Pension novice poses question

jamesd

annie42 wrote: »

I have four properties with an annual rental income of £28800 but after mortgage payments and maintenance costs I am left with around £8000. If I add that to the state pension that's around £15000 plus interest and dividends on my savings and investments.
Would 10k be a more sensible amount re a pension.

It seems that it is not sensible for you to consider limiting pension contributions now to use trivial commutation later. You're expecting to work for many more years and it seems that you can reasonably expect several more of those years to have some higher rate earnings that you can contribute to a pension with 40% tax relief. When retired you'd only be paying 20% tax so that's an easy tax gain to go with the investment potential.

EdInvestor mentioned the age allowance. At the moment someone over 65 gets an increased tax allowance, the age allowance, of £9,030 instead of the usual £6,035. When you have taxable earnings above £21,800 your extra allowance is reduced by £1 for every £2 of extra taxable income. So in effect you pay 33% tax instead of 20% tax on the income until you have enough to take your allowance back down all the way to the standard £6,035. These limits increase each year.

Dividend income counts when working out whether the age allowance is affected, even though a basic rate tax payer gets a tax credit that eliminates basic rate tax liability on the dividends.

Now for you, this age allowance reduction probably won't apply, since you are only expecting "£15000 plus interest and dividends". The interest and investments can probably be mostly moved into cash and stocks and shares ISAs and the income from those is tax free and does not count as part of the age allowance income calculation. Assuming that you can move the interest and dividend producing investments then you can have £6,800 more income before you start to hit that effective 33% tax rate. And even that is better than the 40% tax, so you're still going to be ahead by the difference between those two rates.

A reasonable assumption for long term income from investments is 5% or 6%. I'll use 6% and for 6% on a pension to generate £6,800 in income you'd need to have £113,000 in the pension pot after taking a 25% tax free sum. You're way away from getting that much so it's better to look to take the tax break on the pension.

So it seems that your best initial course today is:

1. Pension contribution via a small business scheme to use all of your 40% tax rate income and get that tax break. Repeat each year until you retire, for any money at 40%.
2. Use your cash and stocks and shares ISA limits each year, either with new contributions or by using "bed and ISA" and selling some and then buying back inside the ISA.

If it turns out that you can't make contributions in later years then if necessary you can arrange to lose money in the pension investments (by investing "badly") to take the value below the trivial commutation limit, if you prefer the lump sum to the ongoing income.

EdInvestor

As a general comment, IMHO you are seriously overexposed to property with a property-related business and most of your capital invested in 3 rental properties.

Some advice on asset allocation may be a good idea.

How much equity do you have in the letting properties? I appreciate now might not be a sensible time to sell, and no doubt there are issues such as CGT, but if you are nearly 60, you are taking a lot more risks with your capital than would normally be thought sensible.

If you eventually plan to sell some of the properties, it may be sensible to consider putting a large lump sum into an immediate vesting pension (what you describe in your OP) to provide an income up to the tax free 10k level (over and above your state pension).

But IMHO it's more important to look at post retirement tax issues at your age rather than making small savings from current tax earnings.The former are unfortunately frequently ignored by advisors, who tend to focus on selling products now.

annie42

I realized from your advice that my situation is not as straight forward as I thought. Have consulted a financial advisor who confirms much of what all of you have told me and am following advice. Many thanks