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Almost FIRE

Including Financial Independence and Retiring Early (FIRE)
SDN123
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Re: Almost FIRE

#203837

Postby SDN123 » February 25th, 2019, 11:34 pm

Hariseldon58 wrote:Having always been a basic rate tax payer, the ISA route has been more atttactive in my FIRE approach.


That makes perfect sense but it’s worth pointing out that anyone can contribute £2,880 to a personal pension (eg SIPP) that the government grosses up to £3,600. That’s £720 of free money in a tax shelter. For the (12 + 6 =) 18 years that you say your investing that’s (18 * £720 =) £12,960 of free money from HMG. Double that if you are married and you can afford to do the same with your wife.

I suspect that you know that, but worth pointing out to anyone reading this who is earlier in their investment life and who is “only” a basic rate tax payer.

SDN

Hariseldon58
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Re: Almost FIRE

#203840

Postby Hariseldon58 » February 26th, 2019, 12:02 am

@sdn123
Thank you for your explanation, I have contributed and still do so to a SIPP, for both of us, given that most of it will be taxed on the way out, at the same tax rate, apart from the tax free portion, the benefit is a little muted and SIPPs have been a small part of my savings.

I think the ISA has worked out to be more flexible, we have contributed to both ISAs and SIPPs for the 12 years we have been in FIRE from taxed accounts...that process will clearly come to an end at some point, as we spend from the taxable account too, Investment returns have been strong and the taxable accounts have a few more years left in them....

Clearly for those who earned more and paid higher rate tax, then the SIPP benefit is much greater and the likelihood that withdrawals are taxed at a lower rate.

JohnB
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Re: Almost FIRE

#203853

Postby JohnB » February 26th, 2019, 7:34 am

@SDN123 as others have said, putting £2880 in a SIPP only saves you 1/4*720=180 in tax. It might save you 3600*40%=1440 in inheritance tax though. Both SIPPs and ISAs could be raided by future governments, but SIPPs are at greater risk, and their IHT advantages are recent and could easily go. The LDs passed a motion to cap the tax free lump sum to £40000 at their conference last year, for example.

Always consider how long you are tying up your money for. For lump sum its the Pension Access Age, 55 and starting to rise, for pension payments its decades.

For tax its best to have a bit of everything, to be below the thresholds that governments set for tax raids.

SDN123
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Re: Almost FIRE

#203999

Postby SDN123 » February 26th, 2019, 3:00 pm

JohnB wrote:@SDN123 as others have said, putting £2880 in a SIPP only saves you 1/4*720=180 in tax.


My understanding is that as long as annual earned income (including SIPP withdrawals) are within the basic rate tax band then pension withdrawals are tax free. Meaning all of the £720 is free and, in this situation, my original statement is true. It may not be difficult to keep within the basic rate tax if most of your wealth is in an ISA.

Actually there are real advantages to using a SIPP even if you pay tax on the way out:

I believe that to get to £180 you mean that when I withdraw my £3,600 from the SIPP at some point in the future it will be taxed at 20% (20% of £3,600 = £720 tax) except for the 25% tax free allowance (25% of £720 = £180).

The example given talked of 18 years of saving for a couple, leading to a minimum total tax saving, if both partners pay basic rate tax on withdrawals of (18 * 2 * £180 =) £6,480 for very little effort. Similar to ISAs, SIPPs pay no tax on on dividends, no capital gains tax and no paperwork or reporting to HMRC is required.

Another advantage is that using this allowance gives you £720 more capital per annum to play with during the accumulation phase.

All of which is to be more specific why I agree with you that a mixed approached to tax shelters is best. Putting all of your eggs in one basket is not the best approach.

In these types of threads I often read that SIPPs are under more political threat than other tax shelters. I work on the basis that ALL tax havens are ALWAYS under political threat. I see no evidence, other than newspaper articles or bulletin boards often written by people with their own agendas (that is NOT a personal reference to anyone on this thread), that SIPPs are under more threat than ISAs, or any other tax shelter.

The disadvantage of SIPP is the fixed “earliest withdrawal date” and the further that is in the future the longer the investment is exposed to the risk of political fiddling. However my otyer tax sheltered investments will be needed in retirement too, and so are exposed for approximately the same time period. Change WILL happen. I just don’t know what change and to which tax shelters. Assumptions or guesses can only hurt me! So, again, the best I can do is diversify.

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Re: Almost FIRE

#204004

Postby JohnB » February 26th, 2019, 3:17 pm

I think most people will have combined state, DB and DC pensions over £12.5k already, so extra SIPP contributions are likely to be taxed on the way out. In a FIRE scenario you might have 5-10 years before the state/DB pensions kick in, so more wiggle room, but with the greater savings needed to FIRE, I suspect you'd still be looking at taxed withdrawal for these marginal contributions.

SDN123
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Re: Almost FIRE

#204010

Postby SDN123 » February 26th, 2019, 3:42 pm

JohnB wrote:I think most people will have combined state, DB and DC pensions over £12.5k already, so extra SIPP contributions are likely to be taxed on the way out. In a FIRE scenario you might have 5-10 years before the state/DB pensions kick in, so more wiggle room, but with the greater savings needed to FIRE, I suspect you'd still be looking at taxed withdrawal for these marginal contributions.


I’m sure that is true for the typical contributor to this website and specific the FIRE board (and BTW definitely true for me although DB pensions are a dream from a previous generation). However I hope the extra detail is useful for readers who aspire to FIRE from relatively lower income levels. I know I have read very useful and/or interesting contributions from such TMF / TLF community members in the past.

thebarns
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Re: Almost FIRE

#204013

Postby thebarns » February 26th, 2019, 3:55 pm

“...as long as earned income within basic rate tax band then pension withdrawals are tax fee....”

Unless I am misinterpreting what you are writing that is not the case and is incorrect.

Any tax withdrawals, excluding the 25% tax free amount, are taxed once you are outside the personal allowance, not the basic rate tax band.

I think in practice most providers will pay the pension net of basic rate tax so there will Iikely be some form of deduction at source.

SDN123
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Re: Almost FIRE

#204015

Postby SDN123 » February 26th, 2019, 4:02 pm

thebarns wrote:“...as long as earned income within basic rate tax band then pension withdrawals are tax fee....”

Unless I am misinterpreting what you are writing that is not the case and is incorrect.

Any tax withdrawals, excluding the 25% tax free amount, are taxed once you are outside the personal allowance, not the basic rate tax band.

I think in practice most providers will pay the pension net of basic rate tax so there will Iikely be some form of deduction at source.


My mistake, thanks for the correction. What I meant to says was:

“...as long as earned income is below the basic rate tax band then pension withdrawals are tax fee....”

A better way to say it may be “... as long as earned income is below the Personal Allowance (£11,850) then pension withdrawals are tax free...” The pension withdrawals counting towards the total.

Let me know if I’m still wrong (perfectly possible!)

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Re: Almost FIRE

#204017

Postby Lootman » February 26th, 2019, 4:07 pm

thebarns wrote:Any tax withdrawals, excluding the 25% tax free amount, are taxed once you are outside the personal allowance, not the basic rate tax band.

I think in practice most providers will pay the pension net of basic rate tax so there will Iikely be some form of deduction at source.

That is my interpretation as well, and the reason why I am deferring all the pensions I am due for as long as possible.

For the state pension that is age 70, I believe. Of my other three retirement plans, two of them allow me to defer until age 70 or so, and the other one allows indefinite deferrals. In each case I will collect more by waiting. The annual accrual rate varies between 6% and 10%, depending on the plan.

Since I don't need the money and don't like paying taxes, it works for me. Although I understand that I will have a bigger tax liability later, of course.

thebarns
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Re: Almost FIRE

#204035

Postby thebarns » February 26th, 2019, 4:56 pm

SDN123

- you are correct now and also note that the personal allowance is going up to £12,500 from April 2019.

I am pretty sure that under all governments, the personal allowance will carry on rising at least in line with inflation and as we have seen on a number of occasions in the past, by considerably more than inflation.

Add in the tax free allowances for interest and dividends, plus income from ISAs, then one person can amass a reasonable income tax free withlegitimate use of allowances. And even better for those fortunate to have a partner.

Lootman also benefits, or should I say his estate will, from the inheritance tax status of his untouched and growing non state pension pots, at least until he is 75 - watch carefully the actions of all potential beneficiaries as you turn 74 for any unfortunate accidents that might befall you.....


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