Is paying tax in retirement a bad thing?

[Jefferson Starfish]

I've read comments on here from people who are determined to have exactly 25% pot value in their AVC's or an income of exactly equal to the personal tax allowance, so there's no chance of them paying any tax on their money.

But is paying tax a bad thing?

Surely it's better to have an income of £20k and lose £1.5k in tax than an income of £12.5k and pay no tax?

[RobertT]

It's horses for courses to some degree!

Paying tax in work doesn't seem to bother most people, as it's something that can't really be avoided.
As soon as retirement is mentioned, tax seems to become a bigger issue. But does it have to be?
Personally, I don't think so!

AVC's are great because of the tax breaks going in and personally I've managed to build up AVC's worth well over 25% of my total pot value.
Although I will end up paying some tax on it, ultimately I'll have more money in my pocket than if I'd stayed within the limits.

I could've cut my Flexiplan contributions sooner and put the money into ISA's instead, which are free from tax on the way out.
But ISA contributions come out of net pay, so tax and NIC's will have already been paid on that money. Whereas RM pension contributions are more tax efficient as each £1 only costs 68p, but pensions count towards income(excluding the tax free cash) so tax is payable on anything above the personal tax allowance!

So it's swings and roundabouts really. You win with one hand, but lose with the other.

The DBCBS has put a spanner in the works too, as that is a relatively recent addition to the RM pension, and will form the majority of most peoples NRA65 tax free cash. Meaning potentially more tax to pay on AVC's than pre DBCBS.

The fact that I will give some cash back to the taxman might not be perfect, but his contributions have helped my money grow more than it would have done otherwise. So it's not all bad.

It's also worth noting that with a current full state pension rate of around £9,300 per year, many posties will pay tax from SPA if not beforehand anyway, when including their RM pensions, plus any other pensions/income they may have.

It's not a bad thing to be tax efficient, but if it means living on a smaller income than you want/need, is it really that important?
As ever it will come down to the individual, and everyone will be in a slightly different situation, but personally I don't see paying a bit of tax in retirement as a deal breaker!

[freespeech]

I've read comments on here from people who are determined to have exactly 25% pot value in their AVC's or an income of exactly equal to the personal tax allowance, so there's no chance of them paying any tax on their money.

But is paying tax a bad thing?

Surely it's better to have an income of £20k and lose £1.5k in tax than an income of £12.5k and pay no tax?

.....or the best of both worlds and an income tax free of £12570 topped up each year by £7430 from your tax free lump sum.

[Jefferson Starfish]

I've read comments on here from people who are determined to have exactly 25% pot value in their AVC's or an income of exactly equal to the personal tax allowance, so there's no chance of them paying any tax on their money.

But is paying tax a bad thing?

Surely it's better to have an income of £20k and lose £1.5k in tax than an income of £12.5k and pay no tax?

.....or the best of both worlds and an income tax free of £12570 topped up each year by £7430 from your tax free lump sum.

But that tax free lump sum isn't going to last forever.

[NorthernBoy]

People may choose to take to the maximum lump sum and a smaller pension, not necessarily to lower their tax (although it could do), but to front load their retirement years with maximum cash.

Personally I’m taking the max I can on the lump sum at 60, as once I get to 67 the state pension will more than make up for my reduced RM pension. People generally spend more in their 60 and 70s and once they get older their desire to spend will reduce.

Choose a strategy that works for you and don’t let the tax question dictate which path you choose.

[Woody Guthrie]

Although I can understand the reluctance to pay tax after a full working life of paying tax it shouldn't be an obsession or even the main driver behind managing your pension provision.

Maximising your retirement income and enjoying your retirement should always be what you're aiming for. Sometimes people overcomplicated their finances just to save a couple of quid and end up tying money up in complex and difficult to access places.

I agree with NorthernBoy that front loading your pension years is a good idea, these are the years you are going to take the most enjoyment from, my dad is 83 now and barely spends half of his pension provision because he just isn't fit to make the most of it, in my mind that's wasted money.

It does take a little courage though.

[freespeech]

I've read comments on here from people who are determined to have exactly 25% pot value in their AVC's or an income of exactly equal to the personal tax allowance, so there's no chance of them paying any tax on their money.

But is paying tax a bad thing?

Surely it's better to have an income of £20k and lose £1.5k in tax than an income of £12.5k and pay no tax?

.....or the best of both worlds and an income tax free of £12570 topped up each year by £7430 from your tax free lump sum.

But that tax free lump sum isn't going to last forever.

It doesn't need to......if it lasts 7 years between ages 60 to 67 (£52k) you are likely to draw your SPA and still get a pay rise.

[RobertT]

Personally I'm a bit greedy and I want everything I can get!

My RM pension will be below the Personal Tax Allowance, so I have a personal pension to drawdown to bring my income up to the PTA amount until SPA, plus the tax free lump sums on top.
In my mind it's pointless having a tax free allowance, if you're not going to use it!

Once the state pension kicks in, I'll be over the PTA and will still have plenty of tax free cash to dip into as and when I choose. Because I think it's important to have flexibility and the ability to pay for life's little luxuries and any unexpected costs.

I have parents in their late 80's and although they've obviously slowed down, they spend their money on different things:

A new boiler
Meals from Hello Fresh and Wiltshire Farm foods, which are a lot less work than cooking from scratch as my mother has done for years, but more expensive.
Plus they still want to go on regular holidays and some of those week long coach trips are quite expensive for what you actually get!
There's plenty more examples!

Although they are still quite independent compared to others of a similar age.

Thinking about being tax efficient is good but don't get too bogged down with it, concentrate on providing a decent income first.
Whether that's using the tax free cash to fund retirement up to SPA, or using other means, it doesn't really matter.
Do what's right for you!

[Schiff]

Everyone has different ideas about how they want to spend their retirement and the amount of money needed to do that.

I've no doubt that some people could live their kind of retirement without paying a penny in income tax whereas others would regard that a paupers existence. There are those who say that they will spend less as they get older but I want to be able to pay a gardener, cleaner, decorator etc if my mobility starts to fail. If I am still able to get out and about then I can't see the point at which I will stop eating in restaurants and going to football matches, theatre productions etc.

Being tax efficient is one thing, but planning your finances so that in retirement you are deliberately limiting your income (and spending power) just to avoid paying tax really isn't a great idea.

[Jefferson Starfish]

Thanks for all the replies so far, all very interesting

[Woody Guthrie]

I want to be able to pay a gardener, cleaner, decorator etc if my mobility starts to fail

I've paid for those up front.
They're called children.
They owe me big time.

[Schiff]

I want to be able to pay a gardener, cleaner, decorator etc if my mobility starts to fail

I've paid for those up front.
They're called children.
They owe me big time.

But surely you want them to be able to see you blowing their inheritance if they don't provide that "payback".

[Woody Guthrie]

I want to be able to pay a gardener, cleaner, decorator etc if my mobility starts to fail

I've paid for those up front.
They're called children.
They owe me big time.

But surely you want them to be able to see you blowing their inheritance if they don't provide that "payback".

They've already been warned by that time there will be enough left to put me in the ground and have a good drink, I've seen families fighting over their "share" before and it's not my idea of a fitting legacy. Each to their own I suppose.

[Dexydog]

Reading this with interest as I am considering getting off the wheel and retiring as I've just about had enough.
I intend living off savings (about 100k) until SPA.
I'll be 57 when I go so that's 10k a year (no mortgage or loans and the other half has a fat government pension) and I have a little cottage industry I'm working on too which will give me a few pennies.
Then have a couple of smaller pensions I can use at SPA.
Quick question for Robert T- I am in whatever the pension is called which I joined in 2018, with AVC's I've been maxing out on there'll be 30k in there when I go which I intend to pull out as a lump sum in one go- would I be correct in saying if I take this as a lump sum at the start of the next tax year April 21/22 I will pay tax on 22500 (7.5k tax free), this will be refunded in the following tax year 22/23, provided I have no other income, as it will be within the total PTA for 21/22?
I might leave it to grow as I have savings but just weighing up options atm.
Similarly if I decide to wait until I've earned the PTA next year,(roughly around September with o/t) obviously I would have paid tax up until then, will this also be refunded the following tax year if I didn't use up the full allowance (and took the pension as a lump sum the following year to do the same and avoid paying any tax.)
Appreciate the comments above about the sense of maximising your income and not worrying about paying tax, but in my case I'm thinking as the amounts are low I may as well use my allowances to full effect where possible.
Thanks in advance.

[RobertT]

Quick question for Robert T- I am in whatever the pension is called which I joined in 2018, with AVC's I've been maxing out on there'll be 30k in there when I go which I intend to pull out as a lump sum in one go- would I be correct in saying if I take this as a lump sum at the start of the next tax year April 21/22 I will pay tax on 22500 (7.5k tax free), this will be refunded in the following tax year 22/23, provided I have no other income, as it will be within the total PTA for 21/22?

I assume you mean the RM Defined Contribution Plan with Scottish Widows?

If so, you can take all of it out in one go if you want to, with the first 25%(£7.5k) being tax free and the remainder being classed as income and taxed accordingly.

If you have no other earned income, the first £12,570 of that £22,500 will also be tax free, with the remainder being taxed at 20%.

In practice you might actually be taxed on all £22,500 initially, but if you have no other income these things tend to sorted out over time and you'll get a refund in due course.
Or you can get in touch with the tax office and either get the refund a lot quicker, or if you tell them beforehand, maybe not pay tax at all.

If you want to avoid paying tax on it altogether, then you'll need to withdraw your money over 2 tax years instead of 1. Assuming no other income.

I might leave it to grow as I have savings but just weighing up options atm.
Similarly if I decide to wait until I've earned the PTA next year,(roughly around September with o/t) obviously I would have paid tax up until then, will this also be refunded the following tax year if I didn't use up the full allowance (and took the pension as a lump sum the following year to do the same and avoid paying any tax.)

If you leave mid tax year, and have a reduced or no income from then onwards, you should get a refund of tax.