Pension dilemma - what should I be considering?

benalder284

Looking for thoughts on issues to consider as to how to progress

I’m in my late 40's with a final salary LGPS pension (current value of £16K) per year. Assuming no further promotions or salary increases, this will increases annually by about £1500 per year as my length ofservice increases. Inflation linked andwith 50% widows pension.

My wife is in her late 30'sand currently has a deferred FS pension of £2500 which is inflation linked and various personal pensions which have a current value of £73000. She currently puts in £500 per month to one of her PPs.

We also have around our combined annual income in S&S ISAs and N&S ILCs and the recommended emergency cash fund equivalent to 6-9 months expenditure.

I am keen to commit more towards long-term savings and pensions as I would like to have the option to not have to work in my current role until 65. So what are the options?

For me, these would seem to be more into S&S ISAs, AVCs, an additional personal pension or SIPP or buy additional pension (ARCs) in the LGPS. For the S&S ISA, AVCs and SIPPs I understand that what I get back is a function of what I put in, what I invest in and investment returns over theperiod I am invested in. The LGPS ARCs allow me to buy £1000 additional pension (index linked from date of purchase and with 37.5% widows benefits) for monthly costs of £123 gross over a 10 year period which compared to the alternatives seems quite a good deal.

We are currently able to put another £200 per month toward long-term savings – but where and how?

Should we put more money into my wife’s pension pot given the disparity in our current pension provision or focus on increasing my investment risk-free pension (with its attractive inflation proofing and widows benefits - especially so given our age difference?) or are we OK for pension provision at the moment given our ages.

What factors or issues should I be considering?

Linton

In my view you need an overall life plan first before you can decide the most appropriate type of investments and how much to save in each. There are two separate time periods to sort out:

(1) Financing long term retirement from standard pension age

You must work out how much income you need for your desired standard of living. A first estimate of this would be how much do you live on now after removing those things you wont be paying in retirement (eg mortgage). Then to ensure a retirement with no money worries add on a bit more.

The other side of the equation is the income. You know what your FS pensions will be and can reasonably assume that State Pension will remain the same. So you should now be able to calculate whether your current pension arrangements will do the job (dont forget tax!). You can get some idea of what income money purchase pension pots will buy using one of the pension calculators.

I suggest you put money into pensions only until estimated pension income matches the need.

It may be helpful putting this onto an excel spreadsheet where you can more easily allow for inflation.

(2) Financing the period from actual retirement until pension age

Having got (1) planned and resourced you can consider early retirement. Here its more a matter of maximising your savings, ideally in my view in his and hers S&S ISAs, to achieve the flexibility you need. Then you carry on working until the amount saved is more than the cost of meeting your income needs from that time until standard pension date plus a reasonable amount extra for one-off expenditures.

Again an Excel spreadsheet incorporating a pessimistic guesses of inflation and investment return can help.

Since you always have the backstop of the guaranteed income from pension date you can afford to look at higher risk/higher return investments in your ISAs. Also you can move the wealth balance more to your wife by filling her ISA allowance first.

atush

Is your mtg paid off? what is the rate?

benalder284

No mortgage - paid off

kidmugsy

Is either of you a higher rate tax payer? Does either of you have access to making pension contributions by salary sacrifice?

benalder284

Both higher rate tax payers; no access to salary sacrifice

jamesd

Does she also want to retire early? Say at 55 if you can manage that? Or otherwise at the same time as you?

Given the age difference it looks best to favour pension for you, using any pension that can be taken from age 55. Or whatever later age you might pick. If the LGPS won't let you take the pension at the age you want, this'll be needed to let you stop work before the LGPS lets you. Or perhaps to live while you wait until the LGPS reduction for taking it early falls to a tolerable level.

For a personal pension the GAD limit restricts how much you can take out. That means that you are likely to need substantial ISA investments that you can draw on before you can take pension income.

For her, the need for ISA money or income from your pension would be even greater because if she's trying to retire at the same time as you that is likely to be well before she can get at her own pension money.

Picking the time and planning for it is crucial here because that helps you to know the split of tax wrappers between pension and ISA.

Later, you'll probably have more than £20,000 in work and state pensions and if so you'll be able to use Flexible Drawdown. That lets you take as much as you like out of any personal pension, taxed as normal income. From the numbers you'll qualify for this as soon as you take the final salary pension, unless it's actuarially reduced for taking it early.

For your wife it's worth thinking about the higher rate tax relief. Can you afford to use all of your own higher rate income for pension contributions? If not, using her income to let you fully use your higher rate money on pension contributions is probably best because you can get at this money faster. Her pensions won't be available until much later so they don't help the early retirement goal for both of you at the same time, if you want that.

For both of you, trying to fully use your S&S ISA allowance each year looks like a good idea, but that comes after fully using your own higher rate tax band for pension contributions.

Working out when she wants to retire and if she wants to do it at the same time as you or wait until age 55 when she can get at pension money is a key question here. That'll help to set the range of available retirement times for you.

atush

In 3 years it seems your FS pension will top 20K per annum. So anything you put into a PP from now on will qualify for flexible DD. Great. How much should you put in? Well at least enough to take you out of HRtax. You could then invest any spare in S&S ISAs.

Same for your OH. As a HRtaxpayer, she should put enough additional into her pension to take her out of HRtax. Then save into S&S Isas if she likes, or additonal pension as she seems to have less provision that you do.