Help! Best order to take income in retirement?

[ScandiNoir]

Hi sorry for the essay..trying to give decent info.

My DH is going to retire in the early part of next year when he reaches 60 so we are just trying to get our heads round how our finances will be. I am 5 years younger and will carry on working part time for a few years, and I earn just about the tax free allowance so often only pay a few hundred a year in tax and NI. Mortgage paid off last year.

He will have one DB pension of around 10.5k pa plus a few DC pots totalling around 550k. We also have s and s isas of around 200k split pretty evenly between us. State pension for him at 66, me at 67.

We have seen a couple of ifas and their general advice has been to use up isa's first as income as withdrawals are tax free and not to touch drawdown pension until all isa money gone ( maybe taking us to when state pension kicks in). The argument being that you can have around 6 years of paying no tax.

However we feel that if we do that then once that money has gone, my DH will have guaranteed income of around 18k ( DB pension plus state) and then the money he draws down will also be taxable. Once I get state pension we will have 26k pa so if we had a few years when we wanted to take larger sums from pot eg helping kids with weddings/house purchase or just having fab hols(!) then we run the risk of being higher rate tax payers in that period. Ifas also seemed v keen on NOT taking 25% as lump sum from pot but that every withdrawal would have a 25%tax free element.

Are we missing something here? My DH is worried that the government may change the rules on the 25% tax free, so better to take it now!
We also wonder if the reason ifas want to draw down pot left intact for more years is that their % fee for looking after it and hopefully growing it will be higher. Not trying to be cynical but we want to do the right thing. Have worked very very hard over the years and want to enjoy our retirement. I realise this is a nice problem to have but a fool and his money are easily parted as my Dad is fond of saying so I would love any insight into this from anyone who has been in a similar boat. Thank you.

Best practice is indeed to run down ISA or other savings first and treat pensions as the pot of last resort. And unless you have an immediate need for tax free cash, it doesn't usually make sense to withdraw all the 25% tax free cash just to stick it in a cash account, because this takes it out of a tax advantaged wrapper with better growth potential than cash. Pensions fall outside a person's estate so no Inheritance Tax liability.

Where your DH isn't using all his Personal Allowance in the years before State Pension, he could take a small withdrawal from the DC pot to maximise using this allowance, and if he's a Basic Rate taxpayer you can transfer some of your unused allowance to him too (if any).

The IFAs are right in their suggestion. Sunseed’s info is spot on too.

Thanks for replies...but I still don't understand why you wouldn't balance some taxable income with some from isas...that's why I asked if we are missing something obvious?

At risk of stating the obvious, financial planning would be a great deal simpler if the date of death was known.

It doesn't make sense to pay more income tax than is necessary, which might happen if you spent taxable pension income ahead of non-taxable ISA money and had an early death.

Without knowing your full circumstances (which wouldn't be appropriate on a public forum) it's difficult to give a more specific response. It would be prudent to hold back say £20-30k of ISA depending on anticipated capital spending, not run it right down to zero.

If your husband wants to uses up his tax-free allowance he must have taxable income. The allowance for this year is £11850 so if he takes £15800 from his DC pension he will have 15800*0.8=11850 taxable and 3950 tax-free. He can do this every year for the next 6 years, until his state pension starts (which will use up most of his allowance)

Once he takes any taxable income from his pension he can no longer contribute the max £40000/year, which is maybe why the IFAs advise against it. This is what I do personally because I can't bear to see that personal allowance going unused.

Thanks Evoke, I don't think there's any danger of him having 40k to put in it once he is retired unless we win out on our premium bonds! I see what you mean but he will already be earning almost up to his allowance with his DB pension alone.
It's all so confusing!