Adding lump sum to Civil Service pension

Penny_Battersea

I have £25,000 I could add to my pension before I retire from the Civil Service in 3 weeks time (this money at present in Premium Bonds doing very little). Would this be a wise thing to do? I roughly worked out the return is about 4% and of course index linked.

atush

Do you have other savings? Investments?

kidmugsy

Even in a year where you will not have not earned £25k? Or will you have?

Penny_Battersea

Yes I do have other savings/investments and no morgage. Its seems that it is OK to put £25,000 in as a one off payment even though I will not have earned that amount this year when I leave.

jem16

Penny_Battersea wrote: »

Yes I do have other savings/investments and no morgage. Its seems that it is OK to put £25,000 in as a one off payment even though I will not have earned that amount this year when I leave.

As far as I'm aware you can put in more than your earnings but you will not receive tax relief on anything above your earnings.

Penny_Battersea

Thank you for your help so far. I'm still not sure if this would be the best thing to do or whether to leave the £25,000 in a savings account and draw £1,000 (the same as the £25,000 would produce annually) each year to pay for holidays etc.

dtsazza

jem16 wrote: »

As far as I'm aware you can put in more than your earnings but you will not receive tax relief on anything above your earnings.

I had the feeling that there was a three-year rolling window of earnings; so as long as the contributions for the last three years (including the £25k) would be less than the earnings for the same period, there would be no issue with the limits on tax relief.

But I admit I haven't paid that much attention to this as it's unlikely to be relevant to my own situation; so please correct me if I'm wrong.

jem16

dtsazza wrote: »

But I admit I haven't paid that much attention to this as it's unlikely to be relevant to my own situation; so please correct me if I'm wrong.

Yoy may well be correct in this - I do remember reading about it too.

Penny_Battersea

Thanks. I think I can do it its just whether it's a good idea. Is adding this money to my Civil Service Pension a good investment at this late stage (now 2 weeks to retirement!) or would I be better off investing the £25000 in ISAs over the next 2 years or in a Building Society/Bank - ICICI has quite a good rate -instead of the poor performing Premium Bonds?

hugheskevi

I have £25,000 I could add to my pension before I retire from the Civil Service in 3 weeks time (this money at present in Premium Bonds doing very little). Would this be a wise thing to do? I roughly worked out the return is about 4% and of course index linked.

There isn't enough detail to comment - 4% would be excellent for a 50 year old, but at some higher age would become unattractive.

Thank you for your help so far. I'm still not sure if this would be the best thing to do or whether to leave the £25,000 in a savings account and draw £1,000 (the same as the £25,000 would produce annually) each year to pay for holidays etc.

Remember the pension is indexed, and also probably has spouse-protection. You aren't comparing like with like.

Its seems that it is OK to put £25,000 in as a one off payment even though I will not have earned that amount this year when I leave.

You will pay tax (assuming you have income over £10K from other sources) on the pension payments, so if you don't get tax relief on the way in it may well not be good value.

I had the feeling that there was a three-year rolling window of earnings; so as long as the contributions for the last three years (including the £25k) would be less than the earnings for the same period, there would be no issue with the limits on tax relief.

I'm not aware of any 3 year rolling window - always thought the limit for tax relief was the greater of 100% of earnings and £3,600 p/a. It is something I would be carefully checking with your HR/payroll.

It sounds a lot like the carry-forward of unused annual allowance, which (probably) doesn't apply in this case.

Is adding this money to my Civil Service Pension a good investment at this late stage (now 2 weeks to retirement!) or would I be better off investing the £25000 in ISAs over the next 2 years or in a Building Society/Bank - ICICI has quite a good rate -instead of the poor performing Premium Bonds?

There is a world of difference between pensions, ISAs and bank accounts.

Only you will know which is best, which is determined by your personal circumstances. In general, the faster you think you will need the money, the more that suggests bank/ISA options. The more you need income, the more that suggests pension.

From what I have seen, the added pension options available to public service workers close to retirement offer a pension which is a higher effective rate than available through commercial annuities. So on that measure it is likely that the added pension would be better than alternative private pension provision and annuities. But that doesn't help you decide between pension vs ISA/bank.

Penny_Battersea

Many thanks everyone its been very helpful to hear the various thoughts and I can now think about the best way forward. Just didn't want to be told in a months time (too late to do anything about it) that I was an idiot not to put the money in the Civil Service Pension scheme as everyone goes on about the Index linking. In fact it's very expensive to buy extra pension and I think there are better investments to do now. Should have done it 10 years ago when they changed the rules for adding lump sums!