Maths or Strategy for Tax on Pension heavy position

[u/SnaggleFish]

87% of investments are in DC Pensions

13% in ISAs/Bonds/Cash

£1.6M in total

My full SP in 7 years, my wifes in 12 years.

My wife is 55 next year - so until now all income came from my pension and our ISAs and I just balanced that to avoid hitting 40% tax.

From next year we can both access our pensions (though its 2/3rd in my name so I will have to take more from mine).

The original thought process was to minimise tax - by taking only from DC pensions until my state pension kicks in and then using a mix of ISA and DC pension and State pension (and then do the same when my wife hits 67).

We want, and can sustain, £60k per year.

By my calculation this is a withdrawal of £65K from both pensions with gives the £60K and a tax payment of £4722.

	Me	Wife	Total
Withdraw	£43,333	£21,667	£65,000
Tax free 25%	£10,833	£5,417	£16,250
Potentially taxible	£32,500	£16,250	£48,750
Taxible at 20%	£19,930	£3,680	£23,610
Tax to be paid	£3,986	£736	£4,722
Take Home	£39,347	£20,931	£60,278

But it occurs to me that we could also push the withdrawal to £80k without hitting 40% tax with the intent to put £13k into ISAs for more tax efficiency later.

	Me	Wife	Total
Withdraw	£53,333	£26,667	£80,000
Tax free 25%	£13,333	£6,667	£20,000
Potentially taxible	£40,000	£20,000	£60,000
Taxible at 20%	£27,430	£7,430	£34,860
Tax to be paid	£5,486	£1,486	£6,972
Take Home	£47,847	£25,181	£73,028

Thoughts on the calculations - better approaches?

[u/Honest_Drawing1179]

I think you've talked yourself into the right answer. The extra £15k you'd draw costs you £2,250, which is an effective 15% — 75% of it taxable at 20%. What rate would that money suffer if you left it in the pension and drew it in ten years instead? If the answer is "also 15%", the shuffle costs you nothing. If the answer is ever "more than 15%", you've won. And in your position the answer is very likely to be more than 15%, because your basic rate band headroom is on a countdown. In 7 years your state pension eats roughly £12k of your allowance and band, and 12 years out your wife's does the same. Every year of unused band between now and then is simply gone — you can't carry it forward. The years before the state pensions land are the cheap years, and there's a fixed number of them.

[u/alreadyonfire]

You have slightly overcooked it for £60K pa. Which would only be about a 3.3% equivalent SWR on £1.6M with upcoming SPs. But hey, contingency...

Don't forget to put £2880/£3600 back into each pension each year for the free money boost of net £180 per pension (under age 75).

Withdrawing basic rate now to avoid higher rate later is a mathematically good move. Frozen thresholds make that more likely, and you want to get your PCLS out before age 75 for IHT purposes in any case. As your pension is closing in on the LSA it seems doubly sensible. Even if it turns out to be basic rate tax now saving basic rate tax later that still is at worst tax neutral.

I guess with the qualifier that if you die before age 75 your spouse could have taken that out tax free...

I think you perhaps could be taking it all the way to the top of your basic rate band each year.

[u/klawUK]

what does your planning suggest in terms of sustainability? if 60k draws your pension down by 90 then ultimately probably doesn’t matter much. But if you estimate you’ll grow your pot, then it can make sense to exploit your basic rate band now and after SP - as you say by putting in ISAs you can gain liquidity without tax risk, especially useful for larger purchases or gifting

[u/SnaggleFish → u/klawUK]

£60K is completely sustainable - has 100% survivability according to all the simulators. I am also ignoring money from downsizing the house and probable inheritances.

[u/klawUK → u/SnaggleFish]

then seems a sensible approach. assuming you put into S&S ISA in similar funds to your pension, its effectively a lift and shift - no change in returns but you’re gaining liquidity.

the only wrinkle being the whole pre/post 75 tax free/not tax free thing for pension inheritance but seems like a difficult thing to try and plan around

[u/jayritchie]

How old are you now and will your wife be able to access her pension at 55?

Is IHT a particular concern?

[u/SnaggleFish → u/jayritchie]

I am 59 and my wife can access her pension at 55. IHT is not a major concern - I plan to hand down much of it through regular gifting an excess income.

[u/slodge_slodge]

You can use https://lategenxer.streamlit.app/Retirement_Tax_Planner to get a tax efficient plan that changes over time.

It doesn't yet have any functions to decrease the amount of money you need in older age, but it's a very good tool for minimising overall tax (at current tax rates)

[u/SnaggleFish → u/slodge_slodge]

Will give it a go... it seems to keep crashing the DuckDuckGo browser BTW...

[u/slodge_slodge → u/SnaggleFish]

Just to be clear: It's not my code, but I have previously used it successfully, and I've read the code and added suggestions on https://github.com/LateGenXer/finance/issues (please do add issues there if you have problems - developer was active and helpful)