Pension: how to invest lump sum drawdown

[Ziferblat]

DH is coming up to 55 just before the next Budget. There is talk of scrapping the 25% tax free pension withdrawal so he feels he should take the money tax free while we can.

I should caveat this with saying we are in a really fortunate position compared to 90% of the country.
He has had a high paying job for years so it will be about 200k. We have paid off the mortgage on our house and never upsized.

What would you do with the money?

Options are:

• Get a BTL (I think it’s a bad idea under the current tax regime and we have got two modest ones by default but are not mercenary enough to run them at market rents as that seems criminal!)
• Upsize property (somewhere nearby which would mean keeping DC in current schools)
• Pay school fees or put it away for uni up front. School is by far our biggest expense but I would sell up and live in a tent before pulling them out as they have thrived and we live in an appalling area for state secondaries. VAT has made school fees a massive financial and mental burden.
• Use up our ISA limits for once including the DCs and open SIPPs for DC? We won’t ever get to see their enjoyment of this though or be able to use it should we need it
• Pour it into stocks and shares? Stock market has had by far the biggest returns. A general account will also be taxable for dividends and cash outs

I’m worried that DH could be tempted to squander it on a car (we don’t even have off street parking and have a perfectly reasonable car already!) or crypto!

I will encourage him to treat himself a bit but it would is also family money as I have sacrificed much of my career to take the mental load DC related stuff…

What would you do?

You need to talk to a decent financial advisor.

Is he no longer working? I thought there were implications for putting pensions into drawing down whilst still employed (but not something that affects me)?

If you are talking about multiple years of school fees for more than 1 child?

It sounds as if you could fill up both your £20k ISA allowance for this year, whack another £40k in a 6 month deposit for next year’s ISA allowance plus Junior ISA allowances are currently £9k each per tax year (that could be their Uni fund).

If you want “risk free” various investment firms have “portals” where you are invited to lend sums to banks with terms varying from “instant access” to multiple years. I think most want £50k+, but that might suit you?

This important and not something you should do on a whim?

Move to a house with a drive and get a car

I wouldn't take it tbh, based on a rumour.

It's better off where it is, staying invested IMO. (Assuming it is well invested with not too high fees).

I'd make sure we had enough income to fill both ISAs every year however so would draw enough for that.

I agree with this. If you must then take out enough to fill your S&S ISA allowances including the kids and then do the same again next April. We are in a similar situation but I won’t take the tax free cash until the indicators that it will disappear are more than just rumours.

Thanks everyone! Some good advice. It looks like stuffing the ISAs and putting it into a general investment account then transferring enough every year for ISAs is the way to go. DH is still working for now but who knows how long it will last. I think he may just tip into the higher earner bracket some years so loses the tax advantages to his pension.
We will speak to a financial planner with tax experience rather than an IFA…most seem a bit clueless or very keen to plug the products with high fees which erodes most of your gains.
was staggered to discover that just 4% of fund managers outperform the market. That means if you’re invested in anything other than a passive all cap global index fund, you’re only 4% more likely to be gaining more than these funds!
DH though being male is insistent that he has made a killing with his investment in Cathy Wood’s tech stocks. She is fascinating - one of the few women fund managers and a mentor of the guy who the Laffer curve is named after.

What rumours about the 25% tax free allowance disappearing? More scaremongering?

er every media outlet and every brokerage firm and economist is talking about it. It could be kite flying - a well known technique to those who work in media or govt where a minister or their aide suggests something semi contentious to see how it lands. There is talk of reducing the 260k to something like 75 or 100k tax free as the tax reliefs on pensions are costing the Treasury too much.

Ok so you mean the rumour is that it'll be capped, not withdrawn. Different things.

i have heard that they want to scrap it but after lobbying they may just cap it. Something has got to give as we are broke as a country. There is a lot of political pressure to tax assets rather than working income. Sympathy for pensioners has dwindled and with votes for 16 year olds, there won’t be too much concern about preserving pensions for the well off. I’m being a pragmatist rather than alarmist.
Also even if this wasn’t coming in and we kept money in the pension, it does get taxed on the way out unlike ISAs. For now!

They will not scrap the 25% tax free allowance. Idiots were withdrawing money from ISAs on rumours that the cash ISA limit would be reduced. Ignore the rumours.

even if this wasn’t coming in and we kept money in the pension, it does get taxed on the way out

Er, the tax free part doesn't. That's rather the point.

Withdrawing to anything definitely taxable, based on rumours that the pension lump sum might become.taxable, doesn't make sense.

If you don’t need it leave it invested or just withdraw enough to top up ISA

Have a proper conversation with a financial adviser. The changes to IHT and pensions that are expected to apply from April 2027 are another thing to factor in when deciding on the most suitable course of action to meet your needs over the short and long term. If you have a potential IHT liability arising you may want to take mitigating action. Drawing out a huge chunk of tax free cash now may make your position worse, not better, without careful thought.

Those rumours seem to have been around every year for the last 20 years.

Thanks for the advice - some good points. If the cap comes into force though would it not be better to have accessed the maximum tax free and then immediately put most of it to work in shares (after the tax free ISA amount is allocated)? It would mean your money is still growing and compounding. The shares and funds my DH has chosen have outperformed his pension so far.

DH has also said he wants to spend a bit on school fees and one or two trips of a lifetime while DC are still at home…

@Sunseed Won’t dragging pensions into IHT make it a better idea to liquidate some of it? If he keeps it where it is the forecast is it will be worth £1m or more in a decade

IF the tax free amount was reduced, it would be done with many years notice, people make financial decisions based on this, years in advance.

Its just a scaremonger story, from he right wing press, like the withdrawal of the single person council tax discount or the ISA changes that never happened.

I think he may just tip into the higher earner bracket some years so loses the tax advantages to his pension.

Not sure what you mean by this? You have to be a very high earner (well above the threshold for paying 45%) to lose tax advantages.

If his investments outside the pension are outperforming the pension, he needs to change what his pension is invested in. He doesn't have to withdraw it from the wrapper to change the investments.

Get yourself over to The Rebel Finance School on FB and YouTube and do the course before you make any decisions.

He would also lose the 25% TFC on the amounts by which the original pension investment grows (remaining 75%). Only new contributions would attract TFC. I also don’t think any Government would introduce it without some notice.

then immediately put most of it to work in shares (after the tax free ISA amount is allocated)? It would mean your money is still growing and compounding.
Your money is still growing and compounding left in the pension. The amount tax free is still growing too (based on current rules).

You would be paying CGT on growth and income tax on the dividends on the part outside of the ISA wrapper instead (and total income probably also tips into HR if he is just under now so chargeable at the higher rates).

If his funds aren't performing well inside the pension, check the investments and whether they are aligned with his risk appetite and whether they have different risk profiles.

@Ziferblat Maybe, or maybe not. This is why you need proper, personal, tailored advice that takes all of your own unique circumstances and objectives into account.

I would tend to agree with those saying it would be mad to take action based on a rumour. I can't believe there are people panic withdrawing from ISAs as well.

@TheFormidableMrsC I have done it! They will have a draw down episode soon. DH is in unusual position for various reasons.