How to spend it?

[James]

Hi
On current projections I should be able to retire in the next few years aged 62.
My magic number will be made up of my defined contribution pension pot (30%), ISA (50%) and equity in a rental property (20%).
My state pension will kick in at 67, at which point my partner will also retire (aged 62), with her pension that is worth roughly 80% of my combined number. She will then collect state pension five years later, too.
My question is how to spend my way through this in the most logical way.
Am I better to live off the tax-protected earnings from the ISA first, then top up with pension funds?
Another issue is that I don't really fancy being a landlord in retirement so will extract the equity from the property. That will take quite some time to stuff into an ISA, and only possible after my earning stops as I'm already filling the limit, so should that be lived off first until it is run down or protected?
These aren't the actual numbers, but if you had £500k in an ISA, £300k in a pension pot, and £200k in cash, and wanted to retire five years before state pension age, what would you do?
J

[Alaric]

These aren't the actual numbers, but if you had £500k in an ISA, £300k in a pension pot, and £200k in cash, and wanted to retire five years before state pension age, what would you do?
J

The solution which would mimimise tax in those circunstances is to draw down from the pension funds enough to meet the personal allowance. You would leave assets in the tax sheltered ISA as long as possible which means using the cash, That's ignoring IHT which might make a difference if the sums are large enough,

[JohnB]

If your goal is solely to minimise income and capital gains tax, not inheritance tax.

1) ISAs are the best thing to have, top them up and spend them last

2) Ensure your taxable income is at least the personal allowance + £2k dividend allowance (you could try to use the £1k interest allowance and starting rate for savings, but cash is such a worse performer than equity I'd not have any).

3) Pension income beyond the personal allowance is taxed at 15% when you include the 25% tax free. Dividend income is taxed at 8.75%, so you might as well draw your pension quickly up to the HRT threshold and then get unsheltered returns. Leave enough so you'll always have enough pension to get to personal allowance

4) Don't have more than £250k in unsheltered equity, else in inflationary times you could be building up more capital gains than you can diffuse with the £12000 allowance. You can have more if inflation is low.

[James]

Should have added some more on personal circumstances.
No offspring so no desire to leave a large legacy. When I chip off, my partner has a life interest in 'my' half of our house, which then goes my nieces/nephews, but I'm not chasing the last penny from the taxman when I die, just trying to figure out the best way to work through it while I'm still around.

[James]

If your goal is solely to minimise income and capital gains tax, not inheritance tax.

1) ISAs are the best thing to have, top them up and spend them last

2) Ensure your taxable income is at least the personal allowance + £2k dividend allowance (you could try to use the £1k interest allowance and starting rate for savings, but cash is such a worse performer than equity I'd not have any).

3) Pension income beyond the personal allowance is taxed at 15% when you include the 25% tax free. Dividend income is taxed at 8.75%, so you might as well draw your pension quickly up to the HRT threshold and then get unsheltered returns. Leave enough so you'll always have enough pension to get to personal allowance

4) Don't have more than £250k in unsheltered equity, else in inflationary times you could be building up more capital gains than you can diffuse with the £12000 allowance. You can have more if inflation is low.

The solution which would mimimise tax in those circunstances is to draw down from the pension funds enough to meet the personal allowance. You would leave assets in the tax sheltered ISA as long as possible which means using the cash, That's ignoring IHT which might make a difference if the sums are large enough,

So it seems that best to do is take the personal allowance at the time from the pension, top up with the cash until that's gone/stashed in ISA, then tap ISA after that?

[Dod101]

I would leave tax sheltered assets untouched for as long as possible. That means leave the SIPP and ISA untouched. Live off the cash. Of course it depends on your tax situation but very broadly that has got to be the best way forward. People get hung up on the tax charges or the other way round, using up the allowances. They are only of value if they will cost if not used and that does not appear to apply to your situation.

Dod

[DrFfybes]

If your goal is solely to minimise income and capital gains tax, not inheritance tax.
...

4) Don't have more than £250k in unsheltered equity, else in inflationary times you could be building up more capital gains than you can diffuse with the £12000 allowance. You can have more if inflation is low.

If you have that then spend it first. Either total return and sell down, or take divis and sell down. Anything you sell from unsheltered is money not taken from an ISA, so is effectively a contribution.

[xxd09]

What I did
You need to establish what your living expenses are-I used Quicken for a few years pre retirement--I knew then what yearly income I required roughly
I spent the same in retirement as working-more travel etc
Always have 2years living expenses in cash on hand in a -“high interest “ account-I currently use Tesco Internet Saver-0.71% interest!
Then if have a cash surplus-live off that until only 2years living expenses available
Then start drawing income from ISAs(Tax free) and/or Pensions (Taxable) as required to top up your 2years living expenses pot
That’s it
Personally…….
I used the 25% tax free cash from SIPP to live on for a while-a nice perk not to be missed
Tax free Personal allowance should be used if possible £12500?- available ever year
xxd09

[Dod101]

What I did
You need to establish what your living expenses are-I used Quicken for a few years pre retirement--I knew then what yearly income I required roughly
I spent the same in retirement as working-more travel etc
Always have 2years living expenses in cash on hand in a -“high interest “ account-I currently use Tesco Internet Saver-0.71% interest!
Then if have a cash surplus-live off that until only 2years living expenses available
Then start drawing income from ISAs(Tax free) and/or Pensions (Taxable) as required to top up your 2years living expenses pot
That’s it
Personally…….
I used the 25% tax free cash from SIPP to live on for a while-a nice perk not to be missed
Tax free Personal allowance should be used if possible £12500?- available ever year
xxd09

And then by the time you reach my age you can live virtually tax free. Otherwise, I entirely agree with xxd09. I used my 25% tax free funds from my SIPP to help buy my current house which whilst downsizing actually upsized in terms of cost.

Dod

[DrFfybes]

I used the 25% tax free cash from SIPP to live on for a while-a nice perk not to be missed
Tax free Personal allowance should be used if possible £12500?- available ever year
xxd09

Is it a perk not to be missed? If you don't take the lump sum, but drawdown, don't you still get the 25% relief, just over a longer period of time, and possibly increasing amounts from a pot still growing tax free?

If someone has a lot of unsheltered assets (eg from a DB scheme lump sum, downsizing, inheritance, or in the OP's case selling BTL properties) that will take a while to shelter, then leaving SIPPs untouched until they might need them rather than taking ££££ out of a potentially IHT exempt pot can be far more attractive than a lump sum they have no immediate use for.

Paul

[ursaminortaur]

I used the 25% tax free cash from SIPP to live on for a while-a nice perk not to be missed
Tax free Personal allowance should be used if possible £12500?- available ever year
xxd09

Is it a perk not to be missed? If you don't take the lump sum, but drawdown, don't you still get the 25% relief, just over a longer period of time, and possibly increasing amounts from a pot still growing tax free?

Using UFPLS each amount you drawdown will have 25% tax free and the other 75% taxed at your marginal rate. Since the uncrystallised pot left would usually grow over time this could theoretically give you a larger total tax free drawdown amount however you need to remember that doing it in that way you would only get the full tax free lump sum if you lived long enough to fully empty the pension pot using UFPLS. Also the downside of that growth is that each UFPLS drawdown is tested against and uses up more of your LTA limit (and there is a further LTA test at age 75 on any still left uncrystallised in the pot) meaning that you would be better crystallising the whole pot and taking the 25% tax free lump sum using flexi-access if you are getting anywhere near the LTA limit (with "near" possibly being a fair number of 100s of thousands away from the LTA limit depending how long before age 75 you start drawdown and how much growth you get).

[swill453]

Since the uncrystallised pot left would usually grow over time this could theoretically give you a larger total tax free drawdown amount

That's a little bit of a red herring because if you withdraw all the tax free amount at once you can reinvest it outside the SIPP, and with a bit of careful management possibly retain all the income and growth tax free.

Scott.

[ursaminortaur]

Since the uncrystallised pot left would usually grow over time this could theoretically give you a larger total tax free drawdown amount

That's a little bit of a red herring because if you withdraw all the tax free amount at once you can reinvest it outside the SIPP, and with a bit of careful management possibly retain all the income and growth tax free.

Scott.

Yes, that is one of the many reasons I used the word theoretically.