Is it better to start taking pension sooner rather than later if you are over the tax free lump sum level?

[Caila]

I am 52 and current have about £1.1m in my pension. Im a company director and can put £60k each year into my pension as a company contribution but I work for myself with no employees and my business is likely to be winding down over the next few years.

I had thought it was best to leave the money in the pension for a long as possible and not touch it but given the tax I will be paying on the income is it more tax efficient to start taking it out sooner rather than later?

How much do you actually need?

We need people to pay tax, to fund essential services.

If you don’t want to pay taxes, consider giving to charity?

Not the answer you are looking for.

This is money matters

You have enough money to get professional advice. Mumsnet will give you other perspectives.

Money gives you choices. So you can go for ‘tax efficiency’ or you can look at other ways to manage your wealth.

Well, this lot are not going to increase it, are they?

Having said that, you won’t be able to get it for another 5 years anyway by which time it may well have been reduced.

You can't take it until 57 if it's in a pension.

What other savings/investments do you have? It can still be worth adding to a pension even if you've exceeded the TFLS- especially if you can later take the money out paying tax at a lower rate than the relief you got on the way in.

Are you maxing out your ISA? Might be worth doing that if you are not already to give you more flexibility.

What are your priorities? Presumably your pension income will be taxed at a lower rate than you are currently.

What's your current income? Do you have other accessible investments - ISA, premium bonds, cash? Do you have a mortgage to pay off? How much money do you think you need for the lifestyle you want? What are your plans for retirement?

I know I can't take it until 57.

ISAs maxed out

It's a £60k company contribution so it's corporation tax and income tax free. It will be £40% on the way out.

I had assumed it was better to leave it as long as possible in the pension but I'm now thinking it probably isnt given that pensions will be inside IHT.

You probably need to speak to a specialist about inheritance planning. But even if you were to retire at 67 you could take out more than you need each year and then use that 'income' to give regular gifts to your children until your assets are below the IHT threshold. Or could you pay into their pensions now? Depending when you die there may be some IHT to pay on those gifts but it's tapered.

You don't know what future governents will do to the IHT limit. Inheritance planning is sensible but your children will inherit a lot before there's IHT to pay so maybe don't worry about it too much, after all,you might live for another fifty years.

Take it out at 40% income tax or pay 40% IHT? Nothing in it.

Definitely don’t leave it until after you turn 75 that would be much worse.

I think it can pass to a partner without IHT abd they can spend it

its more about taking out the tax free lump sum at 57, thereby reducing the pot. And guarding against a change in the rules which reduce the tax free lump sum.

DH is a top rate tax payer.

Chat GPT is pretty good on this stuff IF you ask it detailed enough questions.

Ignoring contributions part, if at the moment you have reached the cap on the amount you can take as a tax free lump sum, and if you could take it tomorrow, then the decision is take it now and grow it outside a pension with a tax rate of 24% CGT for some growth and (say) 40% income, or grow it inside the pension with a 40% income tax rate when you take it out. Which tends to favour taking out sooner rather than later.

That isn’t the answer to ‘should I contribute or not’ though - that is the answer to ‘if it is in there already, should I pull it out sooner rather than later.’

And also assumes you will die after April 27 - otherwise the IHT benefits play a part as well.

Given that IHT is an issue I would be more inclined to take it earlier and reinvest it.

I've plugged it into chatgpt and it is clearly saying to take the 25% due to IHT and the potential for the tax free sum to be reduced but not to touch the rest of the pensions yet.

Obviously at the point at which Im old enough. DH is in a similar position and is old enough.

This wouldn’t change the IHT position and make it subject to tax on growth.

taking it earlier means it can be gifted though and taper will start sooner for IHT purposes.

Plus who knows whether the 25% will be reduced.

The 7 year clock will start but if the £268k is all you are gifting, it is not going to taper.

? It would. It would be a potentially exempt transfer and would be tapering after 3 years and exempt after 7

Taper is only available on taxable transfers. Any gifts up to £325k are not taxable as they use up nil rate band.

thank you thats helpful

I'm sure she has paid more than his fair share in tax over the years!

There's plenty of younger people in the country to take over!!