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  • FIRST POST
    • chile_paul
    • By chile_paul 13th Oct 16, 3:59 PM
    • 379Posts
    • 279Thanks
    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 2
    • robin61
    • By robin61 13th Oct 16, 11:40 PM
    • 489 Posts
    • 371 Thanks
    robin61
    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?
    Originally posted by TheShape
    Salary sacrifice will reduce the gross income on your P60. So yes.
    Last edited by robin61; 13-10-2016 at 11:49 PM.
  • jamesd
    £200k in savings split circa 60% in investments with the remainder in high interest current accounts and regular savers ... My salary (dependant on annual bonus) is in the range of £65k-£75k ... 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.
    Originally posted by chile_paul
    That's a good plan but you can do more.

    Both the Child benefit rules and the Working Tax Credit rules specifically say that the income used for the calculations will be reduced by the value of pension contributions made. For the obvious reason that providing for the future is a good thing that will eventually save the state money vs those who don't.

    I suggest that you instead consider something like this:

    Year 1: pension contributions to restore Child benefit.
    Year 2: pension contributions to restore Child Benefit and also get maximum Working Tax Credits.
    Year 3: if needed, as year 1 to top up savings
    Year 4: as year 3, if needed.

    Given your level of savings you might consider just going down to the maximum Working Tax Credit payment level from the outset and stick there for a few years, then go back up to just CB level.

    Alternatively or as well, you might look into whether some of the lower risk VCTs are suitable for you. VCTs provide income tax relief of 30% of the VCT purchase price. That can make them a very useful tool to eliminate income tax liability provided you pick ones that are suitable for you. You have to hold the VCT for at least five years or you must repay the tax relief, except after death. So in effect if you can defer some of your pay for at least five years you can make it mostly free of income tax.

    I'm using this approach to eliminate most of my income tax liability. I've been mostly using the Albion VCT which in addition pays about 10% of the after tax relief buy price as tax exempt (actually exempt) dividend income and has a 5% discount policy when you eventually come to sell, limiting the potential selling time loss after five plus years. the Albion VCT has recently been funding a new school and some new care homes so it's also a socially useful investment option.

    The VCT method has the advantage that the money remains outside a pension pot so it's available at need and in any case after five years.

    A disadvantage is that VCT buys do not reduce the income used for CB or WTC calculations so you can't use the VCT buying to qualify for WTC. You can use VCT buying to eliminate any remaining income tax liability on the remaining WTC-qualifying income.

    You might, say, use pension contributions for your higher rate tax band to get 40% relief then VCT buying to eliminate your remaining basic rate income tax liability.

    If your work pension scheme uses salary sacrifice there's another tweak. Income tax is payable on total income but work salary sacrifice switches from higher rate band 2% NI saving to basic rate 12% NI saving based on the work pay, not total taxable income. Since you have non-work income there may be a band where you can receive both higher rate income tax relief and basic rate range NI relief for a total saving of 52% on your pension contributions, plus any employer NI contribution.
    Last edited by jamesd; 14-10-2016 at 2:10 AM.
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