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25% Tax Free - What to sell?

Including Financial Independence and Retiring Early (FIRE)
Darka
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25% Tax Free - What to sell?

#320202

Postby Darka » June 21st, 2020, 12:21 pm

I'm in the process of deciding what to do with the 25% tax free that I intend to take from our SIPP's when my wife and I retire, she retires next year with me around 2-3 years later.

The 3 options I've come up with so far are:

1) Use all of it to build an Income Reserve (gives more Reserve, but least amount of annual income, 25%+ Safety Margin)
2) Split it between the Reserve and reinvest some (50/50??) (gives some Reserve, middle level of income, 30% Safety Margin)
3) Reinvest it all into our ISA's (most income, 38%+ Safety Margin, no Reserve)

With option 3, I could then save the extra safety margin each year into creating a reserve... risky as little initial reserve.
None of the options fully build the reserve.

Option 1 gets me retired sooner, 2 a year or so later and 3 even later still as I'd have to save more to fill up the remaining reserve.

Anyway, I haven't yet decided on which option to take (opinions are welcome), but the main question is how to decide what to sell to create the 25% tax free cash in the SIPP, so that I can take it out.....

For those of you who have already done this, or have a plan in place - what did you decide to do?

regards,
Darka

Darka
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Re: 25% Tax Free - What to sell?

#320212

Postby Darka » June 21st, 2020, 12:44 pm

My preferred option would be option 3, but that would require saving the full reserve outside of the 25% tax free.

I'll have a think on how I could create that earlier somehow.

Or maybe it's better not to take all of the 25% tax free...?

swill453
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Re: 25% Tax Free - What to sell?

#320216

Postby swill453 » June 21st, 2020, 12:57 pm

Darka wrote:Anyway, I haven't yet decided on which option to take (opinions are welcome), but the main question is how to decide what to sell to create the 25% tax free cash in the SIPP, so that I can take it out.....

At least if you went for Option 3 that wouldn't be an issue, as you could rebuy exactly the same thing outside the SIPP once you have the cash.

Have you considered not taking all the 25% at once? Currently I'm in retirement spending drawdown from my SIPP, but taking it as annual UFPLS (uncrystallised funds pension lump sum) payments. It's nice and easy and means you don't have to make any major decisions.

Some might say there's a risk of the government of the day abolishing the 25% tax-free bit, so you should take it as soon as possible. At the moment I'm comfortable with that risk.

Scott.

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Re: 25% Tax Free - What to sell?

#320218

Postby xeny » June 21st, 2020, 1:02 pm

Darka wrote:
1) Use all of it to build an Income Reserve (gives more Reserve, but least amount of annual income, 25%+ Safety Margin)
2) Split it between the Reserve and reinvest some (50/50??) (gives some Reserve, middle level of income, 30% Safety Margin)
3) Reinvest it all into our ISA's (most income, 38%+ Safety Margin, no Reserve)


with options 2 and 3, is it attractive to leave it inside the pension unitl you need it, so your 25% is hopefully of a larger amount?

In general, I don't think there's enough information here.

For example, do you want to leave the pension as untouched as possible for potential IHT mitigation (so draw down ISAs first), have you considered using the 25 % over the duration of pension draw down?

Darka
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Re: 25% Tax Free - What to sell?

#320221

Postby Darka » June 21st, 2020, 1:21 pm

swill453 wrote:Some might say there's a risk of the government of the day abolishing the 25% tax-free bit, so you should take it as soon as possible. At the moment I'm comfortable with that risk.

Scott.


Thanks Scott,

I think that is my main concern regarding access to the 25%, not sure I'd trust any government on it as it could be an easy target.

regards,

Darka
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Re: 25% Tax Free - What to sell?

#320222

Postby Darka » June 21st, 2020, 1:28 pm

xeny wrote:
Darka wrote:
1) Use all of it to build an Income Reserve (gives more Reserve, but least amount of annual income, 25%+ Safety Margin)
2) Split it between the Reserve and reinvest some (50/50??) (gives some Reserve, middle level of income, 30% Safety Margin)
3) Reinvest it all into our ISA's (most income, 38%+ Safety Margin, no Reserve)


with options 2 and 3, is it attractive to leave it inside the pension until you need it, so your 25% is hopefully of a larger amount?

In general, I don't think there's enough information here.

For example, do you want to leave the pension as untouched as possible for potential IHT mitigation (so draw down ISAs first), have you considered using the 25 % over the duration of pension draw down?


Thanks Xeny,

We have no dependants, so no need to worry about IHT, sole focus of the retirement fund is to produce an income for us both for the rest of our lives, including the survivor when one of us moves on, not worried about leaving money behind as would prefer the survivor to have max options regarding retirement, care homes, etc. if needed.

I suspect the government (one day) will either limit the amount of tax free cash, or curtail it completely - having the money in the SIPP would just increase our taxable income unnecessarily when it could easily be moved out before they do that.

Of course they may never change it, but pensions are too easy a target and I'm not concerned about a larger 25% tax free as hopefully we'll have more than we need anyway - it's the problem of having to save for a large reserve that concerns me at the moment.

My preference is to retire as soon as possible, the lack of reserve is the sticking point.

regards,

swill453
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Re: 25% Tax Free - What to sell?

#320229

Postby swill453 » June 21st, 2020, 2:00 pm

Is your quoted income safety margin taking into account a realistic forecast for this, Covid19-hit year? If the savage cuts in (some) dividends still leaves you with a 25% safety margin, one might think it is indeed fairly safe.

Scott.

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Re: 25% Tax Free - What to sell?

#320241

Postby Darka » June 21st, 2020, 2:16 pm

swill453 wrote:Is your quoted income safety margin taking into account a realistic forecast for this, Covid19-hit year? If the savage cuts in (some) dividends still leaves you with a 25% safety margin, one might think it is indeed fairly safe.

Scott.


Yes, the currently predicted SM (after the covid-19 hit) is at 25%.

I sold out of those dividend cutting shares which I believed would take some time to recover (if ever) and reinvested into hopefully safer IT's and massively increased my diversification.

That, along with a transfer in from a private pension means my dividends this year will be higher than last, even after the announced dividend cuts.

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Re: 25% Tax Free - What to sell?

#320242

Postby Alaric » June 21st, 2020, 2:16 pm

Darka wrote:My preference is to retire as soon as possible, the lack of reserve is the sticking point.


Your reserve doesn't have to be in cash. It can just be assets that in the event of a shortfall in income, you could easily sell. Alternatively it can be a notional reserve, expenditure that can be deferred or cancelled. Any near future income shortfall can potentially be handled by holding back cash.

From a tax shelter viewpoint, reinvesting in ISAs up to the maximum allowed is a sensible approach for the 25%.

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Re: 25% Tax Free - What to sell?

#320252

Postby Scudsurfer » June 21st, 2020, 2:38 pm

I was looking at putting the tax free cash into ISA's
up to the max, then put the rest into a dealing account and withdraw £12300 a year so not affect by CGT. This will then go into ISA's.

swill453
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Re: 25% Tax Free - What to sell?

#320254

Postby swill453 » June 21st, 2020, 2:55 pm

Darka wrote:Yes, the currently predicted SM (after the covid-19 hit) is at 25%.

Well I might have a different attitude for risk to yours, but in my mind the reserve (by which I assume you mean a cash-like buffer of X years normal expenditure) negates the need for much of a safety margin.

In my case I retired with 3+ years normal expenditure in cash and premium bonds, and very little safety margin in terms of income in our SIPPs and other investments. I deemed it worth it to gain the extra years of quality time.

Scott.

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Re: 25% Tax Free - What to sell?

#320260

Postby Darka » June 21st, 2020, 3:14 pm

Alaric wrote:Your reserve doesn't have to be in cash. It can just be assets that in the event of a shortfall in income, you could easily sell. Alternatively it can be a notional reserve, expenditure that can be deferred or cancelled. Any near future income shortfall can potentially be handled by holding back cash.

From a tax shelter viewpoint, reinvesting in ISAs up to the maximum allowed is a sensible approach for the 25%.


Good point re: the reserve not being in cash, something for me to think about more.

And agree that reinvesting into ISAs would be a good idea and is my preferred approach so far.

Regards,

Darka
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Re: 25% Tax Free - What to sell?

#320264

Postby Darka » June 21st, 2020, 3:21 pm

swill453 wrote:
Darka wrote:Yes, the currently predicted SM (after the covid-19 hit) is at 25%.

Well I might have a different attitude for risk to yours, but in my mind the reserve (by which I assume you mean a cash-like buffer of X years normal expenditure) negates the need for much of a safety margin.

In my case I retired with 3+ years normal expenditure in cash and premium bonds, and very little safety margin in terms of income in our SIPPs and other investments. I deemed it worth it to gain the extra years of quality time.

Scott.


Yes, the reserve would be a cash-like buffer.
I completely agree with your approach of more quality time, that is so important and worth more than any amount of money.

Maybe I'm overthinking it and my safety margin is already enough, and I should be focusing on the reserve for now so that I can leave work as soon as possible, which is what I would like to do.

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Re: 25% Tax Free - What to sell?

#320294

Postby jonesa1 » June 21st, 2020, 5:04 pm

Darka wrote:
Maybe I'm overthinking it and my safety margin is already enough, and I should be focusing on the reserve for now so that I can leave work as soon as possible, which is what I would like to do.


If your income dropped, by how much could you trim expenditure if necessary? A combination of cutting costs, topping up from a cash reserve and potentially selling assets might be a mitigation you could live with in fallow years, if it means needing a smaller safety margin and / or reserve and being able to pack in earlier.

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Re: 25% Tax Free - What to sell?

#320303

Postby TUK020 » June 21st, 2020, 5:41 pm

Darka wrote:I'm in the process of deciding what to do with the 25% tax free that I intend to take from our SIPP's when my wife and I retire, she retires next year with me around 2-3 years later.

The 3 options I've come up with so far are:

1) Use all of it to build an Income Reserve (gives more Reserve, but least amount of annual income, 25%+ Safety Margin)
2) Split it between the Reserve and reinvest some (50/50??) (gives some Reserve, middle level of income, 30% Safety Margin)
3) Reinvest it all into our ISA's (most income, 38%+ Safety Margin, no Reserve)

Darka


Darka,
I think this is conflating two different issues:
a) how do you move stuff around to manage your current and future tax exposure
b) investment stance - equity versus reserves, what to sell/rebuy etc.

The moment I hit 55, I started taking tax free cash out of my SIPP and stuffing it into my ISA + funding kids ISAs at max rate.
I fear not so much the Tax Free Lump sum being cancelled, but limited to an arbitrary amount (50k? where anyone with more than that is rich, and won't mind funnelling their money into the NHS, right?).

Separate asset allocation decision is to determine what level of cash/short term bonds you want as income reserve.

Then next decision is what rate of withdrawal you want to pull from your SIPP - this should be driven by tax rate decision. YOu should pull max tax free you can out, even if you cannot afford to spend all of that, the rest should get funnelled into the SIPP.

A core problem with pensions is that there is always political risk with what the government allows you to touch in your pension, and how much the charge you to do so.

Darka
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Re: 25% Tax Free - What to sell?

#320321

Postby Darka » June 21st, 2020, 7:19 pm

jonesa1 wrote:
Darka wrote:
Maybe I'm overthinking it and my safety margin is already enough, and I should be focusing on the reserve for now so that I can leave work as soon as possible, which is what I would like to do.


If your income dropped, by how much could you trim expenditure if necessary? A combination of cutting costs, topping up from a cash reserve and potentially selling assets might be a mitigation you could live with in fallow years, if it means needing a smaller safety margin and / or reserve and being able to pack in earlier.


Good point, without taking into account the safety margin, our planned spending includes around 25% discretionary which could be cut if needed.

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Re: 25% Tax Free - What to sell?

#320326

Postby Darka » June 21st, 2020, 7:51 pm

TUK020 wrote:You should pull max tax free you can out, even if you cannot afford to spend all of that, the rest should get funnelled into the SIPP.

A core problem with pensions is that there is always political risk with what the government allows you to touch in your pension, and how much the charge you to do so.


Absolutely and the main reason I intend to take out as much as I can whilst I can - especially the initial 25% tax free.

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Re: 25% Tax Free - What to sell?

#320356

Postby xxd09 » June 22nd, 2020, 12:22 am

If you have your Asset Allocation set
Sell the appropriate amount of equity and bonds to keep the Asset Allocation intact
I took my 25% cash tax free when I retired-it is a valuable perk -the government may remove it at any time especially in current circumstances
I then lived on the tax free cash for a few years leaving my SIPP and ISA to grow
A few years not touching either meant the SIPP was back at its original amount pre 25% tax free withdrawal and SIPP was greatly increased also
xxd09

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Re: 25% Tax Free - What to sell?

#320370

Postby 77ss » June 22nd, 2020, 8:51 am

Darka wrote:.....
We have no dependants, so no need to worry about IHT, sole focus of the retirement fund is to produce an income for us both for the rest of our lives, including the survivor when one of us moves on, not worried about leaving money behind as would prefer the survivor to have max options regarding retirement, care homes, etc. if needed.

I suspect the government (one day) will either limit the amount of tax free cash, or curtail it completely - having the money in the SIPP would just increase our taxable income unnecessarily when it could easily be moved out before they do that.

Of course they may never change it, but pensions are too easy a target and I'm not concerned about a larger 25% tax free as hopefully we'll have more than we need anyway - it's the problem of having to save for a large reserve that concerns me at the moment.

My preference is to retire as soon as possible, the lack of reserve is the sticking point.

regards,


With no dependants, go for retiring as early as possible. Unless you really love your job or have no outside interests.

Sure, the sky might fall in, but no decision is risk-free. Keep on working in order to generate a cash reserve and you might then fall under a bus before you can benefit from it.

Have you looked at your major items of discretionary spending?

Some years ago, I looked at what my situation would be when the next crash arrived. I only had a very modest cash reserve, but my major item was my taste for foreign travel, so I said I could always cut back on that if necessary. In the current crash, that decision has been taken for me and my bank balance is actually increasing. Unexpected, but perhaps it illustrates the futility of over-planning. The best laid plans.....

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Re: 25% Tax Free - What to sell?

#320394

Postby Darka » June 22nd, 2020, 10:31 am

77ss wrote:With no dependants, go for retiring as early as possible. Unless you really love your job or have no outside interests.

Sure, the sky might fall in, but no decision is risk-free. Keep on working in order to generate a cash reserve and you might then fall under a bus before you can benefit from it.

Have you looked at your major items of discretionary spending?

Some years ago, I looked at what my situation would be when the next crash arrived. I only had a very modest cash reserve, but my major item was my taste for foreign travel, so I said I could always cut back on that if necessary. In the current crash, that decision has been taken for me and my bank balance is actually increasing. Unexpected, but perhaps it illustrates the futility of over-planning. The best laid plans.....



Very good point, and I really do not love my job.
I have lots of external interests and work generally gets in the way of those.


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