Looking to take out a product to supplement my final salary scheme.

Izzy_Skint_2

Hi all,

I'm fortunate enough to be in a final salary scheme with my Police employers (joined about 7 years ago). I transferred seven years of non-contributory pension over and it achieved just over a years worth of service with the Police pension scheme (I did expect this!). I am looking to take out a private pension product as 1) a back up in case I lose my job and 2) increasing the possibility of retireing earlier. Without going too off track here my question is, is there a limit to how much I can pay into pension provision.( I assume I will get two thirds of my final salary when I retire plus my state pension).

Thanks all

Izzy

jem16

Izzy_Skint wrote: »

Hi all, is, is there a limit to how much I can pay into pension provision

This year it's £1.65m.

However you need to look at how much pension provision you will have. With a final salary pension plus state pension you are obviously going to pay tax. However once you get to approx £21k of taxable income you start losing the extra personal allowance meaning you will pay more tax.

If your Police pension plus state pension is around £21k you might be better utilising S&S ISA instead of extra pension payments.

Or if you are married is your spouse covered for pensions? You should be looking at it jointly.

MikeJones_2

Hi Izzy,

quote=Izzy Skint: I'm fortunate enough to be in a final salary scheme...( I assume I will get two thirds of my final salary when I retire plus my state pension.

Don't assume - find out HOW your scheme works from your Pensions or HR dept.

Most final salary schemes provide benefits based upon 4 key elements:

1. The length of the pensionable service you are credited with as being an active member of the scheme

2. Your pensionable salary

3. The formula or rate of ‘accrual’ which uses service and salary to work out your pension

4. The circumstances under which benefits are taken from the scheme (retirement, early payment, early leaver, ill-health, death etc).

Your pension scheme will use a formula to calculate your pension benefits using these elements. The formula (and the definitions for each part of it) will be set out in the Scheme Rules.

In a final salary scheme your pension is based upon your ‘final pensionable salary’ in the years immediately before you take your pension. Different schemes use different definitions, so it is the definition of your ‘final pensionable salary’ (or ‘final pensionable earnings’) that is important in this type of scheme.

Because your pensionable salary is used as one part of the formula in order to calculate your pension, a final salary scheme is commonly referred to as ‘salary related’ scheme.

Example of a ‘final salary’ formula:

length of pensionable service x final pensionable salary
.........accrual rate

If you want to read more see: What is a final salary scheme?

Hope that clarifies things.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

Izzy_Skint_2

Thank you both for your replies.

I am going by the assumption of my current wages being of £30,000 p.a. and that I achieve 2/3rds pension. With that and my state pension as well it seems that I will reach and exceed my extra personal allowance which Jem has advised is currently running at £21k p.a.

Based on what you have said then Jem is it advisable to take out a S&S ISA. The only issue I have with ISA's is that they are not payable for life (obviously) and annuities are. I might be missing a trick here but this seems a very obvious attraction of taking out a pension based product over an ISA, even if it means eating in my extra personal allowance.

Any thoughts on this?

Thanks again.

jennifernil

with a 2/3 final salary pension and state pension, will you really need any further pension? once retired there are savings such as no NI on your pension, no travel to work to cover and so on, plus you wii most likely have paid off your mortgage.

You might find it a better idea to build up some capital so you can treat yourself in your retirement to some long holidays and other luxuries.

dunstonh

How accurate is your assumption you will get 2/3rds?

david78

You used to only get 2/3 if you accrued 40 years of employment at a rate of 1/60 of final salary for each year of employment (2/3 = 40/60). It is more usual to get less these days as accrual rates have been coming down.

Although a pension 2/3 of final salary used to be an upper limit on what you were allowed to achieve, this no longer applies.

The briefest answer to the OPs query is that he/she can take out a supplementary pension to top up a final salary pension.

david78

Izzy_Skint wrote: »

The only issue I have with ISA's is that they are not payable for life (obviously) and annuities are. I might be missing a trick here but this seems a very obvious attraction of taking out a pension based product over an ISA, even if it means eating in my extra personal allowance.

There's nothing stopping you investing in an ISA now, then if you still think a pension income for life (annuity) is the best option for you when you are older, you can cash the ISA in and move it into a pension later. You will get the full tax relief you are entitled to at the time you make the pension contribution. You could get a bit more tax relief with this strategy if you are a basic rate tax payer now, but will be a higher rate tax payer at the time you make the contribution.

The ISA option is more flexible than the pension option as a means of supplementing savings for use in retirement.

Drumtochty_2

If you are in a final salary scheme you can take 5 times the annual pension as a tax free lump sum but your pension reduces, it is usually a bad deal.

The AVC way can be better; assuming your employer runs such a scheme an AVC not run by your employer cannot do this. So assuming they will do this for you, so ask.

You can have an AVC fund up to of approx 5 times your annual pension plus 25% of the AVC fund as a tax free sum on retirement. In reality approx 6.7 times your final salary. Any larger and the overage has to be taken as taxed pension.

If you will have a non earning spouse on retirement they can take this cash and pay little tax on it while you pay tax on your pension. Otherwise you can use the various tax free saving accounts to protect the cash.

Less flexible than an ISA. One big advantage is to get a bank loan or money from your ISA's two years before retirement and the end of the tax year before retirement and pay your whole taxable pay into the AVC each year, then take it tax free on retirement again within the 6.7 times your pension limit. The last payment you will make say 16% on for writing a cheque and the previous one you make say about 10%.

MikeJones_2

Drumtochty wrote: »

The AVC way can be better; assuming your employer runs such a scheme an AVC not run by your employer cannot do this. So assuming they will do this for you, so ask.

In fact, the ability to do this would have to be detailed within the Scheme Rules. If the Rules don't permit this, a request to the Trustees to change the Rules might be worthwhile considering the efficiency of what Drumtochty has described.

However, given that many schemes' commutation rates are positioned so that they quite frequently work to the scheme's advantage, rather than the members', it might be that a scheme refuses to change the Rules for such a request. Commuting part of the scheme pension for a cash lump sum may well reduce the contingent spouse's pension in the event of the member's death - and in doing so reduces the scheme's liability a little (although some schemes do permit member's to commute pension for cash without reducing the contigent spouse's pension). Worth a request in any event.

Drumtochty wrote: »

If you will have a non earning spouse on retirement they can take this cash and pay little tax on it while you pay tax on your pension.

I am interested to learn how this would work in practice. Do you mean that the cash is a gift to the spouse in this example. Can you expand?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

EdInvestor

Izzy_Skint wrote: »

Based on what you have said then Jem is it advisable to take out a S&S ISA. The only issue I have with ISA's is that they are not payable for life (obviously) and annuities are.

Money in an ISA can be used to buy a "purchase life annuity".This is guaranteed for life like a pension anuity, and in addition gets favourable tax treatment as you are not taxed on the part of the income which represents your capital being returned to you.

This might be helpful if you are veering close to the age allowance clawback zone. Obviously you also have the option of spending some of the money in the ISAon a PLA and leaving the rest to earn income tax free where it is.