Redundancy looms! How do my figures stack up?

jamesd

The first £30,000 of a redundancy payment is free of income tax, leaving £2,000 taxable plus any other money paid.

One good deal is to pay the lump sum money into a pension to get tax relief on it, up to his total taxed income. Depending on his income tax rate he can get anything from 50% to 20% tax relief. Then he could take 25% as a lump sum and expect to invest in bond funds to get 5% of the capital value left in the pension as income.

I could calculate the effect but without knowing his taxable income and knowing what part, if any, of the lump sum is from a pension I can't really do that.

As a pretense that can't be accurate I'll just assume for an illustration that none of it is a pension lump sum and that any pension contributions would get 25% added due to basic rate tax relief. The amount is too high for that to be true and he may not have enough income to make a large enough pension contribution, so it can't be more than a way to show how it can work. If he has a lot of higher rate tax to pay the effect can be much better. It's also better if his employer has a salary sacrifice defined contribution pension scheme he could use to save NI on his pension contributions but I'll assume just a normal personal pension for the moment.

The bogus numbers are £67,277 paid into a pension and 25% tax relief added to give £84,096 in the pension. 25% of that can be taken as a tax free lump sum of £21,024 leaving £63,072 in the pension that could produce about 5% of the capital value as income (subject to GAD limit on how much can be paid out), about £3,154 a year or £263 a month. That reduces your monthly shortfall to £509. However, clearing the mortgage would leave just £499 lump sum. So with these bogus assumptions you couldn't do this for all of the money r you'd fail to match your income target.

A combination that makes some use of pension contributions, particularly for any money taxed at higher rate, would probably make sense. Just have to be sure that enough lump sum remains to cover the living standard for the required time. The advantage is that the income from the pension continues indefinitely and is 100% inheritable by you, so longer term it's better.

Does either of you have any defined contribution pension pots? The types that aren't salary related but where investments can be chosen instead?

I do wonder about the wisdom of clearing the mortgage. You will eventually have ample income to repay it, so why not just switch to interest only, cut the ongoing expense, keep the lump sum, and clear it over time once your incomes have been boosted by the state pensions and it becomes easy to afford? You'd end up paying only £55 or so in interest a month at 3%, a bit more if you went for a fixed rate deal, which would be sensible. Or a repayment mortgage would preserve the capital and not increase the cost too hugely over a long term.

It's seems that you're open to considering moving if necessary. Have you considered just taking a look around to see what's on the market, perhaps on a single level, in an area where you'd like to live? It's easier to move while in work and young so if you do find a nice place it might be a good idea to move to get the capital and better living now, when it's relatively easy. That might improve your qualify of life as well as your finances.

Pollycat

I'd just like to say what a refreshing change Muppet81's post is. :T

I'm in a similar situation as Loughton Monkey (early retired and living a pretty good lifestyle on pensions, savings & investments - although not maybe quite so affluent as LM).

You say you will have £772 per month shortfall based on your current lifestyle but maybe you should evaluate that lifestyle and adapt your spend to what you're likely to spend once you're both retired.

As you are already at home during the day, there probably won't be much, if any, increase in your fuel costs.

But - does your OH have significant costs relating to his work that may not figure in your retirment plan (e.g. travel costs, maybe petrol/train, does he buy lunch out etc etc).

Do you currently cook from scratch, menu plan and batch cook?
You may be able to shave spend from your grocery bill.

It really might be a good idea to do a SOA (Statement of Affairs) using this link:
http://www.makesenseofcards.com/soacalc.html
for what you spend now and what you estimate you'll spend if your OH is made redundant.

You don't have anything in for replacement of goods (TV, freezer etc).
In our monthly budget (which (anally, I know) goes up to December 2040 when I'll be 87 and other half 85 :eek:) we have built in replacement of all things such as this and estimated the life so, for example, we budget for a new TV every 8 years.
If we get to a month where we have spend budgetted but the goods are still working, we roll that cost up and carry it down.

We currently have in our budget an allowance for:
Tumble_Dryer
Hob
Oven
Home Cinema System
plus 4 tyres and exhaust on the car

which haven't so far needed replacing.

We've just bought 3 new TVs because of the digital switchover.
All the costs were in the budget and the spend came in under budget.

We have also built in inflation on council tax, energy costs etc plus rises in pensions.

We've been doing this budget since May 2006 and it's standing up pretty well.

You've mentioned some 'what-ifs' such as care home requirements, maybe it's a good time to read up on how Councils deal with people who need residential care.
What you pay depends on your savings.
If it's something you want to be aware of, I can point you in the direction of some good factsheets & guides.

In short, if you have more than £23,250 in savings you have to fund your own care until your savings drop below this level.
However, recently there has been talk about increasing this threshold to £100K.

Muppet81

maggieann155 wrote: »

sorry but i think i may be throwing another spanner in the works!

i dont think you ll be getting your state pension until you re 66,as
i m 56 now and know that i wont be able to get hold of mine until i m 66 in 2021

but good luck anyway.

we re still waiting for a quote from his company pension admin (over 3 months now!) to see if my husband can retire next march!! its very stressful waiting for the post to drop on the mat every day .

Ah! sussed the quoted idea at last.

Yes, I also realised that last night. Our wonderful Govt have thrown another spanner in our works.

Good luck with your figures. Really hope it works out.

Muppet81

jamesd wrote: »

The first £30,000 of a redundancy payment is free of income tax, leaving £2,000 taxable plus any other money paid.

One good deal is to pay the lump sum money into a pension to get tax relief on it, up to his total taxed income. Depending on his income tax rate he can get anything from 50% to 20% tax relief. Then he could take 25% as a lump sum and expect to invest in bond funds to get 5% of the capital value left in the pension as income.

I could calculate the effect but without knowing his taxable income and knowing what part, if any, of the lump sum is from a pension I can't really do that.

As a pretense that can't be accurate I'll just assume for an illustration that none of it is a pension lump sum and that any pension contributions would get 25% added due to basic rate tax relief. The amount is too high for that to be true and he may not have enough income to make a large enough pension contribution, so it can't be more than a way to show how it can work. If he has a lot of higher rate tax to pay the effect can be much better. It's also better if his employer has a salary sacrifice defined contribution pension scheme he could use to save NI on his pension contributions but I'll assume just a normal personal pension for the moment.

The bogus numbers are £67,277 paid into a pension and 25% tax relief added to give £84,096 in the pension. 25% of that can be taken as a tax free lump sum of £21,024 leaving £63,072 in the pension that could produce about 5% of the capital value as income (subject to GAD limit on how much can be paid out), about £3,154 a year or £263 a month. That reduces your monthly shortfall to £509. However, clearing the mortgage would leave just £499 lump sum. So with these bogus assumptions you couldn't do this for all of the money r you'd fail to match your income target.

A combination that makes some use of pension contributions, particularly for any money taxed at higher rate, would probably make sense. Just have to be sure that enough lump sum remains to cover the living standard for the required time. The advantage is that the income from the pension continues indefinitely and is 100% inheritable by you, so longer term it's better.

Does either of you have any defined contribution pension pots? The types that aren't salary related but where investments can be chosen instead?

I do wonder about the wisdom of clearing the mortgage. You will eventually have ample income to repay it, so why not just switch to interest only, cut the ongoing expense, keep the lump sum, and clear it over time once your incomes have been boosted by the state pensions and it becomes easy to afford? You'd end up paying only £55 or so in interest a month at 3%, a bit more if you went for a fixed rate deal, which would be sensible. Or a repayment mortgage would preserve the capital and not increase the cost too hugely over a long term.

It's seems that you're open to considering moving if necessary. Have you considered just taking a look around to see what's on the market, perhaps on a single level, in an area where you'd like to live? It's easier to move while in work and young so if you do find a nice place it might be a good idea to move to get the capital and better living now, when it's relatively easy. That might improve your qualify of life as well as your finances.

Thanks for such a detailed response. Just trying to get my head round it.

He earns enough to be paying 40% tax - not something I have ever whinged about as I considered us lucky to be earning so much to warrant it.
There is a redundancy payment of £32,000 expected
A Pension lump sum of £67277 and an annual gross pension of £24412
All these figures are from his 2010 projection as he has still not received it for 2011

Would be grateful if you could calculate if possible from this

fairleads

Loughton_Monkey wrote: »

2. Making full use of tax-free status where possible [shifting cash between us for investment income] and filling ISA's etc. Even use the £3,600 pension contribution allowance giving an extra £720 each 'tax rebate equivalent'.


Good luck.

Extra compared to what? sticking the cash under the mattress? This is a classic case of the tax tail wagging the investment dog because, In the first year of taking your pension and regardless of what age you start it you will never have access to more than 50% of the capital residue. And on your demise the residue will be taxed

fairleads

jamesd wrote: »

The first £30,000 of a redundancy payment is free of income tax, leaving £2,000 taxable plus any other money paid.

One good deal is to pay the lump sum money into a pension to get tax relief on it, up to his total taxed income.

Another case of the tax tail wagging the investment dog.
A better one is to use it not lose it.

gadgetmind

fairleads wrote: »

This is a classic case of the tax tail wagging the investment dog

Yes, I kept think of immediate vesting pensions and the like, but they just don't address the situation where someone expects an income gap before state pension and to be OK afterward.

jamesd

Muppet81 wrote: »

He earns enough to be paying 40% tax - not something I have ever whinged about as I considered us lucky to be earning so much to warrant it.

Agreed, it's good, not bad. Can you give me a rough idea of how much income is at higher rate? Say £5,000, 10,000 etc? If not I'll use £10,000 chunks and you can adjust that pro-rata. This affects the tax relief calculation and it's almost certain to be best to use enough to get all available 40% tax relief, but basic rate is less likely to pay given your need for a capital pot to drain fairly quickly.

Muppet81 wrote: »

There is a redundancy payment of £32,000 expected
A Pension lump sum of £67277 and an annual gross pension of £24412
All these figures are from his 2010 projection as he has still not received it for 2011

OK, so total capital available of £99,277 to start.

Please say more about this pension. Is it a final salary or similar salary-related type or is it one where he controls the investments? If it's a final salary type, how much lump sum does each Pound of lost ongoing income buy - the commutation rate, typically between 12:1 and 22:1? I'm checking because for final salary and similar pensions it can often be a good idea not to take a lump sum or to take less, because losing income often doesn't buy enough extra income to make it worthwhile.

I'm assuming that you're both in at least normal to good health and have a normal life expectancy. If not, please say a bit about what would reduce life expectancy, it'll affect the choice between income and lump sum.

Would you be happy to just spend some capital to buy an annuity income for a fixed term of say ten years? Fixed term annuities like this can sometimes be a good deal for people who like low risk income.

gadgetmind wrote: »

Yes, I kept think of immediate vesting pensions and the like, but they just don't address the situation where someone expects an income gap before state pension and to be OK afterward.

Yes, some care is needed - later I'll see what looks like a reasonably sensible split. Enough into pension to fully use all higher rate tax relief is likely to be a good idea but basic rate may not be given the need to draw on capital fairly rapidly. The GAD limit is getting in the way of planning a uniform income until state retirement age, as usual.

I wouldn't use an immediate vesting personal pension, though. Income drawdown because it has better survivor benefits and also because it preserves the option to buy an annuity at an age where that might be better value for money than at the young ages involved here. Also there's only a limited set of vendors of them and I haven't been greatly impressed by the annuity rate offered.

Muppet81

jamesd wrote: »

Agreed, it's good, not bad. Can you give me a rough idea of how much income is at higher rate? Say £5,000, 10,000 etc? If not I'll use £10,000 chunks and you can adjust that pro-rata. This affects the tax relief calculation and it's almost certain to be best to use enough to get all available 40% tax relief, but basic rate is less likely to pay given your need for a capital pot to drain fairly quickly.

OK, so total capital available of £99,277 to start.

Please say more about this pension. Is it a final salary or similar salary-related type or is it one where he controls the investments? If it's a final salary type, how much lump sum does each Pound of lost ongoing income buy - the commutation rate, typically between 12:1 and 22:1? I'm checking because for final salary and similar pensions it can often be a good idea not to take a lump sum or to take less, because losing income often doesn't buy enough extra income to make it worthwhile.

I'm assuming that you're both in at least normal to good health and have a normal life expectancy. If not, please say a bit about what would reduce life expectancy, it'll affect the choice between income and lump sum.

Would you be happy to just spend some capital to buy an annuity income for a fixed term of say ten years? Fixed term annuities like this can sometimes be a good deal for people who like low risk income.

Yes, some care is needed - later I'll see what looks like a reasonably sensible split. Enough into pension to fully use all higher rate tax relief is likely to be a good idea but basic rate may not be given the need to draw on capital fairly rapidly. The GAD limit is getting in the way of planning a uniform income until state retirement age, as usual.

I wouldn't use an immediate vesting personal pension, though. Income drawdown because it has better survivor benefits and also because it preserves the option to buy an annuity at an age where that might be better value for money than at the young ages involved here. Also there's only a limited set of vendors of them and I haven't been greatly impressed by the annuity rate offered.

Not sure about what is at what tax band but salary last year was £59,595. Does this help?

I am afraid I don't know much about the different types of pension scheme. if it helps his is a Local Authority scheme and he has no control in the investments.

To the best of our knowledge we are both in good health and would be prepared to consider any option such as buying a pension annuity if it would be a good idea.

Loughton_Monkey

fairleads wrote: »

Extra compared to what? sticking the cash under the mattress? This is a classic case of the tax tail wagging the investment dog because, In the first year of taking your pension and regardless of what age you start it you will never have access to more than 50% of the capital residue. And on your demise the residue will be taxed

??? Don't understand!

Every £800 I put into a pension becomes £1,000. When I feel like it (probably age 70) I will simply crystalise it and take 25% tax free, and the other 75% at 20% tax immediately on flexible drawdown.

All I have to do is ensure that I have enough headroom to avoid 40% tax - and worst case is probably drawing half on 1st April, and the other half 15th April. So how do I lose 50%?