Tax Planning for Retirement Savings

I've still no plans to 'retire' as yet, because I'm very happy to keep taking on interesting new work projects and therefore the earned income should continue to roll in for as long as I want it to, or at least for as long as the clients still want me to do the work ... 

But there's a looming problem with future work possibilities, in that the majority of the people I deal with in my core group of clients are, like me, also getting older and at some stage they may decide to call it a day themselves. 

This has already happened with two former clients but not entirely due to retirements - people also simply leave and move on to new pastures.  The senior guys and gals I dealt with at these places (senior in terms of their positions within the company) have departed and, although these companies are still prospering, I'm just not on the radar of the next generation of leaders now pulling the strings.  Luckily, in recent years, neither of these clients had been a particularly large contributor to my company's turnover.

So although my company has provided me with a decent income and also made a profit for twenty-odd consecutive years, it's prudent to be planning for a time when most of the work might suddenly dry up, which could happen whether I want to continue or not.

I'm still the best part of ten years from the state-pension age (SPA), but using the government's online service I've checked what I will receive at that time.  Providing I can add another few years of National Insurance (NI) contributions, then I should receive the full state pension amount. 

And looking at my company's future cashflow forecast, I can remain employed and paying NI for another two full years even if all the work dried up tomorrow, so the current finances are not in bad shape.  This 'rolling' two years of future earned income also means that monthly employer's contributions can continue to increase my SIPP pot.

The SIPP currently represents around 1/3 of my total savings and investments.   The other 2/3 is in ISAs and tax-sheltered bonds, and both the capital and income from these other investments will be 100% tax-free to withdraw - they were purchased from taxed income so I've effectively paid the tax on the way in rather than on the way out.

For the last two years, I've also been receiving a very small pension from a defined benefits scheme to which I last made contributions in 1992.  This pension had been deferred since that time, and I decided to take it many years earlier than the scheme's normal retirement date. 

A 25% lump sum from this provider went straight into the ISA and, because this is a defined benefit scheme, the money purchase allowances were not triggered so I can still continue to add to the SIPP without a £4,000 per year limit on contributions.  However, I'm currently being taxed on the regular annuity payments at the basic rate of income tax.

So, if the work was to dry up suddenly, then in two years time I'd crystallise the SIPP and take the 25% lump sum from that too.  The lump sum would be drip-fed into the ISA over a period of a few years, and I'd likely immediately start to drawdown the SIPP up to the limit of my personal tax allowance, not forgetting the small DB pension payments, so I'd pay no income tax at all.  The balance of the income I'd need in pre-SPA retirement will be taken from the ISAs and other investments, which will also be tax-free*.

*The alternative would be to use the lump sum from the SIPP to supplement the first few years of retirement income, instead of simultaneously drawing down against the non-pension assets.  It might seem as if this is exactly the same thing as described above, but there may be benefits in getting all of the lump-sum under the protection of the ISA umbrella as soon as possible whilst drawing down the non-ISA (but still tax-free) assets.  However, I think I'll wait and see what the prevailing economic conditions are at the time, before I decide on this.

At the time I reach SPA, the SIPP pot could potentially be 30-40% depleted, but drawdown from it will then be reduced accordingly so my total taxable income, now including the state pension, remains below the personal tax threshold prevailing at the time, and so I'd still pay no income tax at all.  And as before, the balance of the income I'll need will be taken tax-free from the other investments.

It all sounds quite straightforward, but in reality I doubt if there'll be a 'clean' retirement date when all my earned income simply stops forever and I'm required instantly to fall back on the investments. 

What's much more probable is that the workflow will become increasingly sporadic but I'll continue to be employed by my company.  In these circumstances, I'm unlikely to be able to avoid taxation altogether but the earned income alone will not be sufficient, and so the future mix of earned, pension and non-pension income will need to be balanced each year on an ad-hoc basis, to minimise my overall tax liability.