Updated: Jul 20
Reeves Independent helped Brian save £200k in tax
You spend your whole working life paying taxes. Income tax, council tax, car tax, duty tax, tax on food - the list goes on. So when you hit retirement, you want to make sure that absolutely nothing of your pension pot ends up in the taxman's hands.
Brian Saunders, aged 55, is a client of ours from Bristol. He had built up a pension fund of roughly £1,220,000. Despite being his mid-50’s, he recently married his long-term partner, Dawn. As they began to build a better life together, he wanted to move into a larger property. He proposed to help fund this by using his pension. Pension rules allow those aged 55 and over to withdraw a tax-free lump sum from their pension funds - which can be an enormous benefit, providing invaluable flexibility. However, care must be taken and advice should be sought to ensure that you don't end up paying tax when you could avoid it.
''Our advice to him is to consider looking at alternative methods to fund the property purchase, through means such as mortgage or equity release.''
However, by crystallising the maximum possible, he would more than use up his lifetime allowance (LTA), which currently stands at £1,073,100 (2021/22) and the excess of £146,900 would immediately be taxed at 55% - costing him a substantial £80,795.
If taken as a lump sum, this would have a massive negative impact on his retirement plans and ambitions. He estimates that he would need an annual income of £60,000 a year after tax. To achieve this without taking full advantage of available tax benefits and allowances would be highly expensive. In fact, he would need a gross income of £79,053.33 a year, of which £19,053.33 would go straight to the taxman.
Our advice to him is to consider looking at alternative methods to fund the property purchase, through means such as mortgage or equity release.
By leaving the pension pot untouched, he would immediately save his £80,795 tax bill. He could then use phased drawdown to provide a tax free income for five years. Using phased drawdown, you can target a specific level of net 'income' which consists of part tax-free lump sum and part income (less tax at your highest rate). He could use this method to provide himself with his required income tax-free for five years. Over that period, he would save himself no less than £207,500 in tax. Of course, neither a mortgage nor equity release are free, but they would cost him much less than £207,500.
The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.
Names have been changed to protect identity.
No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.