Pension - Buying additional years?

jabbgra

I am a civil servant (aged 50). I have gaps in my employment over the last 25 years and therefore my pension is reduced. I recently decided to buy additional years to my pension, costing approx £200 per month which when I retire at age 60 will increase my pensionable years by approx 6 years. My expected annual pension at age 60 without buying additional years is £4500 and with additional years is £5950. If I continue to buy additional years until my retirement then I will pay approx £24000. Assuming I remain in the same job should I continue to buy additional years or could I invest the £200 per month in a better way?

dunstonh

Is that £200 you are paying gross or net of basic or higher rate tax?

jabbgra

I think its net of basic rate tax. I earn approx £18500 yearly salary. If I didn't pay it, it would be in my monthly wage.

dunstonh

So, in reality, its costing you £156pm because of tax relief.

If you did 156pm for 10 years but not in pension, you end up with £24,700 (at 5% growth). That £24,700 at 5% income = £1235p.a. Thats less than the added years and of course your figures are based on your current pensionable salary which will slowly increase over the 10 years (if all goes to plan) plus the pension in retirement goes up as well.

jabbgra

Many thanks dunstonh,

I think you are saying I should continue buying additional years?

:T

dunstonh

The non-pension option (ISA for example) couldnt touch the added years for income. However, it would give you capital that the pension cannot give you (bar any tax free lump sum enhancement).

So, if its a boost in income you want, then you are going about it the right way.

EdInvestor

At your age you might like to look at the tax situation after retirement.

From age 65 the personal allowance goes up and this is usually enough to cover pension income of the two full state pensions - the basic plus a full S2P pension - ie around 7-8k at present.

Anything on top of that is taxable if it's pension income.

Whereas any income coming from an ISA is tax free.

It's worth sitting down and working out the optimal arrangement as between additional pension and ISA saving IMHO. Only a quarter of pension saving is actually tax free and of course with the ISA you still have access to the capital any time ( which is also tax free). Not so the pension.

dunstonh

Pension still beats ISA after basic rate tax.

pjala

dunstonh wrote:

So, in reality, its costing you £156pm because of tax relief.

If you did 156pm for 10 years but not in pension, you end up with £24,700 (at 5% growth). That £24,700 at 5% income = £1235p.a. Thats less than the added years and of course your figures are based on your current pensionable salary which will slowly increase over the 10 years (if all goes to plan) plus the pension in retirement goes up as well.

But you can get a guaranteed 10% per annum, with a number of banks now. For instance Halifax are offering 10% on a regular save account. You put in 250 per month for a year, get your 10% (which is over the year, so wont be 10% on everything), then the fund is transferred into a 5% account. You could get your money then at the end of the year transfer the total into an ISA to keep your money up.

I can't be bothered to work it out, but it must add up to a tidy sum.