Is there any merit in this approach?
Posted: March 16th, 2018, 1:28 pm
I'm approaching that time when I need to consider what to do with the pension pot in my SIPP. It will be used to top up the income from a couple of final salary schemes. I do not believe that using the fund to buy an annuity represents good value, so I have ruled that option out.
The three alternatives I have considered are:-
1) Leave the entire pot invested in the pension and take the natural (taxed) income.
2) Take up to 25% as a tax-free lump sum, invest that in ISAs for my wife and I, then use the (tax-free) income from the ISAs and the (taxed) pension income.
3) Wind down the entire pension fund over a number of years using UFPLS withdrawals, invest the proceeds in ISAs and use the natural (tax-free) income from the ISAs.
I ran some experimental figures through a spreadsheet and, much to my surprise, the third option seems to come out on top. Of course, a lot depends upon the rate of return and the number of years over which one considers the approach. Even though one will pay more on tax on the 75% taxable element of the UFPLS withdrawals, the benefit of receiving tax-free income from the ISAs rather than taxed income from the pension seems to win over the course of time.
Obviously there is the danger of the tax treatment of ISAs changing in the future. The question is does this approach have any merit? Has it been discussed elsewhere? Have I missed anything obvious?
Your thoughts appreciated.
RF
The three alternatives I have considered are:-
1) Leave the entire pot invested in the pension and take the natural (taxed) income.
2) Take up to 25% as a tax-free lump sum, invest that in ISAs for my wife and I, then use the (tax-free) income from the ISAs and the (taxed) pension income.
3) Wind down the entire pension fund over a number of years using UFPLS withdrawals, invest the proceeds in ISAs and use the natural (tax-free) income from the ISAs.
I ran some experimental figures through a spreadsheet and, much to my surprise, the third option seems to come out on top. Of course, a lot depends upon the rate of return and the number of years over which one considers the approach. Even though one will pay more on tax on the 75% taxable element of the UFPLS withdrawals, the benefit of receiving tax-free income from the ISAs rather than taxed income from the pension seems to win over the course of time.
Obviously there is the danger of the tax treatment of ISAs changing in the future. The question is does this approach have any merit? Has it been discussed elsewhere? Have I missed anything obvious?
Your thoughts appreciated.
RF