Buying Extra Pension or not?

Aquamarina

I have 15 years to retirement, my husband has 10. My husband has two old occupational pensions which will pay about 3k each and a pot of 35k in a Standard Life pension to which no more is currently being added. My pension is Civil Service Classic which is predicted to pay out just over 9k when I retire plus lump sum. We have 85k to invest. The mortgage is almost paid (hopefully clear it in the next 18 months). ISAs are maxed out for this year. I am considering the following options:

1. Spend 14k this financial year on added pension (gives £880+CPI/year + 2k lump sum) and 14k each year over the next few years (this is the max I can pay in)
2. Open SIPP for husband (higher tax payer)
3. Open investment account and buy more trackers
4. Buy to let (conservatively assuming 4k income per year)

I understand the benefits of tax relief on a SIPP but I am concerned about the low annuity rates. The added Civil Service pension doesn't seem like a great deal but it is guaranteed and should I die my husband would continue to receive a pension from it. Option 3 gives us more financial flexibility. Option 4 would give us regular income but I am fully aware of the pitfalls of buy to let and I'm not really sure that I could commit the time to this at the present.

Any input would be really useful as the cash is sitting in a 2.5% account which in February will reduce to 0.5% and not much prospects of any decent savings rates for the foreseeable future.

Many thanks,

Aquamarina x

kidmugsy

Aquamarina wrote: »

My husband has two old occupational pensions ... and a pot of 35k in a Standard Life pension to which no more is currently being added. ... I am considering the following options:

1. Spend 14k this financial year on added pension (gives £880+CPI/year + 2k lump sum) and 14k each year over the next few years (this is the max I can pay in)
2. Open SIPP for husband (higher tax payer)

Do you mean that your husband pays 40% tax but isn't contributing to a pension? Batter him around the head with a butterbox and then explain to him that he need never buy an annuity but will be able to use income withdrawal instead.

As for option 1 vs option 3, I suppose it depends on how happy you are to tie up the money inaccessibly in a pension, and how happy you are with your current prospective incomes in retirement. Option 4 wouldn't appeal to me, but then I would bring no relevant skills as lawyer, electrician, plumber or whatnot. Maybe one of you two would.

Aquamarina

Thanks for the reply kidmugsy. I love the idea of battering DH around the head with a butterbox. :rotfl: He actually only stopped contributing to the Standard Life one in February due to redundancy. Would it be better to transfer this into a SIPP, or keep it there and open a SIPP as well, or see if he can still contribute to the Standard Life one.

Thanks,

Aquamarina x

FatherAbraham

Aquamarina wrote: »

Any input would be really useful as the cash is sitting in a 2.5% account which in February will reduce to 0.5% and not much prospects of any decent savings rates for the foreseeable future.

If you need to hold cash, then you should hold cash, even if doing so costs you money. If you don't need to hold cash, then the money should've been invested into longer-term better returns. What I'm saying is that a change to cash-return rates shouldn't have an affect on your asset-allocation decisions.

Aquamarina wrote: »

I have 15 years to retirement, my husband has 10. My husband has two old occupational pensions which will pay about 3k each and a pot of 35k in a Standard Life pension to which no more is currently being added. My pension is Civil Service Classic which is predicted to pay out just over 9k when I retire plus lump sum. We have 85k to invest. The mortgage is almost paid (hopefully clear it in the next 18 months). ISAs are maxed out for this year. I am considering the following options:

1. Spend 14k this financial year on added pension (gives £880+CPI/year + 2k lump sum) and 14k each year over the next few years (this is the max I can pay in)
2. Open SIPP for husband (higher tax payer)
3. Open investment account and buy more trackers
4. Buy to let (conservatively assuming 4k income per year)

I understand the benefits of tax relief on a SIPP but I am concerned about the low annuity rates. The added Civil Service pension doesn't seem like a great deal but it is guaranteed and should I die my husband would continue to receive a pension from it. Option 3 gives us more financial flexibility. Option 4 would give us regular income but I am fully aware of the pitfalls of buy to let and I'm not really sure that I could commit the time to this at the present.

Briefly, and possibly controversially:

• Directly holding real estate as an investment is inflexible, time-consuming, risky, and can be highly tax-inefficient (who pays capital gains tax? Property speculators!) -- and these downsides are not adequately compensated for by the expected returns.
• Not paying into a pension whilst a higher-rate tax-payer is financially illiterate
• Annutiy rates are not "low", they merely represent the cost of guaranteed income for life. They're not going to get substantially better, ever.
• Tax relief is given on pension funds, not just SIPPs. Personal pensions and stakeholders also qualify. The benefit of a SIPP compared to those would probably lie in the annual costs being lower.
• ISAs can be a terrible long-term tax trap for higher-rate tax-payers, since they lock in having paid 40% tax on the income, compared to pension funds. Investing/saving in an ISA whilst paying 40% tax, then drawing on those funds when poorer and only paying 20% tax is a good way to destroy wealth.

You haven't said how far away retirement is, but I'd suggest you start to look at how fast you can pump money through the higher-rate-tax-payer-pension-tax-relief-wealth-generation machine before having to (or wanting to) stop working.

Warmest regards,
FA

atush

1,2

but you do need to hold cash as well as S&S isas.

Aquamarina

Thank you for your words of wisdom FatherAbraham. We don't need to hold this as cash, maybe just a small emergency pot. I will look into setting up a SIPP for my husband. Do you think it is worth paying extra into my Civil Service pension or should I just take advantage of the tax relief on the SIPP?

Aquamarina x

Aquamarina

atush wrote: »

1,2

but you do need to hold cash as well as S&S isas.

We only need an emergency pot of cash and we have this in cash ISAs. Does option 1 represent good value?

Aquaarina x

jamesd

Your husband is ten years from retirement? Does this mean he's already 55 or older and has immediate access to money in pension pots?

If so, he can do nice things like paying money into a pension then after accumulating sufficient pot size, going into capped income drawdown and taking a 25% tax free lump sum. Then he can recycle the drawdown income into more pension contributions to get a second lot of tax relief on the same money. Lump sum recycling, subject to some limits, is also available, no limits if it's recycled into pension contributions for you instead of him.

Does your husband happen to be in a job that allows pension contributions by salary sacrifice, where even basic rate tax payers can get 33% or higher tax relief, courtesy of saving the employer NI. If he is then running the money through that scheme seems particularly sensible. He should check arrangements for transferring out to go into drawdown, though, just to be sure it's allowed. And check that he can continue to make new contributions after doing it.

Annuity rates are depressed at the moment in part due to fiscal easing. They may well improve after that ends. But with income drawdown available it's not necessary to focus solely on annuity rates.

Option 1 is buying income at about 3.2% of the capital cost, after allowing for fifteen years of growth at 5% over inflation on that capital. That's a reasonable to good rate. But better to first run the money through your husband's pension, bearing in mind the limitation of being able to take out only 25% of the pension capital, which will be more than 25% of the net cost, due to the tax relief.

Some use of BTL isn't a bad idea but do be sure that you finance it sensibly, buying with a deposit and mortgage, with the mortgage secured on your own property, not the BTL one at the more costly BTL interest rates. This deposit can be a potential use of lump sum money from your husband's pension pot. The deductibility of mortgage interest doesn't depend on the property that the loan is secured against.

colalba

If your husband's Standard life pension is a personal pension plan or stakeholder there is probably an option to continue to pay into it rather than open a new sipp. If it was via a large employer or IFA they might have negociated reduced annual charge (expressed as an annual rebate probably) so it might be cheaper. You will have to check the original documentation or contact them to find out.

At least some of their plans have a large fund rebate of 0.2% if you have a fund over £50k so you'd just about be there with your £14K if that is the case on your plan. I am not particularly recommending this but just something to consider.

If you particularly wanted a SIPP, perhaps because you'd probably get better online info for example, you could just put in enough to get over the £50K you would get the fund rebate each year from then on. Ok only a small amount but better in your hand that theirs.

Aquamarina

jamesd wrote: »

Your husband is ten years from retirement? Does this mean he's already 55 or older and has immediate access to money in pension pots?

If so, he can do nice things like paying money into a pension then after accumulating sufficient pot size, going into income drawdown and taking a 25% tax free lump sum. Then he can recycle the drawdown income into more pension contributions to get a second lot of tax relief on the same money. Lump sum recycling, subject to some limits, is also available, no limits if it's recycled into pension contributions for you instead of him.

Does your husband happen to be in a job that allows pension contributions by salary sacrifice, where even basic rate tax payers can get 33% or higher tax relief, courtesy of saving the employer NI. If he is then running the money through that scheme seems particularly sensible. He should check arrangements for transferring out to go into drawdown, though, just to be sure it's allowed. And check that he can continue to make new contributions after doing it.

Annuity rates are depressed at the moment in part due to fiscal easing. They may well improve after that ends. But with income drawdown available it's not necessary to focus solely on annuity rates.

Option 1 is buying income at about 3.2% of the capital cost, after allowing for fifteen years of growth at 5% over inflation on that capital. That's a reasonable to good rate. But better to first run the money through your husband's pension, bearing in mind the limitation of being able to take out only 25% of the pension capital, which will be more than 25% of the net cost, due to the tax relief.

Some use of BTL isn't a bad idea but do be sure that you finance it sensibly, buying with a deposit and mortgage, with the mortgage secured on your own property, not the BTL one at the more costly BTL interest rates. This deposit can be a potential use of lump sum money from your husband's pension pot. The deductibility of mortgage interest doesn't depend on the property that the loan is secured against.

Thanks jamesd, there is lot to think about in your reply. My husband is 50 and would like to retire at 60 if at all possible. Currently he is not able to pay into a company pension as he is contracting.

Aquamarina

colalba wrote: »

If your husband's Standard life pension is a personal pension plan or stakeholder there is probably an option to continue to pay into it rather than open a new sipp. If it was via a large employer or IFA they might have negociated reduced annual charge (expressed as an annual rebate probably) so it might be cheaper. You will have to check the original documentation or contact them to find out.

At least some of their plans have a large fund rebate of 0.2% if you have a fund over £50k so you'd just about be there with your £14K if that is the case on your plan. I am not particularly recommending this but just something to consider.

If you particularly wanted a SIPP, perhaps because you'd probably get better online info for example, you could just put in enough to get over the £50K you would get the fund rebate each year from then on. Ok only a small amount but better in your hand that theirs.

Thank you for this information. I'll check through the Standard Life documentation tomorrow.

Aquamarina x