Pensions and 40% Tax

Daimo18

Can anyone help me and prevent me paying 40% tax? I currently earn £50,000 via my Local Government pay and a previous employment pension.

I am 55 years old and my current pension age as far as my employment is concerned is 65 but i would like to look at the option of retirement at age 60.

I currently pay 40% tax on my income and pay a standard pension contribution from my local government pay.

I am in a position where I would be able to pay voluntary contributions or lump sum etc into my pension but I would like to be able to draw on it from age 60 which is only 5 years away.

Firstly, what would be the best option to avoid paying 40% tax and would I be able to draw any additional payments at 60?

Thank you in anticipation for you assistance.

jem16

Daimo18 wrote: »

I am in a position where I would be able to pay voluntary contributions or lump sum etc into my pension but I would like to be able to draw on it from age 60 which is only 5 years away.

If you use Additional Regular Contributions these must be taken at the same time as the main scheme which is 65. If you take them earlier they would be subject to an actuarial reduction.

In-house AVCs appear to have to be taken at the same time too.

Paying into a personal pension of your own choosing would allow you to take it at age 55 but would be subject to an annuity or income drawdown.

S&S ISAs would allow the freedom of using the income in any way you see fit from age 55 to 65 but doesn't have the advantage of the 40% tax relief.

Perhaps a mix of both would be useful?

Daimo18

Thanks Jem16

I did think this may have been the case however, I am not an expert in any shape!

You mention actuarial reduction and an annuity or income drawdown and I am afraid this does not mean much to me. I am aware from my last pension forcast that if I did retire at 60 my pension benefits are reduced (fairly significanly) so I presume this would be actuarial reduction on my main benefit?

Is there a standard formula to work out how much the reduction would be if i did make additional regular contributions and would it ever be worth it just to save paying 40% tax?

I relaise I will have to speak this over with my pension people but the more idea i have before that conversation the better.

middlepuss

I guess you are aware of the SIPP option? Let's say you earn £10,000 gross on which you pay @ 40%. You contribute £8000 to a SIPP. The SIPP provider reclaims £2000 from HMRC. When you fill in your tax return you declare you've contributed £10,000 gross to a SIPP and you get a £2000 tax rebate. So your £10,000 SIPP pot has cost you £6000.

There are several providers with whom it is easy to set up and contribute to a SIPP, eg http://www.hl.co.uk/pensions/sipp

hugheskevi

The LGPS allows you to consider AVCs alongside main scheme benefits when calculating how much lump sum you can take.

That means you might be able to make AVC contributions, then when you draw the pension, take the AVCs entirely as tax free lump sum (rather than the more expensive option of reducing annual pension). Worth checking out if that would work for you, as it can be a very good option.

If you are going to have more than £20,000 pension, read up about flexible drawdown (google it).

Benefits in defined benefit schemes are often reduced by about 5% per year taken early, so if you take it at 60, then a 20-25% reduction would be expected.

Daimo18

I was sort of aware of SIPP's but felt 5 years may be a short time to make these work? I could not afford to take too much risk with the additional monies paid.

The AVC's as a possible lump sum sounds interesting and is something to persue.

This money and retirement lark is all pretty complicated when you are not too involved in it?

Any other ideas or options to take forward would be greatfully recieved

fairleads

Daimo18 wrote: »

I was sort of aware of SIPP's but felt 5 years may be a short time to make these work? I could not afford to take too much risk with the additional monies paid.

The AVC's as a possible lump sum sounds interesting and is something to persue.

This money and retirement lark is all pretty complicated when you are not too involved in it?

Any other ideas or options to take forward would be greatfully recieved

Then open a cash account within the sipp and invest all contributions into that.

gadgetmind

Daimo18 wrote: »

I was sort of aware of SIPP's but felt 5 years may be a short time to make these work? I could not afford to take too much risk with the additional monies paid.

There are loads of low-risk SIPP options: short-dated gilts, capital preservation investment trusts, strategic bonds, infrastructure companies, and much more. You can easily build a multi-asset low-risk SIPP portfolio that stands every chance of beating inflation and little chance of losing you money.

middlepuss

gadgetmind wrote: »

There are loads of low-risk SIPP options: short-dated gilts, capital preservation investment trusts, strategic bonds, infrastructure companies, and much more. You can easily build a multi-asset low-risk SIPP portfolio that stands every chance of beating inflation and little chance of losing you money.

It is a common misconception that SIPPs are high risk, probably because of all the bad publicity pensions have had. But as gadget and fairleads point out, a SIPP is only a wrapper that gets you the tax breaks. What you invest in within the SIPP is up to you, and that will determine the risk.

Did you have a look at the link, and the list of funds? http://www.hl.co.uk/pensions/sipp

If you do decide the SIPP route is right for you, when you've decided what to invest in - gilts, income unit trusts or whatever, come back and get opinions of which SIPP provider would be best for your chosen type of investments. EG, the provider who is cheapest for unit trusts may not be the best for gilts.