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    • GT1979
    • By GT1979 10th Oct 17, 1:16 PM
    • 2Posts
    • 0Thanks
    GT1979
    Pie in the sky pension question
    • #1
    • 10th Oct 17, 1:16 PM
    Pie in the sky pension question 10th Oct 17 at 1:16 PM
    I wanted to pick your collective brains, if I may. Currently I'm living and working in London but want to explore my options for moving out into the country and changing down a few gears in the medium term. Some details:

    - I'm 37 and currently earning around £50,000pa.

    - I have £30,000 in a previous work pension and 18 months in a DB pension. Current work pension is just getting started.

    - I own a flat worth around £290,000 with a mortgage of £100,000.

    - Savings of £15,000 in a cash ISA.

    If I wanted to move somewhere and buy a modest house for around £220,000 and have a small income of £10,000 what would be my best strategy and how soon could I do it?
Page 2
    • Triumph13
    • By Triumph13 12th Oct 17, 10:06 AM
    • 1,071 Posts
    • 1,297 Thanks
    Triumph13
    One question: when people say the 40% pension relief is a no-brainer, what do they mean? ... What is the 40% relief and is there a min/max that I should put in myself to avoid some pitfall?
    Originally posted by GT1979
    If you are on £50k then you would be paying 40% tax on the top £5k of that. If you put it into a pension instead then you avoid paying that 40% tax - it's a choice between £3k of cash of £5k in the pension. Particularly attractive in your case as it looks likely that you won't be paying tax on that pension on the way out so the £2k is straight profit - though you will have to wait a long while to get at it as the age 55 limit for accessing a pension will probably have gone up to something closer to 60 by the time you get there.
    • Terron
    • By Terron 12th Oct 17, 1:03 PM
    • 81 Posts
    • 86 Thanks
    Terron
    How early do you want to retire?

    If you want to retire before the SP age then you should at least contribute as much as your employer will match. Say your employer will match a contribution of £3000 (after tax), so that becomes £6000 and with tax relief £10,000. You are not going to do better anywhere else.

    Your pension pot will then grow and with interest rates so low that growth is likely to be at a higher rate than your mortgage. So you would make more money than you would dave by paying down your mortgage.

    So even though you would only get 20% tax relief on further payments your pension would be the best place to save any money you can afford to tie up.for a long time.
    • bigadaj
    • By bigadaj 12th Oct 17, 2:54 PM
    • 10,309 Posts
    • 6,611 Thanks
    bigadaj
    It's a lot easier to deal with pension contributions gross, that is what employers would normally contribute so there wouldn't be any tax added.
    • DairyQueen
    • By DairyQueen 12th Oct 17, 4:32 PM
    • 46 Posts
    • 18 Thanks
    DairyQueen
    One question: when people say the 40% pension relief is a no-brainer, what do they mean?
    Originally posted by GT1979
    You need to read-up on tax relief on pension contributions. This may be a good starting point:
    https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

    Your income is sufficient to pay tax at 40% (this band kicks-in on earnings above £45k in this tax year). This means that you can claim 40% tax relief on ALL of your pension contributions.

    Below is a very brief overview. There are lots of rules around pension contributions but much of the complexity is directed toward those with very high earnings and/or large pots.

    For every £10 you add to your DC/SIPP pension you contribute £8 and the pension provider claims the extra £2 from the government. You then claim another £2 on your self assessment tax return. So, the £10 added to your pension only costs you - a 40% tax payer - £6, but it would cost a 20% tax payer £8.

    This effectively means that you receive a rebate of all the income tax you have paid on the contribution amount (plus more if your contribution is greater than the income on which you have paid 40% tax in any one tax year). There are limits on the amount you can contribute gross each tax year (currently the greater of £40k or your total earned income). There is speculation that the government will change this rule at some point in the not too distant future so it pays to make hay whilst the sun is still shining so brightly.

    Many people's taxable income drops on retirement so the tax they pay when the money is taken out of the pension is usually less than the tax relief they have claimed on the money at the time it was contributed.

    This is the 'no-brainer' scenario referred to. The downside is that you currently cannot touch those pension savings until you reach 55 (except in very exceptional circumstances). That age is likely to be raised in line with increasing state pension age.

    I'm sure that the technical experts here would make a better job of explaining this but I hope you get the gist.

    The bottom line is that for many 40% tax payers this pension rule is so generous that stashing as much of your income as you can afford into a pension makes more sense than investing in other savings wrappings, or paying down a mortgage - especially whilst mortgage rates are so low.
    • AnotherJoe
    • By AnotherJoe 12th Oct 17, 5:21 PM
    • 7,385 Posts
    • 7,914 Thanks
    AnotherJoe
    I believe this statement and especially the bit i bolded "Your income is sufficient to pay tax at 40% (this band kicks-in on earnings above £45k in this tax year). This means that you can claim 40% tax relief on ALL of your pension contributions." is incorrect.

    This is because you only get 40% tax relief on the salary eligible for the 40%.
    • DairyQueen
    • By DairyQueen 12th Oct 17, 6:24 PM
    • 46 Posts
    • 18 Thanks
    DairyQueen
    This is because you only get 40% tax relief on the salary eligible for the 40%.
    Originally posted by AnotherJoe
    Think you are right about that. Apologies, my mistake.
    • mgdavid
    • By mgdavid 12th Oct 17, 8:26 PM
    • 5,223 Posts
    • 4,393 Thanks
    mgdavid
    You are paying £1900 per month council tax?

    I'd check your figures and definitely appeal if they are correct.
    Originally posted by bigadaj
    ah, scrub that, I missed the typo too
    Last edited by mgdavid; 12-10-2017 at 8:28 PM.
    A salary slave no more.....
    • Apodemus
    • By Apodemus 12th Oct 17, 11:49 PM
    • 910 Posts
    • 700 Thanks
    Apodemus
    There are limits on the amount you can contribute gross each tax year (currently the greater of £40k or your total earned income).
    Originally posted by DairyQueen
    I don’t think that is quite correct - it would be the lesser of £40k or your total earned income. In your case, with a £50k salary, you could contribute up to £40k unless you have unused allowance from a previous year (which you probably do).
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