Pension Conundrum......

cloud_dog · 21 March 2008 at 12:32PM

Sounds a bit silly to start a post with this but………..I’m not sure what people will be able to offer me on this but I am just throwing my thoughts out here……….

My wife does not currently work (looking after our child) and has a small pension pot (SIPP) worth approx £30k (atm), and is 40 years old. I am a couple of years older with a final salary pension (40/80).

My conundrum is where to put some additional monies allocated towards retirement planning?

Initially I thought I would put it primarily in to my wife’s pension to build the pot but, then I considered additional contributions in my own name as I am a higher rate taxpayer and therefore we would benefit from the additional tax benefits on pension contributions.

Having said that, I am trying to weigh up a couple of things:

My wife really should have as decent a pension in her own right (as possible)
Taxation on pension income, i.e. it would be better to spread the income and utilise both our income tax limits to the max

Thoughts anyone???????

cloud_dog

EdInvestor · 21 March 2008 at 3:13PM

The old age allowance is going up to roughly 10k p.a soon, so that's the level of pension income (state and other) that you could aim for in your wife's case. (30 years NI only now required for basic state pension, check if any S2P on top).If you contain her total pension income under 10k it means she will get the 20% tax relief free.

However 40% tax relief is better than 20%.So it's probably best at present if you make the contributions in your name.If there's any left over after you hit the 22% band, stick the rest in her SIPP.

With your own pension, make sure you avoid the higher rate band and old age allowance clawback (around 22-27k) levels.

jamesd · 23 March 2008 at 1:55AM

One option is to contribute into a personal pension for yourself and to contribute up to 3600 (after grossing up) of the tax rebate to a pension for your wife. Same net cost, two pensions instead of one. And she gets tax relief on the money going in even though she's not paying any tax: free money from HMRC.

Say you contribute 80 net in 2008/9, grossed up to 100 pension, [STRIKE]20[/STRIKE] tax refund for you becomes [STRIKE]20[/STRIKE] pension contribution for her plus [STRIKE]5[/STRIKE] tax relief. So out of an 80 contribution, you end up getting [STRIKE]45[/STRIKE] in added tax relief. That's a pretty good deal. Wrong higher rate tax refund calculation, see next post.

Assuming that your wife's investments grow at 6% after inflation and fees and that she gets 6% annuity or income drawdown rate at 65 her current pension provision would provide an annual pension income of 7700 a year, plus the state and any other work pensions she may have. If there's a prospect of her being a higher rate tax payer in the future, investing via a stocks and shares ISA for now then getting higher rate tax relief in the future would probably be a better plan for anything above the 3600.

I forget whether you're written about mortgages but if you're happy with investment risk you're also likely to be a good candidate for a pension mortgage.

chesky369 · 23 March 2008 at 9:08AM

Definitely start by ensuring your wife will get a full state pension by paying sufficient NI contributions - it's still a bargain.

cloud_dog · 23 March 2008 at 12:43PM

Many thanks to everyne for their comments / thoughts.

James, you threw me a bit with the below....

jamesd wrote: »

Say you contribute 80 net in 2008/9, grossed up to 100 pension, 20 tax refund for you becomes 20 pension contribution for her plus 5 tax relief. So out of an 80 contribution, you end up getting 45 in added tax relief. That's a pretty good deal.

Am ok with the net / gross aspect but the 5% tax relief threw me. What is is, who gets it, does it need to be claimed or is it just an aspect of making a pension contribution?

I forget whether you're written about mortgages but if you're happy with investment risk you're also likely to be a good candidate for a pension mortgage.

Atm, were using our ISA allowance in (Maxi) S&S ISA's for repayment of the mortgage (plus whatever else), and am very comfortable with this.

I know the arguments over pension / ISA routes but my plan was:

that I will (obviously / hopefully) have a reasonable pension from my company pension
build up my wife's SIPP to a decent level (so as to make use of the income limit at retirement)
probably thinking in terms of utilising a draw-down facility for the SIPP (although this can be re-assessed as we approach that time)
to utilisie ISA investments atm moment switching to ISA savings at aome point in the future.

cloud_dog

jamesd · 23 March 2008 at 4:51PM

cloud_dog, her 5 arrives in the same way as your initial 80 is grossed up to 100: basic rate tax relief at the 20% 2008/9 rate. So your 100 gross took an 80% contribution - 80 - and her gross 25's 80% contribution is 20.

It's reclaimed by the pension plan from HMRC and arrives in the pension plan a few months later. No claiming by her required. Up to 3600 of gross contributions get this tax relief even if someone is not paying any tax at all.

You'd have to tell HMRC the gross value of your own pension contributions to get the higher rate tax relief refunded to you. A letter to your tax office will do.

My tax relief calculation was wrong. Here's the corrected version of that paragraph:

Say you contribute 80 net in 2008/9, grossed up to 100 pension at basic rate (20 tax relief). Additional 33.33 tax refund for you (133.33 * 0.6 = 80). Becomes 33.33 pension contribution for her plus 8.33 tax relief. So out of an 80 contribution, you end up getting 61.66 in added tax relief. 77% boost to that 80 from the tax relief. Or alternatively, 56.5% of the investment needed to get to any given target.

To repay the mortgage from 25% you'd need four times the value so that's still (4 * 0.565) = 2.26 times the investment. But once that tax-free sum is gone it leaves 75% and that's still (4-1) = 3 / 2.26 = 1.33% times as much money left in the investments for income drawdown as if you'd used the ISA and not repaid the mortgage at all. No tax-free lump sum left, though, so this is a pure income option unless the investments exceed their target.

cloud_dog · 16 November 2008 at 5:40PM

Can I just extend my original post a little to see what people's thoughts are..........

The OH has just been oferred a job at our local school, Lunchtime Monitor, basically 1.5hrs per day, not sure of the exact hourly rate (yet) but lets assume £5.50.

Question is............... Is it worth OH contributing to the LGPS?

If this was a full itme employment then I would not be asking the question but, with the limited hours you are only looking at about £90 a year going in to her LGPS.

So, back to.............. Is it really worth contributing???? I suppose a basic position would be 'Yes' insofar as if she gave up the job after a number of years we could either leave it or transfer it in to her SIPP, and I am hoping that a transfer would equate to something more than the sum of her contributions (assuming its more than a couple of years.).

Thoughts welcome...............

Thanks cloud_dog

Pension Conundrum......

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