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  • FIRST POST
    • chile_paul
    • By chile_paul 13th Oct 16, 3:59 PM
    • 379Posts
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    chile_paul
    Increasing pension contributions to enable eligibility for child benefit
    • #1
    • 13th Oct 16, 3:59 PM
    Increasing pension contributions to enable eligibility for child benefit 13th Oct 16 at 3:59 PM
    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?
Page 1
    • atush
    • By atush 13th Oct 16, 5:07 PM
    • 15,277 Posts
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    atush
    • #2
    • 13th Oct 16, 5:07 PM
    • #2
    • 13th Oct 16, 5:07 PM
    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
    • By Triumph13 13th Oct 16, 5:12 PM
    • 714 Posts
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    Triumph13
    • #3
    • 13th Oct 16, 5:12 PM
    • #3
    • 13th Oct 16, 5:12 PM
    A few quick thoughts:
    1. 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.
    2. If you are worried about mortgage rates going up you could always hedge by taking a fixed rate mortgage.
    3. 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)
    4. 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
    • By chile_paul 13th Oct 16, 5:35 PM
    • 379 Posts
    • 279 Thanks
    chile_paul
    • #4
    • 13th Oct 16, 5:35 PM
    • #4
    • 13th Oct 16, 5:35 PM
    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.
    Originally posted by atush
    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
    • By globalds 13th Oct 16, 5:41 PM
    • 8,853 Posts
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    globalds
    • #5
    • 13th Oct 16, 5:41 PM
    • #5
    • 13th Oct 16, 5:41 PM
    I am so glad you have found a way for the state to pay for your early retirement ..
    Speak when you are angry--and you will make the best speech you'll ever regret

    Anger makes dull men witty, but it keeps them poor.

    ..............JAFA CHALENGE ......01/08...#16
    • chile_paul
    • By chile_paul 13th Oct 16, 5:45 PM
    • 379 Posts
    • 279 Thanks
    chile_paul
    • #6
    • 13th Oct 16, 5:45 PM
    • #6
    • 13th Oct 16, 5:45 PM
    A few quick thoughts:
    1. 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.
    Originally posted by Triumph13
    1. 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!

    2. If you are worried about mortgage rates going up you could always hedge by taking a fixed rate mortgage.
    3. 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.
Last edited by chile_paul; 13-10-2016 at 5:51 PM.
    • chile_paul
    • By chile_paul 13th Oct 16, 5:48 PM
    • 379 Posts
    • 279 Thanks
    chile_paul
    • #7
    • 13th Oct 16, 5:48 PM
    • #7
    • 13th Oct 16, 5:48 PM
    I am so glad you have found a way for the state to pay for your early retirement ..
    Originally posted by globalds
    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
    • By PeacefulWaters 13th Oct 16, 7:45 PM
    • 5,052 Posts
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    PeacefulWaters
    • #8
    • 13th Oct 16, 7:45 PM
    • #8
    • 13th Oct 16, 7:45 PM
    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?
    Last edited by MSE ForumTeam3; 14-10-2016 at 12:53 PM. Reason: Quoting deleted post
    • zagfles
    • By zagfles 13th Oct 16, 7:58 PM
    • 11,107 Posts
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    zagfles
    • #9
    • 13th Oct 16, 7:58 PM
    • #9
    • 13th Oct 16, 7:58 PM
    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.
    Last edited by MSE ForumTeam3; 14-10-2016 at 12:54 PM. Reason: Quoting deleted post
    • zagfles
    • By zagfles 13th Oct 16, 8:09 PM
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    zagfles
    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).
    Originally posted by chile_paul
    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
    • By sandsy 13th Oct 16, 8:55 PM
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    • 550 Thanks
    sandsy
    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.
    Last edited by MSE ForumTeam3; 14-10-2016 at 12:54 PM. Reason: Quoting deleted post
    • robin61
    • By robin61 13th Oct 16, 9:01 PM
    • 489 Posts
    • 371 Thanks
    robin61
    Apparently it was designed so that a couple each earning £49,999 both with personal tax allowances of £11k get child benefit in full whereas one person supporting his family on £60k and only one allowance of £11k loses the lot.
    Not awfully fair really is it ?
    Personally I don't blame the OP if he can get around it then good luck to him.
    He didn't make the rules. No doubt he has been sticking to the rules and paying 40% tax on a big slice of his income for years. Rules work both ways. Not just one way.
    Last edited by MSE ForumTeam3; 14-10-2016 at 12:55 PM. Reason: Quoting deleted post
    • zagfles
    • By zagfles 13th Oct 16, 9:02 PM
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    zagfles
    You realise child benefit only exists because we have one of the most family unfriendly tax system in the world don't you? One earner supporting 4 people is taxed the same as one earner who just supports themselves.

    In most other countries, family members are taken account of in the tax system, non earners can use their tax allowance against the income that supports them.

    In France for instance the OP would get no child benefit. Instead the family's income would be split into 3 parts and he'd pay the same tax as 3 people earning £25k, instead of one person earning £75k. That would mean 3 tax allowances, and no higher rate tax. Saving over £10,000 in tax.

    Here he gets under £1,800 in child ben, and that's if he bothers jumping through hoops to sal sac enough into his pension to get his income below £50k.

    Yet just because that £1800 is a paid as "welfare", people get all sanctimonious about it, whereas getting a £10k tax saving like in other countries doesn't seem bother people. Cos it's not that dirty word, "welfare", is it
    Last edited by MSE ForumTeam3; 14-10-2016 at 12:55 PM. Reason: Quoting deleted post
    • zagfles
    • By zagfles 13th Oct 16, 9:07 PM
    • 11,107 Posts
    • 9,123 Thanks
    zagfles
    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.
    Originally posted by sandsy
    Better not mention that the OP could go the whole hog and sacrifice his salary right down to NMW and claim around £6-7k in tax credits as well as child ben
    • robin61
    • By robin61 13th Oct 16, 9:21 PM
    • 489 Posts
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    robin61
    Better not mention that the OP could go the whole hog and sacrifice his salary right down to NMW and claim around £6-7k in tax credits as well as child ben
    Originally posted by zagfles

    Nor should we mention that he could also transfer some of his savings into a personal pension and get his assessable gross income down to around £4k and get nearly 11k tax credits. It's actually around 6.5 k to get the max but they will ignore £2.5 k the first year someone claims
    Providing he has some carriy forward annual allowance to play with. He will also get some tax relief on the pension contributions of course.
    Last edited by robin61; 13-10-2016 at 9:27 PM.
    • Prothet of Doom
    • By Prothet of Doom 13th Oct 16, 9:43 PM
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    Prothet of Doom
    I took advantage of this to make sure my kids got the maximum student grants and Bursaries, by paying loads (£15K plus) into my pension to bring my salary to below £25K - then we had to use savings for any major expenditure, but free, legal and moral (I'll hopefully retire early and pay tax on my pension)

    I got the idea off a work mate who increased his pension payments by £1000 a year so that his daughter got the Full EMA in sixth form of £30 a week (now defunct)
    • Prothet of Doom
    • By Prothet of Doom 13th Oct 16, 9:45 PM
    • 3,115 Posts
    • 3,753 Thanks
    Prothet of Doom
    Better not mention that the OP could go the whole hog and sacrifice his salary right down to NMW and claim around £6-7k in tax credits as well as child ben
    Originally posted by zagfles
    Yes. A good legal loophole.
    • bigadaj
    • By bigadaj 13th Oct 16, 9:52 PM
    • 7,785 Posts
    • 4,741 Thanks
    bigadaj
    Better not mention that the OP could go the whole hog and sacrifice his salary right down to NMW and claim around £6-7k in tax credits as well as child ben
    Originally posted by zagfles
    Yes'm that's the point when things go too far in my opinion.

    Contributions to get child benefit back or even remove all higher rate tax doesn't seem unreasonable to me, whereas putting huge amounts in to gain tax credits does seem wrong.

    The interaction of tax and benefits is unnecessarily complicated, the problem being its even more complicated a process to end up simplifying things in a fair manner.
    • Triumph13
    • By Triumph13 13th Oct 16, 10:20 PM
    • 714 Posts
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    Triumph13
    The interaction of tax and benefits is unnecessarily complicated.
    Originally posted by bigadaj
    Yep. It leads to things like the fact that this year I will, for the first time, be claiming tax relief for 'my share' of the tax on my charitable contributions, whereas before I'd always not done so on the grounds that I believed it was my moral duty to pay my fair share of tax.
    • TheShape
    • By TheShape 13th Oct 16, 11:28 PM
    • 421 Posts
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    TheShape
    Better not mention that the OP could go the whole hog and sacrifice his salary right down to NMW and claim around £6-7k in tax credits as well as child ben
    Originally posted by zagfles
    And, hypothetically speaking, could a single person paying basic rate tax reduce their income through salary sacrifice into a pension and claim Working Tax Credits?
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