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  • FIRST POST
    • Space Orbit
    • By Space Orbit 13th Mar 17, 10:55 PM
    • 5Posts
    • 0Thanks
    Space Orbit
    I am thinking correctly?
    • #1
    • 13th Mar 17, 10:55 PM
    I am thinking correctly? 13th Mar 17 at 10:55 PM
    I am now almost 54 and starting to ensure I have everything in place to retire at 58. I plan, for 2 years to live off savings I have/will continue to accrue then at 60 I can draw my DB without any reduction. At worse I would get a p/time job until 60.

    My pension is split, the vast majority in a DB I still contribute to and a much smaller DC scheme (currently a pot of £3.5k) based on part of my salary.

    I am considering increasing my DC contribution (this is allowed). My DB won't accept additional contributions.

    In very very simple terms am I right in thinking that? :

    I pay via SMART (so no tax or NI on contributions) and am a basic tax rate payer earning around £30k.

    If I pay £100 into my DC scheme then at 58 I can withdraw 25% tax free & pay tax at 20% on remainder.

    So £100 - £25 =£75 £75 - 20% = £60 So I would receive (not taking into account any admin fee etc) £25+£60 = £85 (subject to how investments have performed)

    As opposed to using the same £100 from net pay (which would be £100 -£20 tax -£12 NI =£68)
    to invest.

    I know this is very simplistic and tax rates & rules could change. Fingers crossed, living off savings alone for 2 yrs, I will have no income so all my personal tax allowance will be available.

    I do realise that SMART may mean in some schemes receiving a smaller pension (depending on if a notional salary etc is used). I am waiting for details on this - if so I can opt out of SMART (but of course would need to alter the figures above).


    Thanks
Page 1
  • jamesd
    • #2
    • 13th Mar 17, 11:59 PM
    • #2
    • 13th Mar 17, 11:59 PM
    Do you have other savings and investments available? Trying to get a better of how much you can afford in pension contributions. Did your work scheme allow transfers out while still a member?

    Salary sacrifice is good and you should do as much of that as it takes to get your employer's matching contribution.

    But in the short term you can do better. Usually taking taxable money out of a pension from 55 caps the amount of DC contributions you can make to £4,000 a year, but there's an exception, the small pot rule. Up to three times per lifetime you can withdraw everything in a pension pot worth up to £10,000.

    So you have a better short term plan available: set up three pots at different places that are worth close to £10,000 then take all three under the small pots rule once you reach 55. Then use that money to fund salary sacrifice down to minimum wage in the last couple of years, borrowing using 0% for purchase credit cards as well. Use the cards to help fund the small pots first if necessary. You don't have to do them all at once, you can do them one after the other instead if you need to.

    This lets you get 20% basic rate tax relief once then get the salary sacrifice and tax relief the second time around via the work scheme.
  • jamesd
    • #3
    • 14th Mar 17, 12:19 AM
    • #3
    • 14th Mar 17, 12:19 AM
    If you are sure that you have enough money to do that then there is also something else that you can do: pay into a pension and then when you're 55 take out a 25% tax free lump sum and place the rest into drawdown without taking any income from it. You can do this with any money that you're not already using for the small pot approach.

    In the final tax year of work you can take enough of the taxable money to help you pay for the salary sacrifice down to minimum wage. But you must do that carefully because you are only allowed £4,000 of DC contributions into pensions in your own name after you take taxable money other than by the small pots rule. This includes your employer salary sacrifice payments but not the DB ones. So it's something you can do if necessary to help out during the final two to four months of maximum sacrifice and personal pension contributions.

    It's also worth noting that your employer isn't allowed to let you salary sacrifice below minimum wage. But you still get basic rate tax relief for contributions to non-work pensions for up to your whole after sacrifice pay. So in addition to everything else you can ensure that you do this as well, if you have the money.
  • jamesd
    • #4
    • 14th Mar 17, 12:25 AM
    • #4
    • 14th Mar 17, 12:25 AM
    If you had plenty of money here's what you would do instead:

    1. Gross personal pension contribution this tax year of your whole gross pay. So multiply gross pay after sacrifice by 0.8 and pay that in.
    2. For all future work years:
    2a. Set up work salary sacrifice down to minimum wage.
    2b. Make gross personal pension contributions of minimum wage so you use your whole pay pension contribution allowance. Multiply your after sacrifice gross pay by 0.8 to get the amount to pay in.

    The earlier posts are about ways to help fund that if you can't afford it without help from getting some pension money out, or cheap borrowing.
    Last edited by jamesd; 14-03-2017 at 12:27 AM.
    • Space Orbit
    • By Space Orbit 16th Mar 17, 10:14 PM
    • 5 Posts
    • 0 Thanks
    Space Orbit
    • #5
    • 16th Mar 17, 10:14 PM
    • #5
    • 16th Mar 17, 10:14 PM
    Thank you James D for all your advice.

    I like the idea of creating 3 small pots and cashing them in at age 55 or so.

    Could this push me into a higher tax band - last year my earnings with bonus etc was just under £35k?.
    • AlanP
    • By AlanP 17th Mar 17, 12:46 PM
    • 714 Posts
    • 474 Thanks
    AlanP
    • #6
    • 17th Mar 17, 12:46 PM
    • #6
    • 17th Mar 17, 12:46 PM
    HR tax band starts at £45k from next month so can't see how it would.
  • jamesd
    • #7
    • 18th Mar 17, 1:02 PM
    • #7
    • 18th Mar 17, 1:02 PM
    The taxable part of a small pot is normal taxable income so you'd need to be sacrificing enough to stay out of higher rate. There's room between minimum wage and the start of higher rate to do it.
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