Retirement drawdown advice required

[Binlid]

Age 70 & 68, retired & married
Currently we have a joint income of 42k pa
Would like a further 38k pa tax free from following assets:

• £300k Pension Fund (husband)

• £268k ISA investment funds (husband)

• £260k ISA investment Funds (wife)

• £231k investment Funds (Joint)

Current plan:

Next 5 years take 20% of the 25% tax free cash in the pension fund = £15k

Take 4% of ISA Funds value (£569k by April) = £23k

The joint funds will be used to feed the ISAs accounts @ 40k pa

In 5 years time re-assess the situation

What do you think, any advice
Thanks in advance
Binlid

[Dod101]

Age 70 & 68, retired & married
Currently we have a joint income of 42k pa
Would like a further 38k pa tax free from following assets:

• £300k Pension Fund (husband)

• £268k ISA investment funds (husband)

• £260k ISA investment Funds (wife)

• £231k investment Funds (Joint)

Current plan:

Next 5 years take 20% of the 25% tax free cash in the pension fund = £15k

Take 4% of ISA Funds value (£569k by April) = £23k

The joint funds will be used to feed the ISAs accounts @ 40k pa

In 5 years time re-assess the situation

What do you think, any advice
Thanks in advance
Binlid

That all sounds good. The 4% of the ISA funds can mostly come from the dividends and if not you ought to be able to adjust the ISA portfolio to ensure that it will produce at least 4% in dividends, leaving the capital intact

You certainly should each be subscribing the £20,000 that you each have to the ISAs annually. At the end of 5 years with a bit of luck you will be no worse off than you are now except for the pension fund. (Well you have not disclosed investments in the ISAs so it is difficult to tell.)

Dod

[tjh290633]

Is the 42k current income coming from those assets? Do you wish to get the extra 38k from the same assets?

Approximately £1.1 million ought to give over £50k per year or so at present.

About half could be tax free, more if you are drawing down and getting the 25% tax free portion.

Getting more into the ISAs is a good idea.

TJH

[Binlid]

Thanks Dod,
The investments are in 12 general type funds, trackers and low cost managed. Stuff like Vanguard Life Strategy 40,60,80%, Fidelity Select 50, Fundsmith, etc. I choose from the top 10 best sellers and put the money in equally.
I've taken great care to stay with a 70/30 Stocks/Bonds ratio
The geographical split is 50% Americas 50% 35% UK & Europe tend 15 Asia. Industry types balanced third in in each of the 3 industry classifications

The majority of the funds however are Accumulation and I think maybe I should switch to Income.
My cash reserves are not great about 10k
Hope this helps
Binlid

[kempiejon]

An unwaged couple under 75 can sweat a further few hundred quid each from the tax person by putting £2880 into a SIPP, grossed up to £3600 then tax 25% tax free. Repeat annually until age 75 when the tax claim expires.

[Binlid]

Is the 42k current income coming from those assets? Do you wish to get the extra 38k from the same assets?

Approximately £1.1 million ought to give over £50k per year or so at present.

About half could be tax free, more if you are drawing down and getting the 25% tax free portion.

Getting more into the ISAs is a good idea.

TJH

No the 42k comes from private and state pensions

[Alaric]

Take 4% of ISA Funds value (£569k by April) = £23k

The joint funds will be used to feed the ISAs accounts @ 40k pa

Rather than take money out of the tax sheltered ISA, it may be better to raise an equivalent amount by selling taxable assets. CGT may be hazard in doing this.

[Dod101]

Thanks Dod,
The investments are in 12 general type funds, trackers and low cost managed. Stuff like Vanguard Life Strategy 40,60,80%, Fidelity Select 50, Fundsmith, etc. I choose from the top 10 best sellers and put the money in equally.
I've taken great care to stay with a 70/30 Stocks/Bonds ratio
The geographical split is 50% Americas 50% 35% UK & Europe tend 15 Asia. Industry types balanced third in in each of the 3 industry classifications

The majority of the funds however are Accumulation and I think maybe I should switch to Income.
My cash reserves are not great about 10k
Hope this helps
Binlid

Subject to your tax position, I would certainly be looking at income producing assets. These days, without thinking too hard you can comfortably get 5% minimum from a portfolio of UK shares, before any tax of course. I have lived off my dividends for most of the time I have been retired and am fortunate enough to have most of my investments in ISAs or a SIPP. I would suggest that you change your mindset to income rather than accumulation and whilst you do not need to do it overnight I would certainly look at income producing assets and for me that would mean at least some UK shares. If you are very conservative that could be investment trusts but I hold mostly individual UK shares. When I can get over 7% from the likes of Legal & General I do not think these shares can be ignored by an income investor.

This is not to be critical of what you are doing but I think you need to change your mindset.

Dod

[DrFfybes]

Would like a further 38k pa tax free from following assets:

• £300k Pension Fund (husband)

• £268k ISA investment funds (husband)

• £260k ISA investment Funds (wife)

• £231k investment Funds (Joint)

Current plan:

Next 5 years take 20% of the 25% tax free cash in the pension fund = £15k

Take 4% of ISA Funds value (£569k by April) = £23k

Do you mean £38k "tax free", or "after tax"? Don't let the tax tail wag the dog

You still have a lot of unsheltered assets which you should look at sheltering, which leads me to my first thought echoing other comments - "don't touch your ISAs." £23k is more than one of your annual allowances taken out, so effectively halving what you can put in each year. You have assets that could/should be moved into an ISA, so instead of taking money out of the ISA you sell unsheltered assets to the same value and reinvest the ISA income in the same assets back within the ISA.

This is my approach and time was I could happily sell chunks of unsheltered assets without worrying about CGT, but now need to think about how I do it.

You don't say if preserving SIPP capital for potential IHT exemption is a priority, although it appears not.

So for me I would do it as 2 individuals and it depends on each one's income at the moment as presumably you are both paying tax.

1) Transfer the unsheltered investment Funds between you and sell down to maximise your CGT bands. Depending upon how your investments have done depends on how much this generates. Bear in mind you should also be selling £40k of them each year to move into ISAs.
2) Take some of the tax free cash from the pensions by part crystallisation to make up some or all of the difference up to your self imposed £15k limit.
3) Depending on your tax situation and the amount you still need to generate, either take taxable money from the crystallised bit of your SIPP, or sell more unsheltered assets and take the CGT hit. if you are really determined to do all this "tax free" then take some ISA income, but really you are letting the tax tail wag the dog doing this.
4) option to move £2880 each into a SIPP each year whilst you still can on top of the £20k into ISAs.

Paul

Paul

[scrumpyjack]

In your position I would leave the ISAs and SIPP untouched and realise the cash needed for spending by selling from the general funds. I would also put the maximum into the ISAs while you can.

I think it is a mistake to focus on ‘income’ from the ISA or Sipp. Leave alone what is tax sheltered and use non tax sheltered money first.

[Dod101]

In your position I would leave the ISAs and SIPP untouched and realise the cash needed for spending by selling from the general funds. I would also put the maximum into the ISAs while you can.

I think it is a mistake to focus on ‘income’ from the ISA or Sipp. Leave alone what is tax sheltered and use non tax sheltered money first.

Indeed. But at the same time, ‘building’ an income portfolio within the ISAs would be a good idea for the future. And another thing about using unsheltered assets as income is the sheer botheration factor of doing so and maybe just selling at the wrong time. If the OP is not very hands on it would be much easier just to take the tax free income from the ISAs. No hassle, no reporting, no tax. The beauty of using dividends is that they just appear in the account as cash ready to be withdrawn, leaving the capital untouched. Selling from general unsheltered funds means deciding what to sell, incurring expense in selling it and at the same time checking whether any CGT liability will arise.

I do not think that it is a black or white decision.

Dod

[Adamski]

My thoughts same as scrumpyjack - use the unsheltered funds first. Pensions outside of inheritance tax - perhaps get paid for financial advice if total estate will be taxable.

[Binlid]

Many thanks everybody
Much more than I expected when I made this post
Given me plenty to think about
Cheers
Binlid

[xxd09]

Possibly in a similar position to you -now retired 20+ years -wife same age
Over half our income comes from an investment portfolio of 2x SIPPs,2x ISAs plus 2x Instant Access Cash ISAs and a High Interest Bank Account
Portfolio is 3 Index Tracker Funds only-2 equity and 1 Bond
Asset Allocation is currently 34.5/60.2/5.5-equities/bonds/cash -retired initially with a 30/70 portfolio-conservative investor!
I draw a sum of money once a year to top up the High Interest Bank Account from which I draw on as required (weekly/monhly ) to top up my current account and pay the Visa account
I have taken the tax free 25% from each ISA -I actually took the tax free sum from the largest SIPP on retirement and used it as income for a few years -gives a good breathing space as you your ducks in a row for retirement
Income is tax free from ISAs and I try not to breach the 20% tax band when drawing from SIPPs-juggle as it suits you
Remember to always use any tax free allowance left from your personal allowance if not drawing from a SIPP that year
I use Total Return and sell fund units as required keeping Asset Allocation intact
In practice I have found that I mostly sell equities-understably cos they grow the fastest so as a tip I would keep equities in your ISAs and Bonds in your SIPPs (income from ISAs tax free-income from SIPPs taxed)
One further touch stone or guide -a £100000 in a 60/40 portfolio should safely produce an income of £3000+ pa
Worked for e so far -now 78- wife 77
Hope this some help
xxd09

[tjh290633]

Is the 42k current income coming from those assets? Do you wish to get the extra 38k from the same assets?

Approximately £1.1 million ought to give over £50k per year or so at present.

About half could be tax free, more if you are drawing down and getting the 25% tax free portion.

Getting more into the ISAs is a good idea.

TJH

No the 42k comes from private and state pensions

In that case I fail to see any problem. Obviously you want to avoid higher rate tax, which suggests that you avoid income as such if it takes you into that range. Anything you draw down from your pension funds will count as income, less the 25% portion. Any income that you draw from the ISAs is tax free, as is any capital. You can't avoid tax on what you draw down from the pensions, but you can limit that to the standard rate.

Maximize the income from the ISAs and shift as much as you can into the ISAs each year. You have the choice of investing in ordinary equities or investment trusts based in the UK. The problem with ETFs is that many are not UK domiciled, which may complicate tax matters.

There are plenty of ideas on this site about how to obtain a higher than average yield from those investments, so do your own research and remember the magic word DIVERSIFY.

TJH

[Binlid]

Again thank you everybody for the advice
I retired 6 years ago and have not yet drawn on my assets but will need to in the next tax year onwards
My previous strategy was determined by a Financial Advisor
A local firm, all very cosy but expensive (0.75% FA changes, plus fund manager & fund charges)
Initially they merged all my pensions into one and split my investments into 50% tracker (VLS 60/40) & 50 % actively managed (Parmenion).
Every year they moved the max allowance from non-isa to isa investments which i'd been doing for years anyway.
Nothing changed for 5 years
I gave the FA notice in Jan 2023 and have now moved everything to Fidelity except my Royal London pension
From the information received here the bit I'm going to look into is using non-isa investments as a source of income and also to make further pension contributions balancing CGT considerations Maybe look into starting a SIPP
Cheers
Binlid

[DrFfybes]

Indeed. But at the same time, ‘building’ an income portfolio within the ISAs would be a good idea for the future. And another thing about using unsheltered assets as income is the sheer botheration factor of doing so and maybe just selling at the wrong time. If the OP is not very hands on it would be much easier just to take the tax free income from the ISAs. No hassle, no reporting, no tax.

I do not think that it is a black or white decision.

Dod

Long term it is definitely Black and White.

It might be easier to take the income from the ISA, but not efficient. Your suggestion implies that they are better not to shelter assets, or certainly that is the result of following it.

If we take the premise that Sheltering is Good, then they will be selling unsheltered assets anyway to move into an ISA. So rather than do it once a year, they can also sell a bit each month to live on, and rebuy within the ISA at the same time using the income generated by the ISA but retained within it. If you're going to take £23k pa out of an ISA as income, why not go the whole hog and just not bother ISA-ing your unsheltered assets at all?

Yes CGT is currently slightly higher than divi tax for a basic rate payer, but it is paid once on sale, not every year on the unsheltered income.

And yes, it is a bit more work, but the "spend the unsheltered first" approach effectively halves the time it takes to shelter it, after which the SP will kick in but by then all their assets are ISAd so fewer tax worries.

Paul

[Dod101]

I am not disagreeing but there is quite a lot more work involved.I guess in fact that that is what I did for years ( lived on income derived from unsheltered assets.) I used income producing investments though, long before I had heard of a HYP and any sales were confined to selling to place in an ISA or an earlier equivalent.
Almost all of my investments are now in ISAs or my SIPP and I revel in the freedom that that gives me. That should’ve the op’s priority I think.

Dod

[Charlottesquare]

One observation- lot of discussion about sheltered funds/unsheltered funds, I would actually aim at getting funds out of say a SIPP before out of unsheltered funds as I have an intrinsic fear of future politicians and their meddling and think I would wish to say use the 25% tax free figures whilst available. (Also not sure how the funds post 75 will in future get treated re in/out estate and IHT)

Of course my paranoia may be misplaced, but I took the same view staying contracted out as long as possible, despite the IFA view I should contract back in, I wanted control with me rather than with HMG and that did work out okay.

[Dod101]

One observation- lot of discussion about sheltered funds/unsheltered funds, I would actually aim at getting funds out of say a SIPP before out of unsheltered funds as I have an intrinsic fear of future politicians and their meddling and think I would wish to say use the 25% tax free figures whilst available. (Also not sure how the funds post 75 will in future get treated re in/out estate and IHT)

Of course my paranoia may be misplaced, but I took the same view staying contracted out as long as possible, despite the IFA view I should contract back in, I wanted control with me rather than with HMG and that did work out okay.

I think it unlikely that a SIPP will ever be included in an estate as it exists under the pension rules. Not to say it couldn’t happen but I imagine that there is not a huge amount of IHT being missed. The 25% tax free sum and the treatment of SIPPs if the owner dies before age 75 are different though.

Dod