You have some spare capital now which you may wish to access early in retirement so you can’t afford to lock the money away or take any investment risk. Right now the money is sitting in cash making very little return.
Here’s a thought – you haven’t paid anything into your pension plan this year and neither has your employer so you have the scope to make a £40,000 contribution without going above the annual allowance. The provider would add basic rate tax relief to this and gross your payment up to £50,000. This can be invested in a cash fund to remove investment risk. As a 50% taxpayer in this tax year you will be able to claim additional tax relief from HMRC equal to £15,000. So, you now have a £50,000 pension fund at a cost to you of £25,000.
You retire next year and start to draw your company and State pensions. As these amount to over £20,000 a year you can transfer the above pension fund into Flexible Drawdown. You take 25% tax free cash equal to £12,500 and, under flexible drawdown rules, withdraw the balance of the fund as income. You will pay tax on the income but even if you are still a 50% taxpayer you would receive a net income of £18,750.
End result is that you have received back a net £46,250 at a cost to you of £40,000 or a return of over 15%. OK, you need to factor in some charges but you’re happy you didn’t leave the money in the bank.
40% taxpayers using the same plan could return £45,000 or a 12.5% return before charges.
As always it is important you take independent financial advice before taking any action. The above is based on our understanding of current legislation which can change.
For more information visit us online and contact our expert team of IFA's. The Financial Planning Partners operate in and around Berkshire including Ascot, Crowthorne, Camberley, Bracknell, Sandhurst, Wokingham, Reading and Guildford.
