Drawing Barclays Final Salary Scheme whilst paying HRT

jamesd

Capped or Flexible Income drawdown don't apply to your Barclays final salary scheme.

They do apply if you make payments into an independent personal pension. That can be very tax-efficient.

General principle for £10000 is pay 6000 net into a pension, get 25% basic rate relief added to top it up to 7500 and higher rate tax refunded. That's 7500 in the pension at 6000 cost. Then take out 25% of the pension pot as a 1875 lump sum. Now your net cost for the 5625 still in the pension is 4125, a 36% risk-free gain. You then take an income from that, say 5% of the value a year, £281 taxable. Recycle that into more pension contributions and tax relief until you're retired or no longer getting 40% tax relief. Then start using it to pay off the mortgage. Or sooner if you don't mind paying the tax. Assuming capped drawdown.

If flexible drawdown's 20k income minimum is reached you can take the money out as fast as tax rates make it sensible to do. From the look of your numbers you probably will qualify for flexible drawdown when your Barclays and state pensions are both in payment. If you don't, a year or three of deferring the state pension should get you there.

When you write about residual pension income I start to wonder just what the commutation rate to get a lump sum for reduced ongoing pension income is. Some offer somewhat decent rates, others truly horrendous ones. It's frequently, even usually, the case that keeping a higher mortgage and repaying out of the higher ongoing income will beat taking a lump sum from a final salary pension. It's different for personal pensions, including SIPPs. For those taking the lump sum is usually right.

MikeFloutier

Thanks again James, I'm currently waiting for an estimate for my final salary pension as at normal retirement age ie Feb 2014.

However the current date estimate shows a reduction of £3000pa to my residual pension in exchange for a £52,000 tfls, this didn't seem too bad to me, what do you think - I'd taking my pension at 60.

As I'm planning to work for another 10 years as a high rate taxpayer the idea to invest my residual pension and so clawback the tax is appealing.

I don't want to take any risk and was considering a Cash SIPP where I would invest for 3 month terms at around 2%.

I'm a little unclear how this would work in terms of using the cash to repay my mortgage, could the SIPP be a Capped Drawdown and so enjoy the benefits you mentioned.

I don't need my pension income to live on.

I have to say I'm finding it hard to get my head around it all, sorry if I sound a bit thick.

jamesd

That's a 17.3:1 commutation rate. Middle of the road, not horrible but not good enough to be attractive either. Break even is something like 5.8% plus inflation, still far more than your likely mortgage interest rate, so taking the income and using it to pay the mortgage would leave you better off.

Say start out using half of the higher income against the mortgage and keeping half. Over time the inflation-linked increases will make the mortgage capital amount small by comparison and you'll find that you clear it increasingly quickly. At 3% inflation even ten years means that your income will be up by 34% in cash terms. So the same half of your higher income is now effectively 67% so far as the mortgage balance is concerned.

If you want to clear the mortgage faster keep just a third or quarter of the extra income for yourself and use the rest against the mortgage. Or use enough to fully cover the extra mortgage interest, then some more on top of that to get started on reducing the balance.

You'll end up with a higher income for life and still get rid of the mortgage in not too many years.

Yes, the SIPP can be placed into capped drawdown to get the income out and pay money to use for the mortgage. Working for another ten years with higher rate tax relief means that you may well end up able to clear the mortgage entirely out of the SIPP personal pension lump sum you can accumulate. Would have to know the numbers for the mortgage and amount going in but if you can tell me those I'll work out the numbers for you.

A little risk is better than none but many SIPPs do allow you to put money into cash savings accounts. Low up and down movements - up to ten percent a year or so, up and down, are available from high quality corporate bond funds and it's probably better to make some use of those to keep up with inflation.

Over ten years the effect of the tax relief is equivalent to about 3.1% interest rate on the money you put into the pension. For the money going in in year five it's about 6.3%.

Don't worry about not understanding it all immediately. It takes a while to understand how all of the pieces can fit together.

MikeFloutier

Thanks James, it's starting to become clearer, by the way, when you refer to "higher income" does this mean ANY income on which I am liable for HRT?

Also, my position is that, although I'm earning above the HRT band, my Gift-aid giving means that I don't actually pay any HRT. In that situation, will I still be able to claim HRT relief on future pension contributions?

Obviously I'd review the situation in Feb 2014 (when I get to 60) before making a decision but, barring large interest rate rises, you are saying that it would be better, over 10 years, not to take the TFLS but pay as much as possible against the mortgage; thereby giving me a higher long term pension income.

Ok, moving on to the decision about whether to pay down the mortgage directly OR use the "higher income?" to invest in a pension with a view to using this (somehow) to pay some of the mortgage, here are the figures I'm guessing you would need:

1. Mortgage £100,000 @ 4% variable over 10 years - capital + interest.
2. Pension income (final salary scheme - inflation, max 5% increases) probably £14,000 pa.

somethingcorporate

IIRC if you do not pay HRT you cannot claim it back into your pension.

jamesd

By higher income I meant the higher income from taking the higher pension income instead of the lower one with the lump sum. Assuming that while working and paying higher rate income tax you'd want to pay it into a personal pension for the tax break, then when retired you'd want to use much of it to get rid of the remaining mortgage more quickly.

You can only claim higher rate tax relief for income where you've paid higher rate income tax, so at the moment your gift aid contributions that eliminate higher rate tax mean no higher rate income tax relief on pension contributions.

Yes, I'm saying that it's better to think long term and take the higher income instead of the TFLS from the Barclays final salary pension.

I'll take a look at the numbers later...

MikeFloutier

Thanks James, and again I am probably mis-understanding something here BUT,... if I take my Barclays pension as a monthly income I can presumably get tax relief on a like contribution to a new pension PROVIDED that my gift-aid contributions are only high enough to cover my other (non-pension) HRT'able income.

atush

You own your own business, do you have an acct? If so, you may not be paying yourself int he most tax efficient way, and could reduce your business taxes on profits by giving yourself a non contributory executive pension, and/or by paying yourself in dividends.

jamesd

MikeFloutier wrote: »

if I take my Barclays pension as a monthly income I can presumably get tax relief on a like contribution to a new pension PROVIDED that my gift-aid contributions are only high enough to cover my other (non-pension) HRT'able income.

That's right.

MikeFloutier

Thanks James, I'm still waiting for my retirement (Feb 2014) figures for my final salary scheme from Barclays, I'll post them when available and would be grateful for your having "a look at my numbers"