Increasing pension contributions to enable eligibility for child benefit

chile_paul · 13 October 2016 at 3:59PM

Hi all,

I've been looking at my finances over the last couple of months and would appreciate some views from the forum to check that there isn't a glaring hole in my plan or a better option:

My current position is as follows.

£230,000 o/s mortgage on house valued at circa £320k
£200k in savings split circa 60% in investments with the remainder in high interest current accounts and regular savers
I'm maximising my pension contributions into my companys defined benefit pension scheme (10% contribution rate)

My salary (dependant on annual bonus) is in the range of £65k-£75k

I am very much planning for early retirement at circa 55 or earlier.

Given that the attractive interest rates on the current accounts and regular savers are dropping away, I've been re-looking at whether I would an appropriate strategy would be to increase my pension contributions through AVC's into a defined contribution scheme that I can access through work, therefore benefiting from the tax benefit that I would get and at the same time aim to bring my salary net of contributions down towards £50k so that I can also claim child benefit payments for my 2 children.

In order to be able to afford these additional pension contributions I would effect be in part at least living off my savings.

The only downside or risk that I can see with this, is if interest rates on the mortgage should soar then cash that I would otherwise have used to pay off the mortgage in this scenario is tied up in a pension which I can't access.

Any thoughts?

atush · 13 October 2016 at 5:07PM

My thoughts are it will be quite a while before rates go up so high you need to pay the mtg off in full.

Does your OH work? How much of your savings will you run down each year?

40% tax relief may not be around forever, so it would be wise to make hay while the sun shines.

Triumph13 · 13 October 2016 at 5:12PM

A few quick thoughts:

If you are even vaguely thinking about it then start getting child benefit paid again if you, like me, stopped it when the rules came in. I got caught out as I did end up making a one off contribution just before the last budget in case 40% relief was taken away and I found that you can't backdate the child benefit claim to the start of the tax year.
If you are worried about mortgage rates going up you could always hedge by taking a fixed rate mortgage.
You don't say how old you are, but make sure you factor in enough savings outside of pensions to support you from your early retirement date to when you can access your pension (which may well be 58 or later)
Some people might not be morally comfortable with deliberately manipulating their income to claim a benefit that has to be paid for by other taxpayers. That's a personal decision - I for instance am reasonably comfortable on child benefit as it's something I grew up thinking of as universal, but less so on tax credits.

chile_paul · 13 October 2016 at 5:35PM

atush wrote: »

My thoughts are it will be quite a while before rates go up so high you need to pay the mtg off in full.

Does your OH work? How much of your savings will you run down each year?

40% tax relief may not be around forever, so it would be wise to make hay while the sun shines.

My OH decided to put her career on hold whilst the kids (who are 5 and 11 months) were not at school, therefore she is not earning. She intends to go back to work, at least part time when they are both at school.

I need to fully work through the numbers to calculate how much I would need to increase my pension contributions by to bring me into the circa £50k salary net of pension to be able to claim the full amount of child benefit to work out how much of our savings we would have to eat into each year (partly because to date I've been unable to clarify whether other salary sacrifice payments that I make each month including for health insurance and share save schemes can be netted off; if anyone can clarify I'd be grateful).

However using very basic maths, I think I'd be running down savings by £15k a year and increasing pension contributions by the same amount.

globalds · 13 October 2016 at 5:41PM

I am so glad you have found a way for the state to pay for your early retirement ..

chile_paul · 13 October 2016 at 5:45PM

Triumph13 wrote: »

A few quick thoughts:
If you are even vaguely thinking about it then start getting child benefit paid again if you, like me, stopped it when the rules came in. I got caught out as I did end up making a one off contribution just before the last budget in case 40% relief was taken away and I found that you can't backdate the child benefit claim to the start of the tax year.

Good point - thanks. We also need to register the second child for child benefit which we haven't yet done as we didn't see the point given we weren't claiming the money, but have subsequently realised that this could impact my OH's national insurance credits whilst she is not working.

On the To Do List for tomorrow!

[*]If you are worried about mortgage rates going up you could always hedge by taking a fixed rate mortgage.
[*]You don't say how old you are, but make sure you factor in enough savings outside of pensions to support you from your early retirement date to when you can access your pension (which may well be 58 or later)

Both good points thanks. I'm not overly worried about the mortgage rates and am comfortable with the risk, but fixing would be an opportunity to minimise that risk. I'm 36 and certainly won't be running down savings totally for exactly the reason you raise. I only see this as a strategy for 2-3 years.

[*]Some people might not be morally comfortable with deliberately manipulating their income to claim a benefit that has to be paid for by other taxpayers. That's a personal decision - I for instance am reasonably comfortable on child benefit as it's something I grew up thinking of as universal, but less so on tax credits.

That's a really fair challenge and something that I have been considering. My personal view is that the current scheme is not particularly equitable given the fact that a couple where both work and earn salaries of £49,999 can claim the full amount, but my OH and I who have a lower combined salary can't claim.

The couple both on £49,999 would also be contributing less tax (as a % of their income) to society than we do.

For what it's worth my view is also that child benefit is for the benefit of the child and if we do take this approach we would be paying the benefit into a S&S JISA that we have open for both of them rather than to pay for our retirement.

chile_paul · 13 October 2016 at 5:48PM

globalds wrote: »

I am so glad you have found a way for the state to pay for your early retirement ..

Fair challenge, I will take it on board and thank you for your input.

I have outlined my thinking on this on the previous post but appreciate that some people will not agree.

PeacefulWaters · 13 October 2016 at 7:45PM

The state allows 40% tax relief.

The state allows £40k annual pension contributions.

The state limits pension pots to £1m.

Why seek a change in the law when the OP is working within specified legal limits already?

zagfles · 13 October 2016 at 7:58PM

Child benefit uses "adjusted net income", which is income after deduction of pension contributions. I suggest you seek a change in the law if you disagree with that.

zagfles · 13 October 2016 at 8:09PM

chile_paul wrote: »

My OH decided to put her career on hold whilst the kids (who are 5 and 11 months) were not at school, therefore she is not earning. She intends to go back to work, at least part time when they are both at school.

I need to fully work through the numbers to calculate how much I would need to increase my pension contributions by to bring me into the circa £50k salary net of pension to be able to claim the full amount of child benefit to work out how much of our savings we would have to eat into each year (partly because to date I've been unable to clarify whether other salary sacrifice payments that I make each month including for health insurance and share save schemes can be netted off; if anyone can clarify I'd be grateful).

It's basically taxable income minus stuff like grossed up pension conts, gift aid etc. So the taxable value of any benefits in kind eg medical insurance would count. See https://www.gov.uk/guidance/adjusted-net-income

Note that the there is a consultation underway on sal sac, where the govt is considering taxing the greater of the amount sacrificed or the benefit value, see: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/549682/Salary_sacrifice_for_the_provision_of_benefits-in-kind_HMRC_consultation.pdf

sandsy · 13 October 2016 at 8:55PM

This is a money saving website, designed to help people create a better financial future for themselves. And that's exactly what's going on here - all above board and totally legally, irrespective of how much anyone earns.

Increasing pension contributions to enable eligibility for child benefit

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