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    • lco199
    • By lco199 19th Jun 17, 2:50 PM
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    lco199
    Question regarding pension contributions and tax relief
    • #1
    • 19th Jun 17, 2:50 PM
    Question regarding pension contributions and tax relief 19th Jun 17 at 2:50 PM
    Hi,

    Apologies if the answers to this question lie elsewhere in the forum, however I would much appreciate some advise.

    Info: At present I pay into a civil service pension scheme, which is set at c5.45% of my gross salary (I earn just over £50k). Age 37. This works out at an annual pension contribution of £2,741.57 towards a Civil Service defined benefits scheme. So currently benefiting from a small amount of higher rate tax relief at this income bracket.

    1) If I wanted to contribute to my own personal private pension (SIPP) then a) do my Civil Service pension contributions count towards the £40k annual allowance? b) do I therefore need to manually calculate (and subtract) the higher rate tax relief I'm currently receiving from my Civil Service pension contributions from any claim I may file with HMRC to recover higher rate tax relief on private pension contributions?

    More generally, I'm aiming to retire early (before state pension) age, so trying to build up a combination of savings in stocks and shares ISA as well as a pension I can (hopefully) drawn down before age 60 (at present minimum draw-down age for me looks like it will be 58).

    2) Does anyone have faith/belief that the current pension age limits will remain as is by the time I wish to retire c20 years into the future? I'm nervous that committing too much to a pension pot (despite the excellent tax breaks) might mean the government keep shifting the goal posts and upping the minimum draw-down age to a point where I would not be able to get access to money as early as hoped - anyone share these fears?! I welcome any comments.

    Ideally I'd like to have a basic private pension pot with enough in it to draw-down the basic amount (tax free) from min age and rely on savings and investments (in ISAs). These combined would 'tied me over' until I reach state pension age and can claim both state pension and my Civil Service pension. That's the plan anyway!

    Thanks
    Luke
Page 1
    • Linton
    • By Linton 19th Jun 17, 3:21 PM
    • 7,954 Posts
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    Linton
    • #2
    • 19th Jun 17, 3:21 PM
    • #2
    • 19th Jun 17, 3:21 PM
    1(a) Employment pension contributions arising from the employee and the employer are included in the £40K limit. For a DB pension the deduction from the £40K allowance is nothing to do with your actual contribution. It is calculated from the value of the increase in the pension payment that occured over the year.

    See here (the bottom of the page) for the method of calculation. Best of luck!

    1b) The easiest way of handling tax relief for an additional private pension is probably to tell HMRC how much you are paying in. They will adjust your tax code as appropriate.

    2) It would be surprising if the minimum pension age isnt increased in the next 20 years though I would expect that considerable notice would be given and that existing DB pension contracts would still be honoured as far as money contributed previously s concerned. In any case I think it is sensible to maintain a mixture of ISAs and pensions to ensure reasonable flexibility.
    Last edited by Linton; 19-06-2017 at 3:28 PM.
    • xylophone
    • By xylophone 19th Jun 17, 4:48 PM
    • 21,979 Posts
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    xylophone
    • #3
    • 19th Jun 17, 4:48 PM
    • #3
    • 19th Jun 17, 4:48 PM
    See http://www.pruadviser.co.uk/content/knowledge/technical-centre/annual_allowance/

    Scroll down to

    Defined benefit or cash balance
    • lco199
    • By lco199 19th Jun 17, 4:48 PM
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    lco199
    • #4
    • 19th Jun 17, 4:48 PM
    • #4
    • 19th Jun 17, 4:48 PM
    Thanks, Linton.

    1(a) - Understood, so I can just compare the year-on-year change in my pension projection statement

    1(b) - You're most likely correct. I was just hoping there was a relatively easy method for me to ascertain (upfront) the level of contribution to a private pension that would allow me to fully utilise the maximum 40% tax relief obtainable (for me a little over £5k? - £50k less £45k tax band), but I'm unsure how to do this with a combination of 2 pensions.

    2) You're right, any DB pension contributions to date would be 'ring-fenced' under current scheme rules (as has happened with various prior changes), but I'm more worried about paying into a SIPP, with the expectation of being able to draw-down at 58 (currently) and then the rules being changed to 60, 65, 70 - whatever the govt decides - so my money is perpetually out of reach! I'm not sure if contributions to a SIPP would be ring-fenced in a similar way to my DB scheme...
    • lco199
    • By lco199 19th Jun 17, 4:51 PM
    • 4 Posts
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    lco199
    • #5
    • 19th Jun 17, 4:51 PM
    • #5
    • 19th Jun 17, 4:51 PM
    And thanks, xylophone, for that useful link - looks like it might get quite complicated to calculate
    • MichelleUK
    • By MichelleUK 19th Jun 17, 9:45 PM
    • 277 Posts
    • 172 Thanks
    MichelleUK
    • #6
    • 19th Jun 17, 9:45 PM
    • #6
    • 19th Jun 17, 9:45 PM
    1(b)...I was just hoping there was a relatively easy method for me to ascertain (upfront) the level of contribution to a private pension that would allow me to fully utilise the maximum 40% tax relief obtainable (for me a little over £5k? - £50k less £45k tax band), but I'm unsure how to do this with a combination of 2 pensions.
    Originally posted by lco199
    Yes, it can be calculated:

    Salary £50,304 less
    Tax Allowance £11,500 less
    Civil service pension £2,742 less
    Basic rate band £33,500 equals
    Taxable at 40% £2,562

    £2,562 is the gross contribution you would need to put into a personal pension/SIPP to prevent you suffering any tax at 40%.

    The actual cash amount that you would need to put in is £2,562 divided by 100 multiplied by 80 = £2,050 as the pension provider will gross it up with basic rate tax relief.

    Tell HMRC that you are making a gross pension contribution of £2,562 and they will increase your tax code by £1,281 to give you the remaining 20% tax relief.
    • Dazed and confused
    • By Dazed and confused 19th Jun 17, 9:56 PM
    • 1,468 Posts
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    Dazed and confused
    • #7
    • 19th Jun 17, 9:56 PM
    • #7
    • 19th Jun 17, 9:56 PM
    1(b) - You're most likely correct. I was just hoping there was a relatively easy method for me to ascertain (upfront) the level of contribution to a private pension that would allow me to fully utilise the maximum 40% tax relief obtainable (for me a little over £5k? - £50k less £45k tax band), but I'm unsure how to do this with a combination of 2 pensions.

    From this perspective you can almost certainly ignore the civil service pension in your calculations. Civil service pensions generally operate on a superannuation basis so a "salary" of £50000 where you pay 5% into the employers civil service pension scheme really means your taxable pay, the bit that your P60 will show, is only £47,500.

    So first thing is to look at a recent payslip and establish what your expected taxable pay is going to be for this tax year as your salary is irrelevant.

    The standard threshold for higher rate tax (including personal allowance) is either £43000 (Scotland) or £45000 (rest of the UK) so if you deduct expected taxable pay from this that leaves you with the amount which will charged at 40% tax.

    If you pay into a sipp you will receive basic rate tax relief at source (added to your pension pot) so a payment you make of, say, £800 becomes a gross contribution of £1000.

    None of the above takes into into account any other income or allowances you might have but gives you an idea of how to try and arrive at the figure you're interested in. An example could be

    Taxable pay £50000
    Less PA. £11500
    Taxable. £38500
    Basic rate tax on £33500 (different if you live in Scotland)
    Higher rate tax on £5000
    If you were to pay £4000 into a sipp this would be grossed up to £5000 with the basic rate relief and the amount you can pay basic rate tax on is increased by £5000 from £33500 to £38500, effectively reducing the amount of higher rate tax payable to nil.

    Any higher rate tax relief which you benefit from by paying into a sipp comes back to you, either by reduced monthly PAYE tax deductions or a refund after the end of the tax year. It is never added to your sipp (although it could mean you can then afford to make additional payments into your sipp).
    Last edited by Dazed and confused; 19-06-2017 at 10:01 PM.
    • lco199
    • By lco199 20th Jun 17, 10:55 AM
    • 4 Posts
    • 0 Thanks
    lco199
    • #8
    • 20th Jun 17, 10:55 AM
    • #8
    • 20th Jun 17, 10:55 AM
    That's extremely helpful, thanks both!

    This makes sense, so I think logically seems a good idea to pay c£2,050 per annum into a private pension, which will give me a contribution of £2,562 for a net cost of c£1,500 (after total tax relief).

    Anything else can then go into S&S ISA with an aim towards as early retirement as possible!

    I'll research how to fill out a self-assessment etc myself.

    Thanks again.
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