Should we add extra cash to pension fund?

zakthecat · 20 September 2016 at 11:20AM

Hi

My wife, who is 55, has been paying into her company pension (currently with Scottish Widows) for about 30 years, and would like to consider retiring when she is 60. We have an endowment policy which is due to mature in February 2017 which we expect to pay out £17,000 - £18,000 and want to know if she should pay this into her pension fund. We have no mortgage or any other debts, no children or other dependents, and are in the fortunate position of not needing the cash for anything else at this time.

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dunstonh · 20 September 2016 at 12:23PM

ant to know if she should pay this into her pension fund.

impossible to answer on the very limited info you have given.

How is yours and your wife's retirement planning going in respect of your goals? are you on track to achieve them or not?

AlanP_2 · 20 September 2016 at 12:25PM

The answer is probably yes as she will get tax relief added to the sum you put in so FREE CASH from HMRC in effect.

Whether she can add it to her company scheme needs to be investigated with Scottish Widows and/or her employer.

If she can't then she could open a standalone pension with a provider like Cavendish, Hargreaves Lansdowne etc. This is a DIY approach where you select your own investments.

Given that she is 55 she can access this anytime she wants to.

There are limits on how much can be paid in to pensions - the main one of which is no more than hear earned income in the tax year so you would need to calculate how much that is allowing for the contributions already gone / going to SW.

What is your pension position? Paying some into yours may hep to "balance" your income in retirement thus taking advantage of 2 lots of Personal Tax Allowance?

More details on existing arrangements, salaries, current pension pots etc. will help you to get more specific help.

bowlhead99 · 20 September 2016 at 12:29PM

Putting it in a pension might be quite sensible if the goal is to keep it invested for the future. Or even if she will want to use it to help part fund her early retirement. Assuming she has earnings of 17-18k+ this tax year which are not already going into her scot widows pension, she can stick it all in to a pension (doesn't have to be with scot widows) and get the benefit of tax relie. Or if she earns less than that she can stick in half in Feb and half in April when it's a new tax year.

Then when she takes it out, 25% would be tax free and the 75% will be taxable at her marginal rate when she takes it - which might be 0% if she is drawing on it within her annual personal allowance (probably easier to do before state pension has kicked in). The money could then be spent or stuck into in her ISA allowance or suitable savings or investment vehicle at that time. Makes more sense to do it that way, and get all the tax relief, than invest into an ISA now.

So, seems like a sensible thing to do. Although depending on personal circumstances, it might be better to stick it in your pension rather than hers, depending on your respective marginal tax rates now and expected in the future. As dunstonh says, difficult to say anything more with no more info on goals and current income, wealth etc of the two of you..

zakthecat · 21 September 2016 at 10:38AM

Thanks for the replies.
I'm 61 and recently retired from local government on a final salary scheme, so I think it's unlikely I can add it to my pension. We don't need the cash for anything as we have sufficient access to capital to cover any potential expenses, we really want to know the best way we can invest it to top up our overall income when she decides to retire..

maximumgardener · 21 September 2016 at 4:34PM

to OP - have you and your wife used your ISA allowance for this tax year?

If not you could add any sums you don't need for emergency cash or pensions provision into a S&S Isa
(that money may be invested in similar ways to private pension funds)
Cash isa not great at present time very low returns .....but that may suit you . who knows?
depends on a host of factors......maybe you should seek independent advice?

a mix of emergency cash , pensions & ISA's seems like a good mix to me .....supplemented with your state pensions when those payable etc....

Triumph13 · 21 September 2016 at 4:52PM

The key question is what tax rates will you expect to be paying in retirement? I'm going to assume that neither of you are higher rate tax payers - apologies if this is not the case. If your wife's pension between age 60 and when her state pension kicks in will be well below her personal allowance then it can be a great idea to stick the money into a pension for her as she would get tax relief on the way in, but pay no tax on the way out, thereby making a 25% gain (£80 becomes £100). If she is already going to be over the personal allowance then it is much less worth it as she'd only make a 6.25% gain (£80 becomes £85), although that would add up to about £1000 or so depending on the costs of set-up and extraction.
Simplest route would probably be AVCs into her company pension ie she puts more of her salary into the pension and lives off the capital instead. If she can do it via salary sacrifice then so much the better as this would save NI as well. Make sure not to drop her remaining salary below the personal allowance though or she wouldn't be getting tax relief - if putting in enough to drop her below the personal allowance you would need to do this via a separate pension, as suggested above.
Finally, if she will be above the personal allowance in retirement, but you won't, then you could pay some of it into a stand alone pension in your name up to a maximum of £2,880 per year.
Or you could just spend it!

atush · 21 September 2016 at 8:44PM

zakthecat wrote: »

Thanks for the replies.
I'm 61 and recently retired from local government on a final salary scheme, so I think it's unlikely I can add it to my pension. We don't need the cash for anything as we have sufficient access to capital to cover any potential expenses, we really want to know the best way we can invest it to top up our overall income when she decides to retire..

You cant add it to your LGPS pension, but you can open a PP or sipp and put in 2880 per year (which will be grossed up to 3600 with TR) which can be inherited tax free by your spouse or children.

But if you need immediate income, and wont be spending capital (so capital values can fluctuate freely with the market to no ill effect to you) I would isa, into some good general income funds (or better yet inv trusts yielding around 4% and which have grown dividend for decades)

XRAT · 29 September 2016 at 8:43AM

As has been suggested above, the big benefit to pensions is if you are going to change tax band in retirement.
If you are paying 40% whilst earning and can claim that back into a pension then retire and pay 20%
(Or 15% by the time you have withdrawn a quarter as a tax free lump sum and paid 20% on the remaining three-quarters)
Or if you are paying 20% whilst earning and drop to a non-taxpayer.., don't forget that once your state pension kicks in you may rise to the next tax band, so it may be that you need to draw the extra money out before drawing the state pension to get the greatest advantage.
As you can see from the brackets above, just being able to take a lump sum tax free.., even if you remain in the same tax band, you will benefit by 5%. Which is likely to take you 5-10 years to earn in a building society currently!

Should we add extra cash to pension fund?

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