Early retirement

[Devonian]

As I see it (as a layman):-
If tax free cash left in pension could well be taxed on drawdown (especially if also receiving state pension.
If put in ISA could grow equally well and will be tax free when withdrawn.

The tax free cash element is always tax free cash when drawn up until age 75.

What quite a few people do at 55 or over is crystallise their tax free cash element with the drawdown payments - so assuming no other income stream they can draw approximately £16,666 per annum out of their pension tax free annually. 25% of that is their tax free cash and the balance is their annual taxable income allowance of £12,500. They are then only using a small amount of the TFC.

[noTAGlove]

The tax free cash element is always tax free cash when drawn up until age 75.

What quite a few people do at 55 or over is crystallise their tax free cash element with the drawdown payments - so assuming no other income stream they can draw approximately £16,666 per annum out of their pension tax free annually. 25% of that is their tax free cash and the balance is their annual taxable income allowance of £12,500. They are then only using a small amount of the TFC.

I’ll chip in with a question if you don’t mind, since you know you’re stuff.

I only have a final salary pension scheme, and I’m 50 now and can take an unreduced pension at 60, or reduced (-15%) at 55 with Company agreement.

If I was to take it at 55 and not take a 25% lump sum, would the first 25% pension income be tax free year after year, in addition to my personal allowance?

Ta in advance.


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[David_D]

If I was to take it at 55 and not take a 25% lump sum, would the first 25% pension income be tax free year after year, in addition to my personal allowance?

Nope! Yours is a Defined Benefit/salary related pension. The thread has been more about Defined Contribution/Money Purchase arrangements.

[Devonian]

Taking £16666 from the pension and £8334 from the ISA might work out the same in the end, in terms of fund balancing. The strange thing is (another glimpse into how my brain works...) I have more confidence in the ISA fund remaining tax free than I have in the rules around a 25% pension allowance lasting for the duration of my retirement. Correct me if I’m wrong, but I assume that if I start to withdraw in chunks then I can’t later change my mind and take 25% of the remainder tax free and move the rest into drawdown (without paying tax on it up front)?

Drawdown is flexible so you can change your mind and take more tax free cash later if you want. You are essentially just crystallising more if you do.

As for the the tax free cash going, whilst no one can ever guarantee anything, it would be just about the biggest vote loss for any party to do this. It’s been debated numerous times before each budget and the ‘analysts’ always put it at 1% maximum of happening. It would kill off people being prepared to contribute which is what any government is desperate for them to do.

Also just remember the £16,666 figure I quoted is based on no income for it to be totally tax free - you mentioned rental income so bare that in mind.

Am I right in thinking anything over £85k in an ISA would not be covered by the FSCS compensation scheme in the event the firm goes under?

In stocks and shares ISA’s the money is now more protected, however as mentioned above it’s based on the performance of the individual shares in the holdings. Bank or building society would be the 85k.

Worth considering now that cash ISA’s aren’t very good for a lot of people. Basic rate tax payers can earn £1,000 in interest (higher £500) before paying tax so at 1% they would need £100,000 saved. Lots of accounts pay more interest than cash ISA’s so if you only have 20k or 50k for example you may be losing out.

If you retired overseas would you be able to take money out of your SIPP and pay whatever rate the local tax is instead of being taxed in the UK?

As long as you can get away from the U.K. tax regime, which I’d imagine is more complex than it sounds. Interestingly Portugal are letting Brits who move over draw their pensions tax free. They’ve been really advertising it to attract pensioners over to live and spend their money I guess. Apparently the EU (which they are in!) aren’t happy with it and saying they can’t do it.

I’ll chip in with a question if you don’t mind, since you know you’re stuff.

I only have a final salary pension scheme, and I’m 50 now and can take an unreduced pension at 60, or reduced (-15%) at 55 with Company agreement.

If I was to take it at 55 and not take a 25% lump sum, would the first 25% pension income be tax free year after year, in addition to my personal allowance?

Ta in advance.
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Final salary works totally differently so you can’t do that I’m afraid. However they will offer you take free cash and it may be possible to ‘commute’ some of your pension so you get extra, or take less (or none at all depending on the scheme) and get a higher pension. People generally always take tax free cash but it’s sometimes worth looking at the numbers just to check. It’s worth taking advice on this if you have a good number of years.

15% reduction at 55 is pretty good if you can get it. Many will knock 4 or 5% off per year.