Simple blueprint for long term tax planning

**stek** · 25 May 2014, 19:39

Originally posted by adam42 View Post

Maybe I'm not looking in the right places but I'm looking for and can't find a rough guide for how much salary, pension, mortgage, ISA savings etc to pay / take / set up now I'm about to start contracting through my ltd co again.

I guess my accountant will know all the options but it would be good to have a few ideas myself before I talk to him about it.

What do most smart contractors aim for on retirement? Buying an annuity? I see from Annuity Best Buy Table - Personal Finance - Financial Times that roughly speaking a £100K will get you about £4K a year, so I'd need to save up £500K to get myself the £20K pa income needed for a happy retirement. I'm looking at 18 years income before I'm 65, so that's £27K I need to stash away every year.

I can do £15K a year of that in my personal ISA, and I could put the rest in my partner's ISA if it was best to keep it all in cash.

The contractorcalculator pension calculator has completely outfoxed me and I can't get it to give me a comprehensible answer from the default.

So how much are the tax benefits from a pension?

I know a cash ISA is only going to get some measly interest rate and a stocks & shares invested savings plan could get far more but I want to get a handle on the tax side of it first. I mean, I don't own a house so buying a house might completely change the equation - I just don't know at this point.

£20k a year, fook that, budget on working till you drop, it's the only way.

**adam42** · 25 May 2014, 19:52

Originally posted by stek View Post

£20k a year, fook that, budget on working till you drop, it's the only way.

"Fook that" as in "that's not enough"?

Would cover my current outgoings minus rent and other stuff that I wouldn't be paying anymore, leaving a couple of grand for holidays.

I haven't accounted for the likelihood that inflation could well mean my outgoings in 2032 could be more than that, but that's another subject.

If putting my savings through a pension will get me more, then great - but how much more?

**stek** · 25 May 2014, 20:04

Originally posted by adam42 View Post

"Fook that" as in "that's not enough"?

Would cover my current outgoings minus rent and other stuff that I wouldn't be paying anymore, leaving a couple of grand for holidays.

I haven't accounted for the likelihood that inflation could well mean my outgoings in 2032 could be more than that, but that's another subject.

If putting my savings through a pension will get me more, then great - but how much more?

Pensions are worth bollox mate, stash up as much cash as you can, budget for working until senility sets in, then do the ASDA trolley thing with a fair wad in the bank, or if still compus mentis contract 3/6 months a year to top up, either way you won't care, be either dead, mental or happy....

I'm lucky that I enjoy working, worst thing ever for me is sat around on a park bench saying to anyone listening 'I was an expert in HACMP, I was a Top Boy...'. Not for me - hate sitting around or pottering around in an allotment growing pointless vegetables...

**TheFaQQer** · 27 May 2014, 08:43

Originally posted by adam42 View Post

I'm looking at 18 years income before I'm 65, so that's £27K I need to stash away every year.

That seems to be with negligible growth over the years, though.

When I talked pensions with my advisor, he said that I'd probably look to take the tax free lump sum at the start, and invest the rest, probably not in an annuity. Who knows what the pension options are going to be like that far in the future - there may be better competition within the annuity market (as some are predicting), there may be something completely different.

The Guardian has been doing some advice on things to do in different scenarios in the money section on Saturday - they are probably available online. This week was what to do with a pension pot of £300k.

Bear in mind that the average pension pot in the UK is £30k, so having more than that is a start

**Craig at Nixon Williams** · 27 May 2014, 08:48

Originally posted by adam42 View Post

Maybe I'm not looking in the right places but I'm looking for and can't find a rough guide for how much salary, pension, mortgage, ISA savings etc to pay / take / set up now I'm about to start contracting through my ltd co again.

I guess my accountant will know all the options but it would be good to have a few ideas myself before I talk to him about it.

What do most smart contractors aim for on retirement? Buying an annuity? I see from Annuity Best Buy Table - Personal Finance - Financial Times that roughly speaking a £100K will get you about £4K a year, so I'd need to save up £500K to get myself the £20K pa income needed for a happy retirement. I'm looking at 18 years income before I'm 65, so that's £27K I need to stash away every year.

I can do £15K a year of that in my personal ISA, and I could put the rest in my partner's ISA if it was best to keep it all in cash.

The contractorcalculator pension calculator has completely outfoxed me and I can't get it to give me a comprehensible answer from the default.

So how much are the tax benefits from a pension?

I know a cash ISA is only going to get some measly interest rate and a stocks & shares invested savings plan could get far more but I want to get a handle on the tax side of it first. I mean, I don't own a house so buying a house might completely change the equation - I just don't know at this point.

A very important thing to remember with pensions is that the tax rules on these could change between when you put the money into the pension and when you take it out - but for the purpose of this, we’ll assume that they stay as they are.

With pensions you get tax relief when you put money into the pension but get taxed on the money when you take it out – so if you pay tax at the higher rate now but will only pay it at the basic rate when you retire then there will be a benefit to you. You can take a 25% lump-sum when you retire which is free of tax.

In this year’s budget the chancellor announced that in the future there will be no requirement to buy an annuity in retirement, but instead you will be able to simply draw on your pension pot whenever you like and will be taxed at your marginal rate on what you draw. This means that you aren’t forced to buy annuities at poor rates offered by insurance companies and can leave your money invested for longer. Having the alternative may also encourage providers to offer better rates on annuities in the future.

With an ISA, you add money to it from your income after tax has been paid – there’s no tax relief when you add money to the ISA but you won’t be taxed on the money when you take it out of the ISA either. This makes it far simpler in the sense that you do not need to consider what may happen to the tax rates in the future for when you need to draw on the money saved in the ISA.

If you use a cash ISA then any interest will not be subject to income tax, likewise investments held in a stocks and shares ISA will not have tax applied on dividends nor on any capital gains made.

Hope this helps!
Craig

**Wmnr** · 27 May 2014, 12:33

The answer to these questions depends on your situation and how taxation will change in future years. The first one, only you know about, the second one - no-one knows about.

But here are some general points to consider:-

Make sure you have a warchest in cash - we all have bad days
Will you want to buy a house - you'll need cash in your name for this
Minimise the amount of tax you pay (legally)
Pension rules are currently more strict than ISA rules
Money goes into an ISA after tax and any gains are tax free
Money goes into a pension before tax (or the tax is rebated) but is taxed on the way out
Don't put all your eggs in one basket
Consider the effect of inflation
Consider the effect of growth (for simlple calculations, assume inflation and groath cancel each other out)
ISAs aren't just for cash, they can hold shares/investment trusts/trackers/unit trusts
Include the state pension in your calculations (but it will change)
Annuities are being phased out (but the may be phased back in again) - pension drawdown is the new god
An investment that grows less than inflation is losing you money
Pensions/ISAs are just investment wrappers so think about what you invest in too

Generally speaking, I would take salary/dividends upto 40k (income tax at 20%) and stick any surplus in a pension - avoiding 40% income tax

If you want to work til you drop, stick it all in cash!!!

**TheFaQQer** · 27 May 2014, 12:51

Originally posted by Wmnr View Post

Annuities are being phased out

No they aren't. But they will become optional. Which should encourage more competition in the marketplace for your money.

**Wmnr** · 27 May 2014, 14:18

Originally posted by TheFaQQer View Post

No they aren't. But they will become optional. Which should encourage more competition in the marketplace for your money.

yep - thats what i meant

**adam42** · 28 May 2014, 17:13

Thanks very much for the highly educational answers.

Just a couple more questions if you don't mind -

An annuity seems pretty straight-forward. I get my pension funds, take some as tax-free cash and buy an annuity with the rest, the pay-outs of which are taxed.

With this pension drawdown approach, does that consist of taking a tax-free lump sum at regular intervals until the pot is empty? If so, how does the HMRC get its tax? Or is the tax-free lump sum the same as above and the rest taxed some other way?

Am I right that interest paid on my business bank accounts is also taxed? Or rather, untaxed at source but treated as income for the company?

This is probably wishful thinking but if I left country on or even before retirement, how would that affect the tax to be paid afterwards?

Simple blueprint for long term tax planning