UK tax efficiency in context of FIRE

[Charlottesquare]

Quite, RE means be definition that you cannot use a pension with its time lock. And the trend is for that time to be pushed further back.

Yes, I have never been a fan of pensions. Too many rules and restrictions. Too much government interference and change. You pay income tax rates on investment income. And the whole idea of my money being fenced off beyond my control and forever subject to the whims of UK laws and taxes just irks me.

My original prejudice against them started in the 1970s and 1980s. Back then pensions were barely portable, and you were forced into annuities. Changing jobs was punished. Things have improved somewhat but even so I always avoided them unless my employer matched my contributions and I could control the investments. I have also deferred receiving any payouts for tax reasons. And I haven't even bothered inquiring about pension entitlements that I might have accrued prior to 1988.

I do not formally subscribe to FIRE but I realise that I followed some of its precepts and have successfully avoided both work and pensions for a quarter century now. And as a result my taxation is quite manageable relative to my financial position.

But having one can make giving away assets to outwit IHT so much simpler, I tend to think they have a place in IHT planning especially in estates that would otherwise hit the £2 million mark. My rule of thumb is 1/3 in house, 1/3 in pensions, 1/3 in Isas etc, at worst with £2m that gives a £1.35m gross estate with tax for a couple at a mere £140k on the excess over £1m, but if all exposed, the whole £2m, that is then possibly circa £540k IHT to pay.

Like all tax planning there is usually no one solution but lots of little bites to reduce HMG's shovel in your stores.

[DrFfybes]

That must exclude pension savings, but the average pension pot above age 55 is 37k. I'd guess that excludes DB pensions.

Hmm, I worked for Zeneca/Astrazeneca/Syngenta for 4.75 years around 1998-2003. I'm transferring my pot and it is £60k, and that was a pretty basic money purchase scheme.

That's 5 years from my working life, so I'm presuming that for the average pot to be that low then people must really not have paid much in at all.

Paul

Edit - just realised, that could include lots of people like my mum, who's pension pot was from 3 years at the labour exchange in the 1950s and paid about £100/annum.

[Lootman]

Yes, I have never been a fan of pensions. Too many rules and restrictions. Too much government interference and change. You pay income tax rates on investment income. And the whole idea of my money being fenced off beyond my control and forever subject to the whims of UK laws and taxes just irks me.

My original prejudice against them started in the 1970s and 1980s. Back then pensions were barely portable, and you were forced into annuities. Changing jobs was punished. Things have improved somewhat but even so I always avoided them unless my employer matched my contributions and I could control the investments. I have also deferred receiving any payouts for tax reasons. And I haven't even bothered inquiring about pension entitlements that I might have accrued prior to 1988.

I do not formally subscribe to FIRE but I realise that I followed some of its precepts and have successfully avoided both work and pensions for a quarter century now. And as a result my taxation is quite manageable relative to my financial position.

But having one can make giving away assets to outwit IHT so much simpler, I tend to think they have a place in IHT planning especially in estates that would otherwise hit the £2 million mark. My rule of thumb is 1/3 in house, 1/3 in pensions, 1/3 in Isas etc, at worst with £2m that gives a £1.35m gross estate with tax for a couple at a mere £140k on the excess over £1m, but if all exposed, the whole £2m, that is then possibly circa £540k IHT to pay.

Like all tax planning there is usually no one solution but lots of little bites to reduce HMG's shovel in your stores.

That is fair enough although IHT was not a concern to me in my impoverished youth. By the time I started thinking about IHT my strategy was advanced.

IHT is now a major concern but I have identified other strategies to deal with that. And my assets being very liquid and mobile is a part of that.

[Alaric]

That's 5 years from my working life, so I'm presuming that for the average pot to be that low then people must really not have paid much in at all.

Isn't the point that a series of "pots" are built up, one for each employment? So unless they are aggregated by individual, the "average" isn't a terribly meaningful measure of the amount of wealth ring-fenced in this manner.

[ursaminortaur]

As an aside, I'm often surprised by how so much standard advice and information about retirement simply assumes you will have everything in a pension. Perhaps the FIRE thing is a lot more of a minority sport than I realise.

How much does the average person have in savings UK?
25th percentile point £2,100
Median - 50th percentile point £12,500
75th percentile point £58,500
Average £76,301

That must exclude pension savings, but the average pension pot above age 55 is 37k. I'd guess that excludes DB pensions.

So the standard advice should probably concentrate on how to live on a state pension.

DB pensions are not too dissimilar for instance the average LGPS (local government DB pension scheme) pension is £4000 a year (£2,600 for women). Multiply that yearly payment by 20 to give the equivalent pot size as used for the LTA test.

https://www.unison.org.uk/news/article/2010/01/ten-top-facts-on-local-government-pension-scheme/

The average pension of £4,000 a year – £2,600 for women – does not lead to a gold-plated retirement, but it does mean members have some security in later life.

[the0ni0nking]

Given that Unison article is from 2010 I assume there is a material amount of indexation required to reflect the position today.

[DrFfybes]

That's 5 years from my working life, so I'm presuming that for the average pot to be that low then people must really not have paid much in at all.

Isn't the point that a series of "pots" are built up, one for each employment? So unless they are aggregated by individual, the "average" isn't a terribly meaningful measure of the amount of wealth ring-fenced in this manner.

Ahh - I had missed the subtlety of it as pots rather than per individual. I have 3 uni DB schemes under £37k, one very small, but 2 are over the £30k unadvised transfer limit.

DB pensions are not too dissimilar for instance the average LGPS (local government DB pension scheme) pension is £4000 a year (£2,600 for women). Multiply that yearly payment by 20 to give the equivalent pot size as used for the LTA test.

You need to multiply by 1.8 for CPI since that article was written 14 years ago. I get circa £4k from my LGPS, but I took it 10 years early, so it would have been £6k. And the 20x LTA multiple is really not a figure they should be using, a £10k pa index linked with 33% spouse annuity would cost a lot more than £200k.

Lies, damn lies, and statistics

Paul

[EthicsGradient]

Isn't the point that a series of "pots" are built up, one for each employment? So unless they are aggregated by individual, the "average" isn't a terribly meaningful measure of the amount of wealth ring-fenced in this manner.

Ahh - I had missed the subtlety of it as pots rather than per individual. I have 3 uni DB schemes under £37k, one very small, but 2 are over the £30k unadvised transfer limit.

DB pensions are not too dissimilar for instance the average LGPS (local government DB pension scheme) pension is £4000 a year (£2,600 for women). Multiply that yearly payment by 20 to give the equivalent pot size as used for the LTA test.

You need to multiply by 1.8 for CPI since that article was written 14 years ago. I get circa £4k from my LGPS, but I took it 10 years early, so it would have been £6k. And the 20x LTA multiple is really not a figure they should be using, a £10k pa index linked with 33% spouse annuity would cost a lot more than £200k.

Lies, damn lies, and statistics

Paul

1.5 for CPI growth since Jan 2010 - 87.8 to 131.5: https://www.ons.gov.uk/economy/inflatio ... /d7bt/mm23

[EthicsGradient]

"the average pension pot above age 55 is 37k" seems to be not per provider, but per person (and it's the median person, including those with no "pots" at all) - it's from the ONS in 2022, looking at 2018-2020:

According to the ONS, the average pension pot in the UK for people aged 55 to State Pension age, with aspirations to retire at 55, is £37,600.

https://blog.moneyfarm.com/en/pensions/retire-at-55/

Combining these estimates to describe how much pension wealth people yet to retire had waiting to be accessed (including those without any), showed median wealth increased from £500 among people aged under 35 years to £37,600 for those aged 55 years to State Pension age.

https://www.ons.gov.uk/peoplepopulation ... omarch2020

And from an FOI request, someone got the 55-65 figures in deciles - bottom 3 deciles with no private pension wealth, and of the rest, decile 7 in the middle had a median of £58,900.

[International]

HL has some interesting data by region. I think it comes from the 2023 ONS dataset. https://www.hl.co.uk/pensions/average-p ... -by-region

[International]

I think it comes from the 2023 ONS dataset.

My mistake, it is from ONS 2020. For example, for average household private pension wealth it states:

"The average household private pension wealth in the East of England is around £121,500. This is above the national average of £111,700. (ONS, March 2020)"

[wycliffe19]

Thanks all for the useful comments on here.

Will now be looking further at:

Junior ISA (hattip @Drffybes)
Part-crystalisation of SIPP to fill personal allowance (ditto)
Buying NICs as needed (hattip @Lootman)
Premium bonds (hattip @SebsCat)

[Patch1941]

Total resulting income on unsheltered investments is therefore £2,000 ish + £5,070 = £7,000 ish p.a. i.e. below one person’s Personal Allowance (£12.6k p.a.). Therefore tax payable is zero

When between allowed retirement age and State Pension age, there can be a case for taking amounts out of the SIPP up to the personal allowance.

This is what I will be doing in the next tax year. It's a no brainer for me. Along with the pension fund 25% tax-free elements, most of this money will go into my Stocks and Shares ISA or my wife's. My wife will also increase her own pension contributions to maximise her own tax position over time. As a result of this I don't expect to drawdown any taxable income from my pensions until around 2034.

[Shelford]

Some good advice here.

A crucial factor is you and your wife's current age, and when you both wish to retire. If, say, you are both 45, but aren't intending to retire till 55, then the bulk of your unprotected assets can be recycled into ISAs. You don't state your wife's pension, share ownership or ISA status, but there may be an argument for transferring some of your assets if (say) she earns less than you and is not in a higher income tax bracket.

My inclination, unlike some other posters, would be to pay more into a pension. At £400K, this looks light relative to your overall portfolio, and you can pay in £60K per year (plus carry over from previous years). There may however be more context here I'm not aware of.

Either way, it's looking pretty good. With regard to children (again, we don't have their ages), there is probably no better gift you can give them than free higher education, so JISAs make sense if you agree.

Shelford