Adding lump sum to Civil Service pension

jem16

hugheskevi wrote: »

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.

Yes I think that's what I had read about.

So basically that would allow you to contribute more than £50k but still doesn't provide for tax relief on any more than you annual earnings?

hugheskevi

So basically that would allow you to contribute more than £50k but still doesn't provide for tax relief on any more than you annual earnings?

Yes - basically the system is just as it was, assuming that you aren't one of the small number that put £50,000 p/a into the pension. Same limits, etc.

If you do put more than £50,000 in, then a test is applied to see if you had unused allowance in the last few tax years.

If you do have unused allowance, and bringing that allowance forward means that your contribution is under £50,000 plus the amount brought forward, then all is fine. If not, some pretty hefty charges are on the way.

But basically, the point is that for the vast majority of people, the change to annual allowance didn't change anything.

kidmugsy

If your big problem is going to be bridging the gap before your state pension begins, the £25k might be better in your hands.

bigfreddiel

Penny_Battersea wrote: »

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.

i have exactly the same conundrum - i can retire anytime - just turned 60 and in classic scheme - i could commute my lump sum £25k to about £1100 pension before tax.

Obviously £25k would last 25 years at £1000/year

But of course the £25k will be eaning interest - easily 2.4% after tax.

so if you add 2.4% to your capital each year after taking out your £1000 in year 25 you will still have £11.4k - so thats like taking £80/month

so what can you take per year to use the £25k up in 25 years - £1350 is the answer or for simplicity £100/month with a little bonus in month 12!

but the converse argument £25k buys you £1000/year - this increases by cpi each year - how many years till you have taken £25k? Its in year 20 assuming an annual rate of 2.5% and at 5% you'll have taken £25k in year 17

conclusion - keep the £25k get at least 2.4% interest and take out £80/month

BTW you don't say what your pension is - do you actually need to buy £1000 with your £25k?

Penny_Battersea

Thank you bigfreddiel that was exactly the response I was hoping for. I am not good at maths (or finance for that matter) and you have expained the options brilliantly. No I dont need to buy the extra pension but just wanted to avoid an accountant friend of mine, when we see him in a few weeks time, saying I had been a complete idiot not putting the £25,000 in my pension 'cos then it would be too late. I didn't think it was the best thing really at this late stage but you have helped me make a decision. Perhaps I will leave it where it is - in Premium Bonds - and win a £million in the next draw!

ExBT_Bob

Penny_Battersea wrote: »

Thank you bigfreddiel that was exactly the response I was hoping for. I am not good at maths (or finance for that matter) and you have expained the options brilliantly. No I dont need to buy the extra pension but just wanted to avoid an accountant friend of mine, when we see him in a few weeks time, saying I had been a complete idiot not putting the £25,000 in my pension 'cos then it would be too late. I didn't think it was the best thing really at this late stage but you have helped me make a decision. Perhaps I will leave it where it is - in Premium Bonds - and win a £million in the next draw!

Don't forget that your index linking has now been reduced to CPI from RPI so it won't grow as much it will have done previously.

kidmugsy

Move £15k from PBs to Index-Linked Savings Certificates and you'll get the RPI inflation rate plus 0.5% p.a. if you keep them for 5 years. If you withdraw money after the first year, the penalty is slight. Avoid withdrawing in the first year, because then you get neither the linking nor the interest.

bigfreddiel

Penny_Battersea wrote: »

Thank you bigfreddiel that was exactly the response I was hoping for. I am not good at maths (or finance for that matter) and you have expained the options brilliantly. No I dont need to buy the extra pension but just wanted to avoid an accountant friend of mine, when we see him in a few weeks time, saying I had been a complete idiot not putting the £25,000 in my pension 'cos then it would be too late. I didn't think it was the best thing really at this late stage but you have helped me make a decision. Perhaps I will leave it where it is - in Premium Bonds - and win a £million in the next draw!

I've been over and over my calculations to convince myself I'm right in my logic - i'm sure I am and I to have a load of premium bonds - currently earning 2.5% in prizes (equiv to 3.1% gross) and thats a rolling 12 month rate I calculate.

i have other funds earning a lower rate so they get the 5yr 5% FRISA treatment every April i'm maxed out on ilscs.

So in about 5 yrs time all my investments will be in ISAs or ILSCs making about £15k pa, my actual pension will be just above the tax free allowance as will my wifes - i calculate our joint income should be about £35k and tax will be about £80/mnth - sweet!

moral - use your isa/ilsc allowance - even if you think you wont be paying tax because one day you might -i rkon my monthly tax bill without these wrappers would be about £500-600! - no so sweet!
fj