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One Lump or Two?

Including Financial Independence and Retiring Early (FIRE)
JohnnyCyclops
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One Lump or Two?

#441081

Postby JohnnyCyclops » September 9th, 2021, 8:24 pm

Myself and Mrs C are hurtling towards our mid fifties and pondering hitting 55 in the next few years (well before 2028 and the possible age change to 57) and being able to access pension pots.

I'm in full time employment, higher rate taxpayer. Mrs C isn't currently working. We've both got a number of DC pension pots.

I'm trying to work out if we should both grab all the 25% tax free lump sums when we each hit 55. They would be more than what could be reinvested into ISAs in a single year, or even across a pair of tax years if done both pre and post 6 April in a single year. Indeed, in my single largest DC pot, 25% would exceed the £80k that could be ISA'd in two successive ISA/tax years.

Is it possible to take the lump sum from my largest DC pot in two or more tranches? And would it be sensible.

I'm still paying into my current employer's DC scheme and intend to continue, likely through to 60 and retirement. I believe that precludes taking the 25% tax free lump from that particular DC pot?

We've got a few very small DC pots. I seem to recall if the entire pot value is less than £20k it's possible to take the whole thing out in one go, but I presume only 25% is tax free, and the rest taxable. It may make sense for Mrs C (not presently working or paying income tax) to do that with one or two very small pots, perhaps over successive tax years once she turns 55.

I suppose I should also ask whether we should consolidate DC pots to a single SIPP (each) before or after withdrawing lump sums. BUT, given my question immediately above on small pots, if we consolidate into a SIPP then I presume that option evaporates.

Finally, we might want to use some of the lump sums to knock some chunks off the mortgage (I presume it's a rationale thing to do, to clear the debt sooner, even though it feels like I'd be converting 25% of ~30 years of diligent pensions savings intended for retirement).

TIA
JC

Alaric
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Re: One Lump or Two?

#441083

Postby Alaric » September 9th, 2021, 8:34 pm

JohnnyCyclops wrote:I suppose I should also ask whether we should consolidate DC pots to a single SIPP (each) before or after withdrawing lump sums. BUT, given my question immediately above on small pots, if we consolidate into a SIPP then I presume that option evaporates.


That question came up recently in another thread. Unless Lifetime limits are an issue, the taxation is the same whether it' is several DC funds or one consolidated one. The option to take pension money out without paying tax was made more feasible with the extension of the personal allowance and the greater flexibility of drawdown withdrawal from SIPPs.

kempiejon
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Re: One Lump or Two?

#441085

Postby kempiejon » September 9th, 2021, 8:40 pm

JC I'm considering similar things and have a few ideas - there's few years to finalise my plans but current thoughts are
Small pots – up to three small pots of £10,000 each from non-occupational pension schemes and an unlimited number from separate occupational pension schemes, subject to scheme rules can be accessed. [/quote]

Accessing pensions - once an individual has accessed any pot their continued contribution is capped at £4k even if they stay in employment. A consideration if only one of you is working and continues to work the not working one could I think recycle part of any lump sum back into the employed's pension a sum the max of either £40k or relevant earnings.

A few years back I was dead set on extracting the full 25% as soon as I could now I'm toying with letting my pensions run a few years past 55 while I use non sheltered investments to supplement my income as I might be earning over £4k part time anyhow and perhaps could even afford to shelter more money from tax and IHT.

As for the mortgage psychologically it's nice to be mortgage free I'm sure but my investment increase is a higher rate than my mortgage.

I'm not really planning just bumping around the ideas at the moment so I might have the wrong end on any of those suggestions.

JohnnyCyclops
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Re: One Lump or Two?

#441090

Postby JohnnyCyclops » September 9th, 2021, 8:48 pm

Alaric wrote:That question came up recently in another thread. Unless Lifetime limits are an issue, the taxation is the same whether it' is several DC funds or one consolidated one. The option to take pension money out without paying tax was made more feasible with the extension of the personal allowance and the greater flexibility of drawdown withdrawal from SIPPs.


Indeed! I posted first and then started poking through other recent posts on this board.

viewtopic.php?f=30&t=30422

It mostly answered the questions, and highlighted popping up to £50k in Premium Bonds, as well as using the £20k ISA annual allowance. I presume the PBs is a one-time thing, not annually.

Most answers (focused on tax) made the assumption on income outside of tax shelters as being the only income. For me, still working, it would be taxed at my marginal rate, so beyond the £2k p.a. dividend income allowance (presently unused) it would be expensive.
Last edited by JohnnyCyclops on September 9th, 2021, 8:59 pm, edited 1 time in total.

swill453
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Re: One Lump or Two?

#441092

Postby swill453 » September 9th, 2021, 8:50 pm

kempiejon wrote:Accessing pensions - once an individual has accessed any pot their continued contribution is capped at £4k even if they stay in employment.

I think the £4K cap only applies if you take drawdown. If you only take tax free lump sum(s) it doesn't apply.

Scott.

JohnnyCyclops
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Re: One Lump or Two?

#441095

Postby JohnnyCyclops » September 9th, 2021, 8:59 pm

kempiejon wrote:JC I'm considering similar things and have a few ideas - there's few years to finalise my plans but current thoughts are
Small pots – up to three small pots of £10,000 each from non-occupational pension schemes and an unlimited number from separate occupational pension schemes, subject to scheme rules can be accessed.

Accessing pensions - once an individual has accessed any pot their continued contribution is capped at £4k even if they stay in employment. A consideration if only one of you is working and continues to work the not working one could I think recycle part of any lump sum back into the employed's pension a sum the max of either £40k or relevant earnings.

A few years back I was dead set on extracting the full 25% as soon as I could now I'm toying with letting my pensions run a few years past 55 while I use non sheltered investments to supplement my income as I might be earning over £4k part time anyhow and perhaps could even afford to shelter more money from tax and IHT.

As for the mortgage psychologically it's nice to be mortgage free I'm sure but my investment increase is a higher rate than my mortgage.

I'm not really planning just bumping around the ideas at the moment so I might have the wrong end on any of those suggestions.


I'm borderline to exceed the LTA on a forecast to 60, and will highly likely exceed if I don't retire til 65, depending on growth rates, and am stuffing 17% p.a. into my current employer's scheme (6% them, 11% me). I don't think we'll need to recycle Mrs C's lump sum into my active pension. I think I need to stay the right side of the LTA, and any excess savings ability over the next few years could instead be diverted into ISAs (once an expensive house extension gets done and paid for).

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Re: One Lump or Two?

#441113

Postby kempiejon » September 9th, 2021, 9:44 pm

JohnnyCyclops wrote:[
I'm borderline to exceed the LTA on a forecast to 60, and will highly likely exceed if I don't retire til 65, depending on growth rates, and am stuffing 17% p.a. into my current employer's scheme (6% them, 11% me). I don't think we'll need to recycle Mrs C's lump sum into my active pension. I think I need to stay the right side of the LTA, and any excess savings ability over the next few years could instead be diverted into ISAs (once an expensive house extension gets done and paid for).


I feel you pain - have you considered jacking it in before 60 and spending the money quicker?


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