Pension need to knows Official MSE Guide Discussion

Silvertabby

GunJack said:

jem16 said:

DavidDowdle said:

Hi, I have a civil service pension that became available at age 60, I am now 61 ½ years old. I am in full time employment and pay tax at the 40% rate. My civil service pension is only £7,000 ish but I will pay £2,800 tax on it if I take it now. Several IFA’s have lost interest as soon as I say I am looking for advice on this, they seem to want customers with huge pension pots to invest instead. I have been thinking about taking out a new pension but I intend to retire in 3 to 4 years so it's probably not worth it.

Any advice on how I can avoid paying this tax is gratefully received, even if it is just a signpost to a more appropriate body.

Thanks very much

David

Any reason you didn't take the Civil Service pension at age 60 if that was when it was due? It doesn't increase because you didn't take it.

Only way of avoiding the 40% tax is by paying an appropriate amount into a pension scheme to reduce your taxable income. Does your employer offer a pension scheme and are you already paying into this? 

Pretty much this from jem, CS Classic (I'm assuming with a NPA of 60)  is a bit "use it or lose it", so so far you've lost 1.5 year's worth of pension by not taking it...

Instead of looking at it as 'if I take this pension now I will pay 40% tax' look at it as 'if I take this pension now I get to keep 60%'.

DavidDowdle

Hi to those who were good enough to reply. My response to some of your comments are:

“What advice are you looking for?  its unusual to go to an IFA for advice on a public sector pension that is already in payment.” – it is not in payment if you mean am I drawing it now. I am in the process of starting to draw it within the next few months. 

“You mention about wanting to commence a new pension, but you also state that you are employed.  An IFA cannot help you there because the advice would be to use the employer's auto-enrolment scheme. There is no point turning down the free money from the employer. If you didn't join the workplace pension, you would be classed as an opt out and only around 1 in 10 IFAs hold the permissions required to give advice to opt-outs.” – I already have an employer pension which I will draw when I retire so auto-enrolment on a new employer pension is not possible is it? What do you mean by “If you are a member of the workplace scheme then using that would likely be the advice”? – apologies but use it to do what?

Thanks for the advice re starting a new thread.

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“Any reason you didn't take the Civil Service pension at age 60 if that was when it was due? It doesn't increase because you didn't take it.” – it increases yearly dependent on the fund managers capabilities just like any other pension doesn’t it?
“Only way of avoiding the 40% tax is by paying an appropriate amount into a pension scheme to reduce your taxable income. Does your employer offer a pension scheme and are you already paying into this?” – this is what I was looking for, paying into a new and separate pension scheme an amount that offsets the annual £2,800 tax. I am already paying into my employer’s pension scheme and was advised by a recently retired civil servant, who had taken two years of advice to optimise his pension, that AVC’s were not advisable at this late stage in my career.

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“Pretty much this from jem, CS Classic (I'm assuming with a NPA of 60)  is a bit "use it or lose it", so so far you've lost 1.5 year's worth of pension by not taking it...” – yes correct, that is why I am now going through the process of taking it, though it has risen year on year (better than rate of inflation usually though not as much as many private pensions have) since I first started it over 40 years ago (left civil service in 1993 with 14 years accrual), so it’s now like a savings account is it not? It has more than doubled since I retired but, as mentioned, many private pensions have done a lot better than this I believe. As mentioned, I just want to know how to minimise the extra tax, via an ISA for example rather than a new short duration pension? Have to say the Civil Service have been absolutely useless in providing any kind of advice on this.
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“Instead of looking at it as 'if I take this pension now I will pay 40% tax' look at it as 'if I take this pension now I get to keep 60%'.” – Point taken, that is why I have started the process to take it.

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Thanks for your advice guys

jem16

DavidDowdle said:

“Any reason you didn't take the Civil Service pension at age 60 if that was when it was due? It doesn't increase because you didn't take it.” – it increases yearly dependent on the fund managers capabilities just like any other pension doesn’t it? 

No it doesn't I'm afraid. If, as we suspect, you are a Deferred Member of the Civil Service pension scheme, then you have totally misunderstood what kind of scheme it is. It is a Defined Benefit scheme which doesn't have a pot of money and is not dependent on the stock market so no fund managers. Instead it is based on length of service and final salary. 

Since you became a Deferred Member, your CS pension was calculated at the time of leaving and increases yearly by inflation. You could have taken it at age 60 but haven't so you basically lost 1.5 years of pension.

As to your other question about starting a new pension - you say you are already in your employer's pension scheme which is good. You then have two options - either increase the payments into that scheme if it's possible or use a Personal Pension/SIPP. What kind of employer's pension are you currently paying into? is it Defined Benefit ( ie based on service and salary ) or is it Defined Contribution ( ie it's a pot of money invested into funds)? There is no £2880 limit ( £3600 gross) as that's purely for non-earners. Your limit for tax relief is 100% of your current earnings.

As to means of reducing tax, only a pension will do that. An ISA won't help. The Civil Service are not allowed to give you any advice as they're not regulated to do so.

Dazed_and_C0nfused

You previously mentioned that you are already a higher rate taxpayer before this £7k pension starts to be paid.

That means that overall you cannot avoid paying some tax on the £7k pension but if you want to mitigate the tax you could put the amount you receive (net of the 40% tax the pension payer will deduct) into a personal pension/SIPP.

This will benefit from both the basic rate tax relief the pension company will add and also save you some personal income tax.

For example if you added the £4,200 net pension you will receive into a personal pension or SIPP then the pension company will add 25% giving you a fund of £5,250.

Assuming you pay higher rate tax on at least £5,250 income then that gross pension contribution will increase your basic rate tax band, moving £5,250 from 40% tax to 20% tax.  This tax saving of £1,050 will come back to you, it doesn't go into the pension fund.

But you end up with a pension fund of £5,250 and are £1,050 better off from paying less tax, a total of £6,300 so an effective tax rate of 10% from the original £7,000 pension you were paid.

hugheskevi

“Pretty much this from jem, CS Classic (I'm assuming with a NPA of 60)  is a bit "use it or lose it", so so far you've lost 1.5 year's worth of pension by not taking it...” – yes correct, that is why I am now going through the process of taking it, though it has risen year on year

Good news is that as you were a deferred member when you reached the Normal Pension age of 60 you will receive arrears of your classic pension back to 60 when you do claim it (rule 3.11).

This may provide a way to avoid higher rate tax, if you anticipate a future year when you will have a sufficient amount of basic rate tax available to receive the Civil Service pension plus back-dated payment to 60 in a single tax year.

GunJack

hugheskevi said:

“Pretty much this from jem, CS Classic (I'm assuming with a NPA of 60)  is a bit "use it or lose it", so so far you've lost 1.5 year's worth of pension by not taking it...” – yes correct, that is why I am now going through the process of taking it, though it has risen year on year

Good news is that as you were a deferred member when you reached the Normal Pension age of 60 you will receive arrears of your classic pension back to 60 when you do claim it (rule 3.11).

This may provide a way to avoid higher rate tax, if you anticipate a future year when you will have a sufficient amount of basic rate tax available to receive the Civil Service pension plus back-dated payment to 60 in a single tax year.

I don't get that from rule 3.11, what am I missing??

hugheskevi

GunJack said:

I don't get that from rule 3.11, what am I missing??

It is as much about what the rules do not say as what they do say. In rule 3.11 there is no provision for the payment of the preserved pension to be deferred, simply that the pension "will be brought into payment when the civil servant reaches the pension age." Therefore, if it is claimed late (eg at age 64) the pension is treated as if it came into payment from the pension age of 60 and arrears paid.

GunJack

hugheskevi said:

GunJack said:

I don't get that from rule 3.11, what am I missing??

It is as much about what the rules do not say as what they do say. In rule 3.11 there is no provision for the payment of the preserved pension to be deferred, simply that the pension "will be brought into payment when the civil servant reaches the pension age." Therefore, if it is claimed late (eg at age 64) the pension is treated as if it came into payment from the pension age of 60 and arrears paid.

that's interesting, it was always put to us that if not claimed then no backdating would apply (Classic scheme, joining date 1988)

DavidDowdle

This is the conundrum I am having, what is the point of being offered the opportunity to defer taking your pension for a period after you pension due age, 60 years for civil service, if there is a penalty of losing your annual pension payment for those years deferred. I was under the impression arrears would be backdated as mentioned by Hugheskevi. Getting hold of someone to speak to at civil service pensions is hard work at the moment but I will keep trying and get back to all.   

rustyfinkle

My husband is about to turn 60 and has no pension. He has inherited a small lump sum (£30k) - is it worth starting a pension now?