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    • timthebin
    • By timthebin 12th Oct 16, 7:53 AM
    • 15Posts
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    timthebin
    Pension Contribution Advice
    • #1
    • 12th Oct 16, 7:53 AM
    Pension Contribution Advice 12th Oct 16 at 7:53 AM
    Morning all and thanks for taking the time to read my thread.

    A little about me: 29 year-old male, wife and a new son - hoping to have another child in a couple of years time. Also hoping to retire between 55-60.

    Financial situation: salary of £60k with an annual bonus of around £10k (not guaranteed but it's unlikely this won't happen). Current pension balance of around £15k, paying in 2& of my salary (the minimum to get the maximum out of my employer)

    £200k mortgage outstanding on a property worth £350k.

    Wife's currently on maternity leave however as a part-time council worker she will be earning around £26k. Her pension is now a DB (average salary) scheme. Anyway, enough about my other half.

    As we've just had a new child we can start receiving child benefit (CB) however as I earn over £60k I will have to pay this all back in tax, this has really made me consider if I should use this as an excuse to plough (much) more into my pension to (i) benefit from 40% tax relief (ii) not pay back any CB (more out of principle). Additionally, I would like to start purchasing childcare vouchers - all this is through salary sacrifice.

    To compound the issue further I am very interested in the LISA due to be launched next year and hope to max out 2 of these (1 for both me and my wife).

    Anyway, to the questions:

    1) If I reduced my gross salary from £60k to £50k (ignore the bonus payment for now) through increased pension contributions and childcare vouchers - I understand that I would receive a 40% top up/tax relief on the full £10k going into my pension, which negates the need to pay back any CB, is that correct?

    2) If (hypothetically) a £45k earner (in the middle income tax bracket) reduced their salary to £35k (basic tax bracket) through salary sacrifice, would they receive a 40% tax relief on all/part/none of their pension contributions?

    3) Can anyone see any glaring risks/miscalculations with my plan?

    Many thanks - Tim.
Page 1
    • AnotherJoe
    • By AnotherJoe 12th Oct 16, 8:19 AM
    • 4,180 Posts
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    AnotherJoe
    • #2
    • 12th Oct 16, 8:19 AM
    • #2
    • 12th Oct 16, 8:19 AM
    If you want to retire what may be 15 years earlier than the standard state pension age by then, why are you paying the minimum imto your pension? There are various complexities withnpensions but one fact anyone can grasp is, if you pay peanuts in, don't expect anything better out.

    As a higher rate tax payer it's hugely beneficial for you to pay in now because every £10 you get in your pension only costs £6 and when you come to take that money out, you'll get at least £8. Plus, being so young you are giving that contribution maximum time to grow.

    Also, what is it about the LISA you like ? AFAiCS for a high rate taxpayer, a pension wins hands down. It may be that the government changes the rules on tax contributions for HRT so that's a good argument for putting money away now whilst you can. And AIUI the money can only be used for first time house buyers which you arent so it would only be useful to you as a pension.

    I don't know about how CB and pension contributions interact.
    • timthebin
    • By timthebin 12th Oct 16, 10:05 AM
    • 15 Posts
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    timthebin
    • #3
    • 12th Oct 16, 10:05 AM
    • #3
    • 12th Oct 16, 10:05 AM
    Many thanks for your response, AnotherJoe.


    I suppose my main pension plan to date has been the traditional 'pay down debt first'. To date I have been overpaying my mortgage significantly (and cleared my student loan) - I guess the thinking was to clear debt and then I'll ramp up my pension once they are gone (which would be in about 12 years)... but now I fee that's too conservative and more funds should go into my pension.


    I suppose I'm still confused whether if someone's pension contributions take their gross (or taxable) pay below the higher-rate threshold, will they still receive the full 40% tax relief or will HMRC see the person as a 20% taxpayer?

    I suppose the idea of paying in £4k and receiving £1k per year, or a 25% APR sounded attractive, and diversifies my savings portfolio somewhat... but following your post (and some research) it seems I should be paying what I can directly into my pension.


    Hopefully someone will be along soon to assist with the CB question.


    Thanks again.
    • AnotherJoe
    • By AnotherJoe 12th Oct 16, 10:13 AM
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    AnotherJoe
    • #4
    • 12th Oct 16, 10:13 AM
    • #4
    • 12th Oct 16, 10:13 AM
    Many thanks for your response, AnotherJoe.


    I suppose my main pension plan to date has been the traditional 'pay down debt first'. To date I have been overpaying my mortgage significantly (and cleared my student loan) - I guess the thinking was to clear debt and then I'll ramp up my pension once they are gone (which would be in about 12 years)... but now I fee that's too conservative and more funds should go into my pension.

    To be fair its a balancing act, so paying that down first isnt necessarily bad ..... but .....with interest rates so low, and the fact you can get 25% FREE MONEY into your pension and then it can grow for many years, at least some of your money should be headed that way.

    At the moment you are saving say on a 3% mortgage but forgoing an imemdiate 25% uplift and perhaps 30 years of investment growth.

    Having said that the downside of a pension is it is tied up, so taking a happy medium of some money for now, some for later is best. All for now, which is effectively what you are doing, isn't probably the optimal balance.



    I suppose I'm still confused whether if someone's pension contributions take their gross (or taxable) pay below the higher-rate threshold, will they still receive the full 40% tax relief or will HMRC see the person as a 20% taxpayer?

    I suppose the idea of paying in £4k and receiving £1k per year, or a 25% APR sounded attractive, and diversifies my savings portfolio somewhat... but following your post (and some research) it seems I should be paying what I can directly into my pension.


    Hopefully someone will be along soon to assist with the CB question.


    Thanks again.
    Originally posted by timthebin
    You only get relief on whats over the threshold, whats due, eg if you are paid £10k over, only that £10k is counted for the 40% relief.

    Look at it this way, if you were paid £1 over the threshold, do you think the government is going to give you 40% relief on the other £39,999 you could save?
    • PeacefulWaters
    • By PeacefulWaters 12th Oct 16, 10:14 AM
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    PeacefulWaters
    • #5
    • 12th Oct 16, 10:14 AM
    • #5
    • 12th Oct 16, 10:14 AM
    A little about me: 29 year-old male, wife and a new son - hoping to have another child in a couple of years time. Also hoping to retire between 55-60.

    Financial situation: salary of £60k with an annual bonus of around £10k (not guaranteed but it's unlikely this won't happen). Current pension balance of around £15k, paying in 2& of my salary (the minimum to get the maximum out of my employer)
    Originally posted by timthebin
    Current balance doesn't imply any likelihood of retiring unde 60.

    As we've just had a new child we can start receiving child benefit (CB) however as I earn over £60k I will have to pay this all back in tax, this has really made me consider if I should use this as an excuse to plough (much) more into my pension to (i) benefit from 40% tax relief (ii) not pay back any CB (more out of principle).
    If you can feed your family while making significant pension contributions that get your taxable income under £50k then do it.

    Additionally, I would like to start purchasing childcare vouchers - all this is through salary sacrifice.
    Yes, although restricted to 20% relief.

    To compound the issue further I am very interested in the LISA due to be launched next year and hope to max out 2 of these (1 for both me and my wife).
    No benefit for you compared to 42% tax and NI relief on a pension contribution. If your other half is using salary sacrifice there's no benefit there either, other than penalised early access.

    1) If I reduced my gross salary from £60k to £50k (ignore the bonus payment for now) through increased pension contributions and childcare vouchers - I understand that I would receive a 40% top up/tax relief on the full £10k going into my pension, which negates the need to pay back any CB, is that correct?
    Yes, but you'd need to pay your bonus in too. You have to get your taxable income for the tax year below £50k to retain child benefit. Salary plus bonus plus overtime plus benefit in kind minus pension contributions minus half the value of childcare vouchers.

    2) If (hypothetically) a £45k earner (in the middle income tax bracket) reduced their salary to £35k (basic tax bracket) through salary sacrifice, would they receive a 40% tax relief on all/part/none of their pension contributions?
    40% on part. 20% on another part.
    • dunstonh
    • By dunstonh 12th Oct 16, 10:57 AM
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    dunstonh
    • #6
    • 12th Oct 16, 10:57 AM
    • #6
    • 12th Oct 16, 10:57 AM
    I suppose my main pension plan to date has been the traditional 'pay down debt first'.
    Short term expensive debt yes. However, not long term cheap debt.

    To date I have been overpaying my mortgage significantly (and cleared my student loan)
    As a higher rate taxpayer that has been a costly thing to do. By all means overpay some of it but going heavy into one option and doing virtually nothing in the others is not a good idea. I am a higher rate taxpayer and have been overpaying my mortgage. However, I have also made larger pension contributions and a stocks & shares ISA.

    As it stands, your goal of early retirement is not likely to be achievable unless you start putting money aside for it.
    I am an Independent Financial Adviser (IFA). Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
    • atush
    • By atush 12th Oct 16, 11:10 AM
    • 15,317 Posts
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    atush
    • #7
    • 12th Oct 16, 11:10 AM
    • #7
    • 12th Oct 16, 11:10 AM
    What is your mtg rate? What was your tudent debt rate?

    TBH, you should have been concentrating pensions contribs (100 of which would only cost you 60) over paying off a 2% mtg, or 3% student debt. But so be it, you make your choice.

    I would concentrate on pension now, and stop overpaying. Get your salary down to 50K by contributions and CC vouchers.

    And if you can afford to, it might make sense to get your income down to the BRT limit of 43K. 40% tax relief on your pension is a fine thing, and well worth doing- esp as you dont know how long this will last (it could be cut back in future).

    When the OH is back at work, she could fund your Lisas from her income. AS if you want to retire at 55-60, you could come up against not being able to use pensions until you are w/in 10 years of SPA so might need iSas too. AS you will probably not be able to take yours until at least the age of 58.
    • Kynthia
    • By Kynthia 12th Oct 16, 1:45 PM
    • 4,701 Posts
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    Kynthia
    • #8
    • 12th Oct 16, 1:45 PM
    • #8
    • 12th Oct 16, 1:45 PM
    The tax charge for Child Benefit is based on your adjusted net income. Use this calculator to play around with your income to see what affect it would have on your child benefit. Your whole income, including property income and savings interest, is used and pensions and gift aid are deducted so it pays to understand what affects this figure.

    https://www.gov.uk/guidance/adjusted-net-income
    https://www.gov.uk/child-benefit-tax-charge/overview
    Don't listen to me, I'm no expert!
    • timthebin
    • By timthebin 12th Oct 16, 4:08 PM
    • 15 Posts
    • 1 Thanks
    timthebin
    • #9
    • 12th Oct 16, 4:08 PM
    • #9
    • 12th Oct 16, 4:08 PM
    Afternoon all,


    My mortgage rate is currently sat at 1.99% (however has previously been higher) and my student loan rate has varied with RPI, however as it was Plan 1 it has always been very low (I believe it finished at 1%). I realise now I've made a small error is ploughing all my funds into this 'cheap debt'.


    I just wanted to say thanks to all those that took the time out to contribute to this thread - certainly helped me in making my decision re pension contributions, in short: pay in as much as you can afford whilst the rules permit 40% tax relief (and you can afford to live of course).


    Regards,


    Tim
    • jaybeetoo
    • By jaybeetoo 12th Oct 16, 5:09 PM
    • 554 Posts
    • 261 Thanks
    jaybeetoo
    When working out your total salary, don't forget to include any benefits such as private medical, company car, etc.
    • RuleTheWorld
    • By RuleTheWorld 12th Oct 16, 8:59 PM
    • 79 Posts
    • 14 Thanks
    RuleTheWorld
    I often read these threads and see recommendations to do everything i.e. extra pension, savings and overpay mortgage.

    Is the best option really to split if a higher rate tax payer and IF mortgage will be paid off long before minimum retirement age. In this scenario I question any mortgage overpayments? I am considering starting overpayments next year for first time but only as a sort of achievement - I don't really see it as the best thing to do
    • timthebin
    • By timthebin 12th Oct 16, 9:42 PM
    • 15 Posts
    • 1 Thanks
    timthebin
    RTW - agreed.

    I think it was just the lure of being able to see your mortgage balance reduce combined with the feeling of having 'mortgage-free' status that drove me to make overpayments.

    I can now see that whilst this sounds good - financially it is not the best way to an earlier, and more lucrative, retirement... which is what its all about!
    • RuleTheWorld
    • By RuleTheWorld 12th Oct 16, 10:02 PM
    • 79 Posts
    • 14 Thanks
    RuleTheWorld
    I'm 32 and we are not very likely to move house in future.

    Currently mortgage is going to be paid off at age 50 but obviously very earliest retirement will likely be 57+

    My priority is to bank the 40% benefit while young as 1) it might go away 2) gives many years for the money to grow and 3) take a pessimistic view that might not always have spare money
    • Kynthia
    • By Kynthia 13th Oct 16, 12:30 AM
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    Kynthia
    Like many things it depends on individual circumstances. There's a balance of where to put additional funds; improving your long term future, improving your short term future, improving now.

    You want enough money now to enjoy life, afford holidays, make memories with your children. However this needs to be balanced against having money in a pension to have a goid retirement and financially it's a good decision dye to tge tax relief and length of time to invest. However this money is inaccessible until 55 or older and short term future needs considering. Mortgage overpayments could be considered an option as once you've maxed out savings options that have a higher interest rate then paying more off your mortgage saves you paying more in interest. You can get this money back if you remortgage and it might make things easier should you wish to buy a bigger, more expensive property. You also need short term savings for other expenses like a car when you need one, expensive maintenance of your property, and paying for children's university/house deposit/wedding may be something you want to do before you can access your pension.

    So a balance between all three is needed but what percentages or shares go to each type depends on the individual and their predictions and plans in the short and long term.
    Don't listen to me, I'm no expert!
    • squeeks
    • By squeeks 13th Oct 16, 3:59 PM
    • 285 Posts
    • 220 Thanks
    squeeks
    If you want to retire early you will need an alternative savings/investment vehicle in addition to a pension.

    Pension savings are only accessible within 10 years of the state retirement date. At your age, you are looking at a state retirement age of 69 or 70. Keep on eye on this, it is being "phased" in. so you are looking at an early retirement age of around 60, rather than 55.

    Things to do:
    - Make use of any matched pension contributions from your employer.
    - Consider reducing your income to the higher tax threshold by making additional pension contributions to maximise the 40% contributions from HMRC.
    - Remember that pensions are still taxed, you just delay when you pay tax, and hope that you pay a lower rate at that time. 30-40 years is a long time and tax laws can, and do change.
    - Save more and regularly. For long term investing take a look at S&S ISA's
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