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Phased Drawdown and ISAs
MartinCh
Posted: 13 June 2018 14:47:06(UTC)
#1

Joined: 20/01/2018(UTC)
Posts: 3

It seems that some people crystallise their whole SIPP as soon as possible so that they can use the tax-free sum to pay off a mortgage or because they fear futures changes to the tax system.

My question is does it make sense to phase these withdrawals to maximise the use of the annual ISA allowance if I don't have any immediate use for the TFLS? To take a simple example suppose I am 60 and have a SIPP value £400000. Assume I am a basic rate tax payer and have used up my income tax allowance:

  1. I can leave it alone and let the SIPP grow until it gets near the LTA.

  2. I can take £100000 TFLS now and leave £300000 in drawdown. Any income from the drawdown account is taxed. The ISA allowance is £20000 so I can put £20000/year in an ISA. After 5 years (age 65) I will have an ISA of £100000+growth but will have paid tax on the income from the TFLS that was outside the ISA (let's assume no CGT).

  3. Or I can take 5 annual TFLSs of £20000. After 5 years I will have £300000+growth in drawdown and an ISA of £100000+growth but will have paid no tax on the income from the TFLS.

I realise that the ISA will be part of my estate for IHT (but then so is the TFLS).

Or is this the tail wagging the dog? I have always tried to use up my ISA allowance and I hate to see it go to waste but on an ISA of £100000 the income would be say £5000. That's a tax saving of £1000. Is that really worth losing the IHT benefits for?
DCB
Posted: 13 June 2018 15:55:37(UTC)
#2

Joined: 11/03/2013(UTC)
Posts: 54

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If you do not have an immediate use for the TFLS but wish to take some you could put it in the ISA and invest in AIM shares for 100% IHT relief using BPR after two years.
Some brokers will sell you an AIM portfolio service but I invested directly in my AJBell Youinvest ISA account.
Aim shares are volatile and the results have been mixed but I am above water and can look forward to saving 40% IHT...…..unless the rules change
Lots of information available on the net
DB
DCB
Posted: 13 June 2018 16:01:57(UTC)
#3

Joined: 11/03/2013(UTC)
Posts: 54

Thanks: 9 times
Was thanked: 28 time(s) in 19 post(s)
If you do not have an immediate use for the TFLS but wish to take some you could put it in the ISA and invest in AIM shares for 100% IHT relief using BPR after two years.
Some brokers will sell you an AIM portfolio service but I invested directly in my AJBell Youinvest ISA account.
Aim shares are volatile and the results have been mixed but I am above water and can look forward to saving 40% IHT...…..unless the rules change
Lots of information available on the net
DB
Samual Saunders
Posted: 13 June 2018 18:02:10(UTC)
#4

Joined: 15/04/2018(UTC)
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It depends on what income you will need when you stop generating an income from work. Many people underestimate their needs, particularly if you like to change car/s regularly, have expensive holidays, cruises etc and what your state pension will amount to, possible with a spouses state pension also?

I retired at 70 but did not start drawdown for a couple of years and also boosted my state pension by deferment for 5 years, which is highly recommended.

When I did start Drawdown in 2013, my overall pot was only £338k, so I moved £100k to Drawdown and took £25k TFC to spend on a special cruise. Since then I have only drawn a further £35k in odd lumps, as I have used other savings for ISA's etc and now (at 77) I have an overall pot of £381k and manage to keep my income tax rate to 20%.

Not a fortune, but I hope enough to continue several holidays each year until one of us falls off our perch, including a cruise, plus changing cars about every 3 years.

So, your system #2 would seem to follow that course and allow you to do whatever you wish with drawdown. I have chosen to keep my pension invested and use up other investments, with the odd dip into the account as required, but the idea of taking £20k p.a ang putting that in an ISA sound good and keeps the 'other' investments topped up.
Sam
Money Spider
Posted: 14 June 2018 18:16:17(UTC)
#5

Joined: 11/01/2013(UTC)
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MartinCh,
You suggest age=60 in your example, so I will assume that you actually are around that age.

Growth in both SIPP and ISA is 'tax-free', so where the money is doesn't make much difference. If your SIPP=~£400k, then you have plenty of headroom to your LTA. You understand how income from each is taxed.

So, what is your view of possible changes to LTA and TFLS. Is either at risk from a future government?
Similarly, will future governments restrict ISAs (max size, annual contribution level etc).
If you are in good health, its probably a bit early to focus too much on IHT (and a spouse can inherit a partner's ISA into their own ISA).

So, if you are not using your ISA allowance, then crystallising £20k p.a.is financially neutral on growth, but offers potential future tax advantages.So I would probably run with that.

FYI, I'm currently crystallising my SIPP in tranches (approximately annually, but decision is driven by a staged growth target - I want to max my TFLS).

@Samual Saunders
I looked at making additional contributions to my wife's state pension - it would take ~15+ years to get a positive return. I would rather invest the money myself for that length of time: likely to get a better return, keep control and ownership of the capital and not have to worry about future governments. Not quite the same as deferment, but the same modelling required.
1 user thanked Money Spider for this post.
Mike L on 15/06/2018(UTC)
MartinCh
Posted: 17 June 2018 16:51:09(UTC)
#6

Joined: 20/01/2018(UTC)
Posts: 3

Thanks for those replies.

I didn't know about AIM shares and IHT relief. AIM is a bit too risky for me, it's really casino-style investing i.e. most are flops and a few are big winners.

I'm not really bothered about IHT as I have no dependants and my wife will inherit tax free and leave it all to the cats' home.

I agree it makes very little difference whether I phase the drawdown or not, but I like the idea of a few thousand tax free to add to my state pension when I'm 66.

I know some people are very keen on deferring the state pension - I will think about that closer the time.

People on these boards often suggest that a future government could reduce the LTA or restrict the 25% tax free. I think that's very unlikely, what could happen is:

  • Reducing the tax advantages when paying in to a pension, maybe 30% for everyone.
  • Imposing NI on working pensioners.
  • Some sort of clampdown on ISAs, especially if John McDonnell ever gets to be chancellor. There are some ISA millionaires, that's tax-free income of about £40000/year.

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