Maxed out Civil Service Pension – what next SIPP or ISA?

ianthy · 8 July 2017 at 6:29PM

My husband works in the Civil Service and is currently paying the maximum into the Civil Service Premium Scheme. He is age 55 and will start taking his pension at age 60. To invest spare cash of £10k per annum, he was wondering if he should open a SIPP and pay in until state retirement age of 67 – another 12 years? Would this be a better investment than Stocks and Shares ISA’s

Your advice is appreciated.

BobQ · 8 July 2017 at 7:38PM

What do you mean by maxed out. If he is literally unable to pay more in due to the Scheme Rules fine but if you mean he has no scope within the Annual Allowance then that will apply to any pension.

In short who says he is maxed out?

Can he invest in CS AVCs?

He can invest in an ISA S&S and in a SIPP if he wants. Both have risks depending on the funds selected

The ISA is only limited by his £20K limit.

The SIPP contributions need to take account of the total AA.

If he is retiring at 60 will he have an EARNED income (pension does not count). If not he cannot contribute to a SIPP above his earnings in that year.

He can buy extra state pension from 60-67 by voluntary contributions.

Dazed_and_confused · 8 July 2017 at 8:11PM

I don't think anyone can say what will be a "better investment" because neither ISA or SIPP is an investment in themselves, they are just tax wrappers.

I think what you probably mean is which is the better vehicle/wrapper for your hubbies investments?

There are pros and cons with both and a lot will depend on hubbies current income, if a 40% payer and particularly if paying 40% tax on £12.5k or more a year then SIPP could be very tax efficient but there would almost certainly be tax to pay when the money is subsequently withdrawn but again this all depends on hubbies circumstances in the future. It could be taken with no tax to pay if used as a bridge between work ending and civil service pension starting but there could easily be 20 or 40% tax to pay depending on hubbies other income.

ISA has no initial tax uplift but there is no tax to pay when subsequently withdrawn which can be good.

Before considering any investment growth (or loss) £10,000 invested in an ISA basically costs £10,000 but £10,000 in a SIPP puts £12,500 into the pension pot (due to the basic rate tax relief added at source) with the possibility of a £2,500 tax refund if hubbie is paying enough 40% tax. So you can end up with £12,500 in the pension for a real cost of £7,500.

But as BobQ says there are many other things to consider first.

ianthy · 8 July 2017 at 11:08PM

Thanks both for the reply.

By 'maxed out' I mean that OH is paying the maximum contribution from his salary, this includes added years. We currently share rental income and his portion is £70k per annum with work salary of £40k. When we finish work in 5 years time age 60, I estimate he will have the same portion of rental income £70k plus his civil service pension £20k. From reading both replies, I think ISA's may be better as the income is tax free at the time of taking it and also more flexibility eg not subject to drawdown rules etc. Please correct me if I am wrong.

Question - buying extra state pension 60-67? does this apply if you have the max NI contributions?

Thanks again.

bigadaj · 9 July 2017 at 12:01AM

If he's earning £110k a year in total then he could be losing his personal allowance so an effective tax rate of 60% in which case pension contributions could stil be efficient, even if drawing with 40% tax to be paid.

25% of the pension pot would be tax free anyway which would be a boost to the pension, but isas are tax free so may be as beneficial in your circumstances.

You are wrong a it drawdown rules though, those no longer exist in most circumstances.

BobQ · 9 July 2017 at 3:41AM

Dazed_and_confused wrote: »

There are pros and cons with both and a lot will depend on hubbies current income, if a 40% payer and particularly if paying 40% tax on £12.5k or more a year then SIPP could be very tax efficient but there would almost certainly be tax to pay when the money is subsequently withdrawn but again this all depends on hubbies circumstances in the future. It could be taken with no tax to pay if used as a bridge between work ending and civil service pension starting but there could easily be 20 or 40% tax to pay depending on hubbies other income.

.

There is an important point here for the OP. While her husband is earning (particularly income taxed at 40%) paying to a SIPP (with the level of risk you choose) is quite feasible. So a SIPP is suitable in the next 5 years. But from the date of retirement, if he does not received a salary his ability to contribute to a SIPP almost disappears (£4K I think). It does not matter that he has income from rental property or a pension which are taxed they are not earnings so do not count for pension purposes. The cap on contributions relates to earnings not income.

So a different strategy for the next five years may be needed than in the following 7 years. If he is not working then ISAs make sense, If he is working then there are pros and cons to either.
He also has the advantage that with a fairly large CS Pension guaranteed and inflation indexed, then it is possible to take more risks in investments.

Note however that while the annual allowance for pension contributions is currently £40K the increase in his CS Pension's nominal cash value will use part of that.

The choice of ISA/SIPP only matters if you can get 40% tax relief on contributions and have that taxed at the lower rate when drawn down.

The Voluntary contributions issue arises because a CS would have been contracted out of his state pension for that period of service. If he has been in the CS all his career for example he will probably only get the basic pension (about £110 a week). You can check this on line. Since 2016 he has been able to increase the pre 2016 pension by about £4 a week by his NI cintributions If he retires at 60 he may still have scope to increase the state pension by paying £700 in a year and gaining a further £4 a week. It will depend on his contribution record what he can do.

https://www.theguardian.com/money/2016/oct/08/how-to-boost-state-pension

xylophone · 9 July 2017 at 12:38PM

But from the date of retirement, if he does not received a salary his ability to contribute to a SIPP almost disappears (£4K I think).

If a person has no relevant earnings, the maximum net contribution he can make is £2880 which will be topped up by tax relief (claimed by provider) of £720.

http://www.pruadviser.co.uk/content/knowledge/technical-centre/tax_relief_members_contributions/

In certain limited circumstances rental income can be relevant earnings - see above link.

If a person has relevant earnings but "flexibly accessed" a pension and taken income, ( this does not include taking benefits from a DB Scheme) then the amount he can contribute to a SIPP reduces to either £10,000 or £4,000 pa depending on what the Govt decide.

See http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/

With regard to state pension, the OP's spouse has been contracted out for a significant period - has he obtained a new state pension statement?

It is very likely that his "starting amount" was lower than a full NSP but he will be making contributions over the next five years while he is working as CO has ended. He could choose to make voluntary contributions after retirement if it would improve the state pension.

ianthy · 10 July 2017 at 9:51AM

Hi

Thanks for the replies - very helpful. After discussions and from the point of ease/flexibility OH has opted for ISA's. Topping up/buying extra state pension would have been of interest but I understand this closed in April 2017. Let me know if have this wrong.

jamesd · 10 July 2017 at 10:30AM

You have it wrong and choosing ISA over pension in his situation is frankly insane.

The option to buy class 3A national insurance which ended on 5 April 2017 was only available to people who reached their state pension age before 6 April 2016. But any person with missed contribution years can go back six years to buy missed years and if not getting contributions from work can buy ongoing years. Anyone with at least ten qualifying years can defer claiming and have it increase by 5.8% per year of deferral, pro-rated for parts of years.

The pension decision is so bad that I can only assume it's due to still not understanding how easy pensions are these days. He could literally pay £30,000 gross into a pension and take out a quarter of that as a tax free lump sum a couple of months later. The rest he could take out as well but it's better to leave that until he stops working because taking any of it would reduce how much he can pay into pensions. It's ridiculously easy to start a pension, he can phone a place like Hargreaves Lansdown or do it with them online in a few minutes.

Given his apparent income the effective cost to him of getting that £30,000 into a pension could be about £12,000 assuming it was all in the range where he gets effectively 60% tax saving, which isn't quite true but close enough for now. A quarter of that £30,000 is £7,500 so if he goes for that choice he ends up only having paid in a net of about £4,500 to get the £22,500 that stays in the pension for later. What ISA does he know that in a few months can turn 4500 into 22500 with no risk at all?

We'd need to go into the numbers a bit more to get it exactly right but it should be clear now why I think it's insane not to use a pension.

ianthy · 10 July 2017 at 11:20AM

Thanks JamesD. We need to do a bit more homework. You mention HL - are they lowest/best on fees for small pensions - likely OH would opt for a off the shelf portfolio based on risk profile.

Thanks

Maxed out Civil Service Pension – what next SIPP or ISA?

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