My wife, 56, is still working but has a final salary scheme from a previous employment which she is drawing as well - currently £26k per annum.
The pension scheme at her current employment is defined contribution, and her fund stands at £1.050m. Therefore, her total pension is valued at around £1.57m. We have protected her Lifetime Allowance at £1.25m, but obviously all growth will now be taxed at the excess rate when drawn down.
My idea is to take the 25% tax free amount out of the defined contribution pot, and reinvest it in the same funds as the pension is already invested in.
This will then have the effect of removing growth on the 25% from the excess tax rate to a capital gain when sold, thereby saving a considerable amount of tax (subject to the amount of growth) in the long term. Am I right?
So in principle Rod, your wife could take tax free cash from her pension, so that future growth or income on this amount would be outside of the pension.
It therefore wouldn't add to the lifetime allowance tax charge. The tax free cash would be around £250,000.
It's all rather complicated stuff but in simple terms, if we assume a 5% growth after charges, in effect this could save £6,875 over a year (55% of £12,500 growth).
However (of course) it is not as straightforward as this.
Here's a couple of things worth bearing in mind:
- You may save on lifetime taxes but pay more death taxes -
Pensions are normally inheritance tax free. IHT on a non-pension portfolio of £250,000 could be £100,000
- The growth on investments in the pension is tax-free,
However funds and shares (outside of an ISA) produce income and gains which will be taxed on an ongoing basis.
So you might save 55% on the growth in pension, but would still pay up to 38.1% on dividends and up to 20% on gains.
- Taxes have a nasty habit of changing...
In this kind of situation, it might be best to speak to a financial adviser who can offer you guidance which is highly specific to you.