th, 2017, 8:48 pm

Hi fellow Lemonistas,

I am married, currenty 52 and looking to retire in about three years time. I have a question regarding lump sums

I have a SIPP and some ISA's, plus I am recently mortgage-free.
I have a sizeable SIPP and will receive a DB pension (of ~9K) in 2025 (aged 60)
Mrs Pheid is a non-earner with a minimal SIPP (just accumulated 2,880/3600) and will receive a DB pension (of ~12K) in 2029 (aged 65)

My plan was to use the cash in my Mortgage offset account to fully utilise mine and Mrs Pheid's ISA limits for the next three years (i.e. 120,000)

The idea is to get as much as possible out of my SIPP as soon as possible in order to minimise our income tax liability on the way out.
I have absolutely no intention of sacrificing ANY of the wonderful benefits of our joint DB plans, but I was wondering whether I could use the aggregate value of my notional DB and my SIPP when calculating my 25%. I was hoping to swap these SIPP stock investments into stock ISA's by converting the cash ISA when I'm 55.

The idea being that I am a non-earner between 55 and 60 and would then be able to draw down my SIPP to minimise my tax liability, whilst topping up from my residual ISA's

I'm not sure that this is possible, as my problem is that my notional retirement date is before my DB's come into play

Any advice would be most welcome

Regards

Pheid

Urbandreamer
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Re: SIPP vs DB Pension Strategy

#27345

Postby Urbandreamer » January 30th, 2017, 7:13 am

I'm no expert and suspect that to get this right you may need profesional advice.
My question is why you would want to?

I'm not questioning the value of your reasons, just what they are.

Currently the 25% that you are talking about is tax free be it in a SIPP or ISA, while you live.
IHT may not be relivent, but in principle moving capital from a pension to an ISA may expose it to tax at 40% in the future.

I'm 53 (married) and historically targeted ISA's for my "pension" savings, though I also contributed to a company pension. My reasons were restrictions about when I could take my pension and what I could do with it.
Since pension freedom I have dramatically increased my pension contributions (at the expence of ISA saving) to the extent of taking dividends out of an ISA and investing them in my SIPP. That is to say I'm doing almost the oposit of what you intend.

When I retire I intend to draw more heavily on my ISA than pension with the intent that it runs out before my pension pot and to reduce my income tax bill.

Pheidippides
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Re: SIPP vs DB Pension Strategy

#27553

Postby Pheidippides » January 30th, 2017, 4:04 pm

Urbandreamer wrote:Currently the 25% that you are talking about is tax free be it in a SIPP or ISA, while you live.
IHT may not be relivent, but in principle moving capital from a pension to an ISA may expose it to tax at 40% in the future.


My current SIPP and stock ISA's can carry on as they are, protected from CGT. I will add to CASH ISA's for the 120K. I am effectively maxed out on my SIPP contributions because of a generous company scheme.

Future state at 55 I will have my mortgage fully offset by ISA-held cash.

So as at age 55 (simplified numbers):

Mortgage -200K
Offset 200K in CASH ISA's

SIPP 600K
DB Pension 200K


Ideally, I'd like to:

Transfer the Cash ISA to a Stock ISA provider

Sell down 200K of my SIPP holdings for cash (25% - If I can aggregate DB & SIPP) as cash and fully pay off my mortgage

Re-invest the 200K into the same equity holdings that were in my SIPP, but now in an ISA wrapper.

Result: SIPP investments, converted to ISA so do not attract tax as it is not classed as income


Remember that between 55 and 60 I will have no income so intend to live on tax-free (or low-tax) SIPP money (i.e. 12K or then equivalent) and topping-up with ISA sell-downs

Regards

Pheid

ursaminortaur
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Re: SIPP vs DB Pension Strategy

#27562

Postby ursaminortaur » January 30th, 2017, 4:25 pm

So as at age 55 (simplified numbers):

Mortgage -200K
Offset 200K in CASH ISA's

SIPP 600K
DB Pension 200K


Ideally, I'd like to:

Transfer the Cash ISA to a Stock ISA provider

Sell down 200K of my SIPP holdings for cash (25% - If I can aggregate DB & SIPP) as cash and fully pay off my mortgage


The SIPP and DB pension are separate arrangements so you won't be able to aggregate them in that manner. You will only be able to take out 25% tax free from your SIPP ie £150K. Your DB pension , according to its age, may come with a default lump sum eg 3 x final salary. In a few cases this may even be more than 25% of the value but in most cases it will be less. You can make the DB pension lump sum upto 25% by commuting some annual pension but this isn't generally recommended as the commutation rates tend to be terrible eg for each £1 of annual pension you give up you only get £12 pounds of tax-fee cash - a rate of 30 or more would be equitable. Note you will only be able to take this DB pension tax-free lump sum when you take your DB pension.


Dave


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