The 3 Big Pension Mistakes EVERY Retiree Makes (Real world examples)
Вставка
- Опубліковано 17 тра 2024
- Taking tax-free cash is not tax-free if it means you have to pay more tax in the future!
Financial Planning
I am a Chartered Wealth Manager and Partner in a financial planning practice based in the UK. If you would like to find out more about our services, please follow this link: go.novawm.com/getintouch
DISCLAIMER:
This channel is for education purposes only and does not constitute financial advice. Any opinions or assessments expressed are James’ own opinions or assessments, which are not affiliated with any third party. Any representations stated as facts or views based on such facts are relevant to circumstances applicable at the time of publication. This information should never be relied solely upon to make decisions, and James accepts no liability for any investment actions undertaken by viewers. Please seek regulated financial advice or an advisor if you require assistance. The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested.
00:00 Intro
01:06 Tax-Free Cash
07:05 Defined Benefit Pension
09:59 Asset Splits
James Shack™ property of James Shackell
Copyright © James Shackell 2023. All rights reserved.
The author asserts their moral right under the Copyright, Designs and Patents Act 1988 to be identified as the author of this channel and any video published on it.
I must be the rare person that still found the video complex. Pensions are an absolute minefield, well finance in general for me. Perhaps I need to play it back a few times to wrap my head round it :)
Don't worry, I struggled with it too. Numbers are not my strong point.
Me too. This is a subject that really needs to be in the school curriculum.
None of us have a clue.I am planning on getting help from a planner as it's too important to screw it up.
The whole industry needs a change it's deliberately complicated so you're likely to make mistakes and not draw what you could or draw too much or drive you into the arms of financial advisers taking thousands of pounds from tiny pensions of the average worker just to tell you even more gobbledygook 🤷
Kind of says it in the title do I need 20k 40k or 60k haha where are the videos for 5k a year plus state pension???
I would like to see more videos about pensions for low earners who will be getting very modest amounts of money.
With you.
Agreed. How about a married couple a few years apart neither with defined benefits. There is a point where one is still working the other not. The step by step guide to minimise tax and maximise pension.
The guy who made this video I suspect is only interested in clients with big pension pots.
An IFA who takes 1% on a pot of £800,000 makes £8,000 a year in fees but only makes £800 a year from someone with a pension pot of £80,000. No surprise he doesn’t want his clients reducing the pot size (whatever it is) by 25% as it earns him less money.
@@sultanoftippoo3857 I make the same point elsewhere. The key is to keep your yearly income below the £50K limit per person, that way you avoid being clobbered for Income Tax at the higher rate. Also taking out your 25% tax free as a lump sum means that you're not as exposed to inflation, where over the last decade or so, pension pots have failed to keep pace with inflation. This is no longer the case with many savings accounts, due to increased interest rates, they're offering 5% or more interest.
I wonder what percentage of people watching this video have private pension pots of £800K plus? I know I don't, along with probably 90% plus of the population. This video really didn't teach me anything I didn't know, having been both self employed and PAYE at different times, running a small business (recently sold as I retired). I've had an accountant making sure I don't pay more tax than I need to, as well as a pension adviser. As you say, this video is aimed at those with large pension pots and 40% taxpayers, not the vast majority of people. The Government Pension Advice service is good, I used it before I got my State Pension in 2018. The bad news is if your pension pot is small (under say £100K) and being used to supplement your State Pension, your options are somewhat limited. That's the position that many people in the UK now find themselves in and why so many people are having to work past State Retirement Age.
Excellent info James - thank you 👍🏻
It’s one thing knowing that stuff but delivering it in a logical and understandable order is very impressive
I’m glad you find it clear!
Totally agree, exceptionally illustrated and described. A double-whammy of mind blowness in that video! My wife and I are Neil and Grace in the waiting. I can't help but think sitting down with James even now would at least allow us to flex and adjust what we are doing each year as we/tax bands/inflation flexes. Because at the moment I plough the whole £60k into my pension because I pay 40% and my wife pays the basic tax rate. We are also on course to pay our mortgage off ten years early so will have a lot more disposable income to save 'somewhere'. Absolutely fantastic video, I had thought I'd learned all there was to learn about pension drawdown but 🤯
You are the second advisor I have heard saying that if you leave your cash free sum or part of it in your pension fund it grows tax free. In practice it does not. The purpose of a pension fund is to provide you with a future income with a side issue involving inheritance tax. For most people, the state pension will use up all their personal allowance so as soon as you draw from it you will pay tax so we are talking about a deferral of tax rather than exemption from it. This may not be an issue but before deciding not to withdraw any tax free cash it is important to consider other options that could be available such as unused ISA allowances, debts that could be repaid and using the increasingly small tax free dividend allowance. Others have pointed out that the tax free element is not guratanteed to be available in the future and additionally, future tax rates are not guaranteed.
Also the tax free cash decision is a gamble on how long you will live.
@@JohnSmith-xi3sq Very true. I've known people to die not long after retirement. Such a waste all round. One reason I took the maximum lump sum I could. Better in my pocket than some company that might go bust.
This video gives bad advice because it assumes political stability. How do you know that the rules wont be changed in the future? Better to take available tax free cash and invest it in e.g. ISA's than risk leaving it to potential land grabs by the Chancellor.
For most people, it only makes sense to draw tax-free cash if you want to spend the money there and then.
It's generally better to keep it within the pension so it can continue to grow tax-free and remain outside of your estate.
I do not expect the 25% tax-free lump sum to be removed (at least in full) because it is one of the only advantages pensions have for basic-rate taxpayers.
If you remove it, the BR taxpayer gets 20% tax relief on the way in and pays 20% tax on taking it out (when in receipt of a full state pension, as you point out), so what's the benefit over an ISA? (other than IHT protection, which BR taxpayers are often not concerned about)
However, there are some situations where it can make sense to take tax-free cash to fund an ISA:
- You're at the tax-free cash Lifetime Allowance, meaning that any further growth gets pushed into the taxable part of your pension
- You want to spread assets across tax wrappers to hedge your bets against potential future legislation changes.
You need to be careful with this second option because you have to be certain that IHT will not be an issue. Which is hard to be certain of if they never raise IHT Nil rate bands again! There is also nothing to say that the government won't change ISAs or remove any of the other allowances you're trying to make use of (as they are slowly doing). But if IHT is not an issue, having a balance between tax-free cash in a pension and ISAs may make sense.
As I said at the end of the video, it's hard enough to understand the rules as they are right now, let alone trying to guess what political party may get into power next and what changes they may bring.
So, for the most part, it's best to play the game as the rules are now. Otherwise, you'll tie yourself in knots and never be able to make decisions.
@@JamesShack Does the same advice go for either DB or DC pensions if you are a 40% taxpayer ie it's more tax efficient to not take the cash?
This says to me, get all the good stuff done while working and change to a more sedate, low cost life style in retirement
That's great if you have the time, income and flexibility to do that while you are working but it's not achievable for everyone. Although James's videos cover many topics, the general theme is around how to set yourself up to be able to retire earlier than state pension age, so that you should have a few years to enjoy your new-found freedom before old age catches up with you.
Thank you James. Superbly and clearly relayed to your audience. Over the last 14 minutes, the duration of your most helpful video, I've learnt more about how pensions and tax work than I've ever learnt reading through the bumf I was provided to myself pre-retirement age.
Now retired, but still well worth learning this stuff for my children, and their children too. Just subscribed to your channel fella for the sake of future proofing my family lines pensions, so again James, a big thank you to you.
Hi James, another great video, thanks a lot!! Your examples are great to understand the tax implications and how to maximised your income at retirement minimising the tax impact. Many of your viewers are probably considering retirement outside the UK, as I do. Although you will not be able to cover every possible country, it would be great if you could explain which tax implications we should look into if we decide to retire in a EU country, from the UK tax point of view, and which tax factors we should be looking into the country where we want to retire. Thanks!
This is the first time these options have been explained in a manner I can easily understand. Great video
Really excellent video!!...if only more people were aware of these pitfalls...it also demonstrates how incredibly difficult it is for the average person to manage their pension in a tax effective way by themselves.
I need to keep looping back to this every few weeks, makes my head spin!
This is very good advice if you are a robot without any human traits. Life is for living and enjoying and you only get one shot at that . Most of the population is unhealthy abd obese. There will be no enjoying life in your 80s you will be dead or in a nursing home .
My independent wealth management advice is retire early . Take the full tax free lump sum and enjoy yourself with it . If you pay a bit more tax years later whats the big deal you will be too old to enjoy the extra money .
If you do run out of money whats the problem ,the taxpayer will pick up the tab for the nursing home if your pension doesnt cover all of it .
Love life be free... enjoy the pains of time and then relax with the gains off time???? Time is an????
'the taxpayer will pick up the tab for the nursing home if your pension doesnt cover all of it .' Sounds like someone is in for a VERY rude awakening...
@@user-sy7py4td2s
You obviously don't live in the UK . Over here ,if you arrive illegally on an inflatable you get free accommodation, free money, free food ,free healthcare ,free dentistry, free education and never have to work a day in your life .
If you work hard all you life and save some money and pay your mortgage off over 35 years then if you need to go in a nursing home the local authority will take all your money plus your house to pay for it while the person in the next room in the nursing home who never worked and spent every penny of welfare benefits they got on wine ,women and gambling get their nursing home fees paid for by the taxpayer.
This is why all the Afghan Syrian Iraqi and African economic migrants risk their lives to escape France and come to England.
Great content and clearly presented, thank you!
This has been a help in fine tuning our retirement plans.
I love your videos - I think I’m reasonably knowledgeable (for the average person!) on personal finance but you really demonstrate in each and every video both something new and the benefit of getting a real dedicated professional involved.
100% agree I know all the bits but putting them into operation all at the same time is head-spinning, I get confused by how the tax-free allowance works, I get the allowances but the fact that it kinda of sits there and can be drawn along side the taxable party? how do you or the pension company know which part is being drawn against?
I have one of these DC pensions (SIPP) and with my platform, you define an amount (e.g. £10k) to be moved into "drawdown" and 25% of that amount (£2.5k) is then transferred to you tax-free. You can also define a regular monthly income, or take ad-hoc amounts when you wish. Of course, for them to transfer cash to you, you must have previously sold some of your investments in order to hold the necessary cash in your account. It is not necessary to sell all of the investments to the value of the drawdown amount and they can continue to grow as investments. This is undoubtedly a more complex scenario, so if you are not comfortable managing this yourself, then that's where a financial advisor can help. The alternative is that you effectively turn your DC pension into a DB pension by taking a lump sum and purchase an annuity. Of course, you may prefer to mix and match solutions, so you could purchase a short-term annuity that provides income until state pension age, at which point you could use drawdown to top-up the state pension, or purchase a longer-term lifelong) but lower value (income level) annuity in order to maintain a consistent level of income.
There are so many options that it can be difficult to make a decision about what is best for you. Financial advisors can be a great help but they can be expensive. Start by watching more of James's videos and also talk to Pension Wise from moneyhelper: "Pension Wise is a service from MoneyHelper, backed by government. We offer free, impartial guidance to over 50s. We’ll explain the options to take money from your defined contribution pension pots."
Just had this video recommended by the algorithm. I would like to think I'm pretty financially literate (paid off my mortgage early and made large pension contributions when times were good), but I definitely learned some new and useful stuff from you. Subscribed immediately, and I look forward to exploring your past videos as well 👍
Hours of useful viewing ahead for you!
Great video mate, thanks 👍
I'm sure I'll get it all, once I've watched it a few more times 😊
Haha - glad you enjoyed it!
This is a good video and it makes you think how you should plan your pension contributions and drawdown between partners to limit the amount of tax. If one partner is unlikely to cross the tax threshold to 20 % in retirement then invest in a pension for that partner and get the 20% tax free allowance. No mention is made of Isa,s you may have paid tax on the sum invested but after that its tax free.
Superb summary.
Great advice as always James.
Glad you enjoyed it
Interesting discussion, but not the only way to look at it. The starting premise that I agree with is that it is never a good plan to draw income to the extent that you pay higher rate tax on it. My intention is however to only use regular income to pay basic bills like food, heating, petrol etc. and on that footing £30-35k pa before tax should be enough. Anything fancier, like the long haul flights mentioned in the video, get funded by carefully controlled capital drawdowns from my ISAs.
Darn good video (again!). So useful.
this is a brilliant video, i have never seen anyone talk about being tax efficient in retirement, well done!
Excellent video, thanks
You brushed over the tax that Neil would pay on his PAYE by reducing his salary sacrifice in order to direct more of the couples money into Grace’s pension. So some of the extra contributions going into Grace’s pension may have 20% relief input but that money was freed up by paying tax at 40% on Neil’s income.
This is what confused me too. Would there still be a net advantage, even with this hit?
James discusses several complex scenarios. Taking one relatively simple example, Neil should pay enough into his pension to bring him into the 20% tax bracket. Then, Grace contributes to her pension, gaining the same relief that Neil would have received (20% + employee's NI). The difference comes when they take an income from their pensions in the early years (prior to state pension age) because Grace is not making full use of her tax-free personal allowance, so where Grace takes income, she can receive a total of £12,570 tax free, including her government pension but Neil would be paying 40% tax to achieve the same net income because he's already using his full personal allowance plus the 20% rate allowance.
Edit: At the risk of making this look more complex: "Grace's pension may have 20% relief input but that money was freed up by paying 40% on Neil's income". Yes, so the net result is that overall, the couples pension contributions were subject to tax at just 20% (going in to Grace's pension) but they are now able to make full use of Grace's tax-free personal allowance and 20% tax band, on the way out. This would still benefit the couple if Neil was hitting contribution limits and unable to get down to the 20% tax bracket. This is not a problem that most of us, contributing within the 20% tax band, need to worry about but maximising the future use of a partner's personal allowance would still be a big benefit, for a couple, especially if retiring prior to normal state pension age.
Great video thank you. Have you run the numbers for a comparison of taking or not taking the lump some from DB pension? Say with a 12 exchange
James l love your no nonsense videos 👍
Nicely explained.. Thanks. Every one has individual circumstance and they need to check that.
This video really really addresses those most who are high rate taxpayers. The real problem will be if the State Pension continues to rise annually (for new recipients, it's now over £10K from April 2024), while at the same time the Personal Income Tax Allowance has been frozen at £12570 between 2021 and 2027. At this rate, the gap between the two will disappear to a point where you could end up paying Income Tax on the basic State Pension by 2027. The key here is to keep your taxable income (in total, including State Pension) to below the 40% tax threshold (just over £50K a year) per person, which would suffice for most people here. The large savings shown here as regards tax savings aren't really applicable to people with pension pots worth under £200K and paying Income Tax at the 20% rate, which is around 85% plusof the population currently working who don't pay higher rate Income Tax. The key is to keep your yearly income well below the £50K mark and not attract higher rate tax.
Thank you for great explanation. It was very helpful video.
This is fabulous resource. I am now 53 and to be honest have not paid attention to all this for years, but I am now (warning - time catches up with you). Paying attention now.
I`m 55 - I would like to retire now - single , not married and no kids ..
Good on you..I wish I had been briefed on this by my advisors..it would have made a huge difference
James, could I please make two video requests?
Employee Stock Purchase Programmes are they worth it? Pros and Cons? How does this affect other salary sacrifices (pensions) and applications for mortgages?
Restricted Stock Units? Best to Hold or Sell? Short term, long term CGT etc.
Happy to share some info for context and real life examples.
Visuals spot on 👍
Thanks for the appreciation. They took me ages!
Good points.
Lots of if & buts, but no one knows the future.
This is a really valuable video James, all your videos are great, but this one really stood out for me - thank you, keep them coming!
Excellent again! What’s the lifetime pension allowance you mentioned? Thought that had been abolished?
There is still a LTA for the maximum amount of tax-free cash you can withdraw from a pension.
Another fantastic video James. This is an angle I've not seen explained ever and it's certainly got me thinking
Big numbers are always impressive - I'll take my flat cap off and keep hoping for handouts
Not sure if you know army pensions in the UK.. but i get my army pension at 60 and a 25% tax free sum, it then goes up at pension age as well. Now as im going to be working still hopefully do you know if i can like the state pension defer it until i claim state pension at 67??? And will it then increase? Sorry but nobody knows :)
Wow, this is an exceptionally good video! I've recently had to make decisions about my own pension and I realise I should probably have watched some more of your videos first! (It's just one person to consider, though, and not much pension.)
Taken the tax free cash, had a great holiday and paid off mortgage
Absolutely fascinating!!!
Brilliant video James
Mind. Blown. 🤯
Great video, thank you!
My pleasure!
I am 68...69 in December! I have 2 small pension funds that I have yet to draw from. They have both shrunk substantially EVERY YEAR FOR THE LAST 4 YEARS! It seems that I am paying more in administration fees than any 8nterest that they accrue! I don't need these pensions yet, but the longer I wait to withdraw, they lower the funds appear to get....on top of the effects of inflation. The system is crooked!
you need to speak to an independant financial advisor ... to give you impartial advice .
@@willboa5365 Not sure that this is a solution! Financial advisors are just salesmen.
I did mine differently. I took the entire lump sum from my defined benefit pension and bought a property outright with it. I then use the rent from my property to supplement my state and private pension. I am immune to any hike on mortgage interests because I do not have a mortgage. I'm not bothered if my property does not increase its value much. In view of the chronic housing shortage in the UK, there is a good chance that my property will increase in value. It's a win win situation for me.
Property investment has been a one way bet for the last 20 years plus, the only downside is getting a tenant who fails to regularly pay the rent. Many people in the property game buy properties at auction at reduced prices and have the ability themselves or a team ready to repair the property and depending on the rental yield, either rent it out or sell it on. As ever though, Cash is King, as you say, safer to not have to borrow money to buy the property, as changes in interest rates could cost a BTL purchaser dearly.
@@paultaylor7082 Yes it can be very stressful if you have a bad tenant. I'm fortunate to have good tenant for both of our properties. I'm a DIYer as well so yes I can do repairs etc. I make good friends with my neighbors and they can give me a bit of leverage if my tenant defaults on their rent.
Yes but you can get commercial property too or you can use your own scheme to but property and pass it on to next generation
Problem with doing that is you never retire until you dispose of the property.
@@Bustergonad9649 You live off the rent my friend.
Super video, thank you. When you draw money from your pension, how do you define what comes from the taxable vs. non taxable pot? Is this just an election on your tax return?
Bookmark this for when I’m 65
If taking tax free cash from your pension causes you to have to pay more tax in the future…it’s not tax free!
Maybe, but for a lot of people it makes sense. If the future is being aged 75+ then it's better to have cash while you are young enough and fit enough to enjoy it.
the government will probably take this away in the future ( i was told this by a professional tax planner )plus inflation will eat it all in the future.. I took a tax free lump sum and bought Bitcoin, so far so good, I could have bought property but too risky
@@0scartheCat....😂
Virtual Bitcoin v bricks & mortar property.
@@0scartheCathow is property more risky than bitcoin? At least the property is real
But what about taking a TFLS from a DB scheme which has index linkage increases ? That’s a whole different calculation ?
Invaluable content
This all makes sense if you know when you are going to die. Having had cancer twice i took all the cash and retired mid 50's. The world is a big place.
This works for Defined Contribution (DC) pensions but not for legacy Defined Benefit (DB) pensions, where there is only one opportunity to take a tax-free lump sum at pension commencement and there may be no option to commence taking your pension early (or to delay beyond the scheme pension age). Also with a typical DB annuity based scheme, there is no option to take a higher income at the start and then reduce once the state pension kicks in. Having separate (additional) DC pension savings provide greater flexibility in these circumstances.
This is really useful. I was about to take the tax free lump sum but the tax impact down the line is an issue.
Excellent video.
I have been taking payments by UFPLS for nearly ten years, doing that significantly reduces the payable tax.
Thanks for this it's a useful insight, I take it you have a variable income approach as well?
Yes, I have a number of income streams. At the moment my pension income has been reduced so that the fund can grow. The plan is to restore UFPLS withdrawals in the next financial year, but I am waiting to see what the clowns do before then.
Excellent video / thanks James
Love your vids. Can you cover the tax implications on the tax free part if a spouse inherits the pension after 75?
Will all db schemes allow you to take the tax free part in dribs and drabs? I haven’t crystallised mine yet but I didn’t think this was on offer.
great video as ever and bugger im a Grace with respect to DB pension but a have a Neil DC pot, tho my wife has a good DB pension so its not all bad. tho im only 52 so cant get at any of it and my wife is 60 and gets hers with little to no reduction
Love real life representative examples
Glad you pointed out sharing unused personal allowance. Works for me as I'm still employed while my wife draws a pension.
I understand that once you draw from a pension you can only then make a certain amount of contributions to a new or existing plan, and only out of income as you're not allowed to recycle funds.
Only issue here is that I can only give you 1 thumbs up. Excellent!
Another great video James, thanks! 🫡 Video topic suggestion: how does one go about hiring a financial advisor, how does the process work, how do the advisor fees work etc etc. Cheers 👍🏻
Just found your channel, and I must say your videos are excellent.
Minor point on item three in this video, you neglect to factor in the benefit of compounding investment growth for tax relief for the higher rate tax payer. Appreciate this adds another level of complexity, and this is offset by potential LTA as well as the already mentioned drawdown tax implications.
Your videos have given me food for thought in more detailed modelling of my own household situation.
Bit of advice here please I have four pension plans not a massive amount due to my income two are with the same company as I finished working for a firm but ended up working with them again and they opened new pension for me when I got re employment should I put all pension into one lump it's mine field one is quite a lump as I had been employed for the company for twenty years before moving on for one year then going back to work for same company hence new opened I also have two static pensions from way back
you need to explain the difference between maximising each years pension to maximising the amount you get in your retirement, both very different.
I started drawing down some of my smaller pensions early, keeping below the LEL, and thus this money went back into ISAs, so tax free.
Dont leave retiring until the last minute, unless you have to, retire earlier and longer, means you are more likely to get more out over your entire retirement.
BUT,,, its all very dependent on your calculated death date (a very difficult thing to do) and personal circumstances.
how is the 25% tax free calculated? I get the 100k/25k thing but if you draw down over time so don’t take it all at once, then the lump sum grows, how does that track the tax free part? or is it always 25% of the remaining lump sum? and is that 25% across each pension you have
Two questions LTA does that still have an effect with the changes HMRC "From 6 April 2023, it removes the Lifetime Allowance ( LTA ) charge and limits the pension commencement lump sum ( PCLS ) to its current maximum" also Divorce ? they split the pension in that case!
This highlights the importance of getting proper advice at retirement. Unfortunately a lot of people at retirement baulk at the thought of paying 8-10k for the advice, but as James has just demonstrated clients can save 10x that in tax efficiency. Very well explained, well done :)
So you're saying someone with a total pension pot of say 100k is foolish not to give 10% away to a financial advisor???? Maybe address the issue of an over complicated pension system first? Not every working person has 7 figure pension pots to worry about probably because they saw too many fat cats in the 80's pissing pension funds up the wall so became reluctant to waste even more money?
Well said!!!👍@@Spudd66
I was thinking of using capital and/or pension lump sum to invest in ISAs paying income. Wouldn't that be a tax efficient option.
Another great video. Can we discuss some personal advice on my situation? In some ways similar to this example.
Hi Tony, there is a link in the description of the video where you can book an initial call with my financial planning team.
What a great explanation. I do all my projections on excel which helps me plan. I put an inflation on mine, they don’t have that on 60k which means in 20years time it will have an effective much lower salary. I am getting 5% on my savings at the moment for the next 5 years, so at the moment my pension is fully funded by interest on my savings.
Another really interesting video once again.
Why aren’t we informed about taxes? Why are taxes so complicated? Can you do a simple video about tax? Thanks for making me think, that I may need to go read and study about tax guidances, and tax law.
Hi James , I would like to read about this in more detail and slower pace… tried replaying parts to no avail. 😊Can you point me to any further information?
Hey James, great video!
There's one thing I'm not sure I understood from the tax-free cash section. Are you saying that once people are able to access their pension money, they can choose whether to withdraw money from the tax-free 'pot' or the taxable 'pot'?
I was under the impression that in most cases people could only choose how much to withdraw (but not what 'pot' to withdraw from), and 25% of that sum would be tax-free.
Advice on tax free cash from large pension pots is sensible but people won't apply to most people with smaller funds. In these uncertain times of reduced bond values believe diversification is key which includes investing in physical assets outside of the system.
Hi James, I'm new to your channel but find it useful information. I am due to retire early (55) and have DB pension with tax free lump sum. I can also sacrifice pension for additional tax free lump sum (up to max 25%) but I am torn as to which is best option.
Sacrafice is 12:1 ie £12k for each £1k pension sacrificed so I figure with investment my break even would be 15years.
Have to done any videos around this?
@Message___James___now sorry, something popped up about WhatsApp but lost message
The recent (if temporary) removal of the LTA does, for a few folks with large SIPPS, present an opportunity to avoid the additional 50% marginal tax above the old LTA which Labour have said they will reintroduce immediately upon taking power (so sometime 2024 in all probability). Its possible to save a large sum by drawing down a SIPP at least to the old LTA limit. Income tax payable on the taxable component above the 25% can be invested in VCT's to further reduce the tax take.
I'm going to have to watch this video a few times to get all the points. Your example is of a very wealthy couple so doesn't really apply to me but you have made me look at my pension situation wrt my impending state pension.
It would all be helped if the taxable allowances were transferrable between people (living together) in full, rather than a mere £1000 which is a joke. Even if this only was allowed post-retirement.
@jamesshack do you have to own a business to use a sipp to buy commercial property?
Yes, you can, although it's typically done through an SSAS, another type of pension.
I don’t know if you cover this elsewhere James? I realised one of my DC pensions was being put into less volatile holdings as I got closer to retirement. Our plans include continuing to grow our pension funds and make smaller withdrawals if there is a severe slump. I've managed to get this revised so we have a prospect of better fund growth during retirement.
Interesting stuff if only I knew any of this forty odd years ago feeling quite poor now thanks 😮
Add to that if Neil & Grace feel the need to adopt an older child I’m available 😊
I like rhis vid. Good insight and good. Caae study.
If you crystallise part or all of your pension pot and move it into drawdown, if you keep some of the amount in drawdown invested, how is any further growth treated? Does it add to your LTA, or is only uncrystallised funds counted towards LTA? I’m aware the LTA is being abolished, but it may be reintroduced when there’s a change of government.
There is a lot in flux in regard to the LTA. A lot of things are not clear beyond April 2024.
But in essence, when you put money into adrawdown it sits in a separate account within your pension. It can grow and grow but cannot be used to generate any more tax-free cash. But you also no longer get an LTA charge if it grows too much.
I did a video on the old allowance here, which helps to visualise the Drawdown account as a separate account. ua-cam.com/video/hqfsfpK8WZU/v-deo.htmlsi=xmfYKBoFAzLX2iae
Thanks for taking the time to reply James, it’s much appreciated. I think your channel is excellent for us novices.
If you put a certain amount into drawdown now (2023-24 tax year), then the amount put into drawdown is recorded as a percentage of your LTA. Although the LTA has nominally been abolished, the 25% tax-free limit remains, at least for now. If you don't take anything out of your drawdown pot, then it can continue to grow but the 25% tax-free is limited to the value when crystallised into drawdown.
Explained brilliantly and been waiting for reference to DB pensions. and how taking early may be the best approach.
Started receiving from my DB at 42 .
Can you provide an analysis for 2 people both with good defined benefit pensions. My wife (NHS) and myself (civil service) earn approx 65K and we have been paying in for about 10 years. We want to retire, mortgage free at 60. We are 39 and 37 now. I don't see any defined benefit advice online, about tax free cash, age, or taxation considerations. I have 60K in a DC too.
Very interesting thanks James! Wish I’d seen this 5 years ago!
You don't mention employers pension contributions. That's an additional 10% for many.
I’m thinking of taking my defined benefit pension later this year and working part time to top up my income because I can’t afford to retire at the moment. What are the tax implications of doing this? Would I be better off remaining with my current employer?
Excellent video, I learned something that I'll need. Thanks
How does the tax free cash with draw work over time if you slow draw down and the pot keeps increasing over time? Taking lump tax free in one go is easy calculation but not sure how the slow draw works when being tax efficient
What about the interest on a bigger pension before you take it
Wow. Very impressive.
Some good advice I will now use, like putting some of tax free lump sum in my other halves ISA. Hard to plan when most of my pension will increase with RPI but who knows what the tax allowances will increase by so will end up paying more and more higher rate tax over the years and then the state pension will be also be taxed at 40% when that kicks in. Do I wish my pension income was less? No, so I guess a nice problem 😊
There's even good advice for Americans here. One of the DC plans (there are no "schemes" in the USA) we have is the Roth IRA which allows for after tax contributions followed by entirely tax free withdrawals in retirement. Our state pension is called Social Security and also uses an actuarial calculation to determine one's monthly benefit based on age you begin (break even age is around 82). Your insights here apply very usefully to both of those.
I love your videos James.
Just the right level of information, and this particular topic is certainly something I will look into more.
I always thought a TFLS was just that, you could only take it as a lump sum? I understand if you have a number of pensions you can retire the pensions at different times and take the lump sums for each at that time. But are you saying you can keep the TFLS in your fund, and still get growth from it, but also take it in dribs and drabs? Or are you saying put this in a savings account and tax the money from that each month?
If you have say £100k in an uncrystallised pension pot, could you take out £12.5 k in a year (the personal allowance) from the taxable amount and leave £87.5 k in the pot with £25k tax free still in the fund? Or would you have to crystalize £16,666.67 with £4,166.67 being tax free and the other £12500 below the tax threshold?
You have to take the tax free portion when you take the taxable part. But you could just stick it in an ISA if you don’t need.
@@JamesShackthanks for the reply
And this is why you need a financial planner
Hi, Im 53, Dont have a pension. Cant start a LISA and my ISA is full. Is there anything else I can do?
“BUT!” 😂
(Luv ya dude)
It would also be a good idea to have an ISA which when drawing on is tax free., if your paying 40% tax thats a big tax saving.