I think we've been naive, still time to rectify?

Fancy_China

Hello,

My husband started a personal pension 13 years ago (aged 26) when he earned about £19,000 pa. He paid in £100 per month and that figure has never changed.

Fast forward to now, he now earns £54,000 pa. We haven't really thought about his pension as we have been busy over paying our mortgage, which should be complete in 2 years.

Now we are both 40, we have been starting to look further than just having the mortgage cleared, so I looked at his latest pension statement and it says his pension fund might be worth £93,600 or £2690 pa. Compared with the previous statements these figures have reduced from a max of £110,00/£4210, but I guess that's due to the economic climate.

I'm not sure what I was expecting, but I guess it was a lot more than £2690 pa!

From a quick look at the pension info on this site I now realise we have to tell his pension company he is a higher tax payer.

Is the situation rectifiable without crippling us until we're 65?

In case you're wondering, I'm more fortunate in that I have a company defined benefit pension which is projected to be worth about £15k pa.

Any thoughts gratefully received!

xylophone

http://www.hmrc.gov.uk/incometax/relief-pension.htm

"You pay Income Tax on your earnings before any pension contribution, but the pension provider claims tax back from the government at the basic rate of 20 per cent. In practice, this means that for every £80 you pay into your pension, you end up with £100 in your pension pot. If you pay tax at higher rate, you can claim the difference through your tax return or by telephoning or writing to HMRC. If you're an additional rate taxpayer you'll have to claim the difference through your tax return."

http://www.friendslife.co.uk/doclib/mpen15c.pdf

He should have been increasing his pension contributions as his income grew.

CLAPTON

well, if he has paid in 100 pm for 13 years then he has paid 15,600 in total so if it is worth 93,000 then that is truely amazing;

however its more likely that the 93,000 is the estimated value assuming he contributes for the next 20 years or so


the fact of the matter is that a annunity rate of round 3% per annum of the capital is reasonable depending up the assumptions made;
so for 93,000 around 93,000 x 3% = 2700 per annum is reasonable

if he wants a higher income in retirement he nees to increase his savings rate by a very significant amount.


assuming he is paying the pension contributions out of taxed income and as he is a 40% tax payer he needs to contact HMRC asap and provide details of how much he is paying (and details of the last few years too)

Fancy_China

CLAPTON wrote: »

well, if he has paid in 100 pm for 13 years then he has paid 15,600 in total so if it is worth 93,000 then that is truely amazing;

however its more likely that the 93,000 is the estimated value assuming he contributes for the next 20 years or so

Yes, that's right, it's an estimated value.

He's only recently earned enough for higher tax rate, so we will be contacting the tax HMRC asap.

Thanks for your comments - I think all our mortgage payments may go straight to pension payments!

jamesd

£2690 is 2.87% so that means that the income they are quoting is for a pension that will increase for life. Probably also includes pension for a spouse after death. Growth projections were recently lowered and are now quite pessimistic so that will have reduced the estimated value at retirement as well.

He must tell HMRC the amount that is added to the pension each year, including the tax relief added by the pension company (also tell them his net payment). HMRC will then adjust his tax code to give him the higher rate tax relief. The pension company does none of this. If he doesn't tell HMRC then he'll only get basic rate tax relief. He can tell HMRC about past years but there is a limit to how far back they will go, only a few years.

The annuity rate is based on the current low rates, depressed by ow interest rates and fiscal easing. They are likely to improve a fair bit before he retires. It's also not necessary to buy an annuity. He can use income drawdown instead. That can produce an income in the 4-6% a year range and have decent inflation provision.

It's also good to consider possible early retirement, Personal pension income can be taken from age 55. It can be boosted by income and/or capital from S&S ISA investments. It can also be increased by drawing on a mortgage then repaying the mortgage drawings from the state pensions when those start. That all has the effect of producing a more level income from retirement until the start of the state pensions.

Putting all of the mortgage payment money into a pension would miss some other serious issues, like how you're going to live if he becomes unable to work or just can't get work for some reason long term. Pension is best for retirement income but the age and income limits from it make S&S ISA more suitable for this need. It's a shame you've been overpaying your mortgage, though. You could instead have a nice and profitable fund to provide for this sort of thing and early retirement.

atush

Bascially, he did well starting when he did and how much he was paying in.

but in the last few years with mtg rates so very low, he should probably have been putting that mtg overpayment into the pension. So stop overpaying ASAP.

At his rate of tax, and not counting employers contributions (what do his employers pay?) every 100 that goes into his pension costs you/him only 60. 80 from his salary that gets grossed up to 100, and he gets 20 off his tax.

Fancy_China

atush wrote: »

(what do his employers pay?).

His employers pay nothing as its a personal pension with Royal London that he set up himself. We're looking into whether his employer should offer a pension, but even if they should, we know they won't be keen (another thread altogether!)

We thought we were being so smart overpaying our mortgage, and with less than 2 years to go, it seems a shame to not follow through, however, we will look into all the options posted.

Thank you for taking the time to read and comment.

bigadaj

The company will have to start a pension scheme in the next few years, the exact date is determined by the number of employees.

It's not a bad thing yo pay down your mortgage, and people's priorities and preferences vary. I used my isa allowances initially, then paid off mortgage and then whacked up contributions to pension.

There've plenty of pension calculators online to give an indication of what you might get from varying levels of contributions, the old rule of thumb is half your age in percentage terms, which would need him to contribute £10k a year. This sounds like a lot but would make sense at his salary level as his net contribution would only be £6k due to tax relief. You don't say if you have kids but if you do then pension contributions also reduce salary assessed for child benefit which would reduce the cost even further.

Fancy_China

bigadaj wrote: »

You don't say if you have kids but if you do then pension contributions also reduce salary assessed for child benefit which would reduce the cost even further.

Yes we do have a child. We're still receiving child benefit, even though I am not sure if we should, so I put it in a separate savings account each month, in case we have to pay it back.

jamesd

bigadaj wrote: »

It's not a bad thing yo pay down your mortgage, and people's priorities and preferences vary. I used my isa allowances initially, then paid off mortgage and then whacked up contributions to pension.

Well, other than it making you poorer than not doing it but investing the money instead.

Paying off a mortgage is good for those with the lowest risk tolerances who won't even use investments, including investments in a pension. For others, it loses investment gains that are almost always greater than the amount of saved mortgage interest.

It's still fine as part of a mixture and some people will just prefer it even though it's not optimal from the point of view of making you better off overall. Some just want it gone and don't see having enough money in investments to pay it off at any time as better - more flexible and better growth - than having no mortgage.

Personally, I'd be happy to have a mortgage on the day I die rather than having dead money tied up in equity in a property.

bigadaj

jamesd wrote: »

Well, other than it making you poorer than not doing it but investing the money instead.

Paying off a mortgage is good for those with the lowest risk tolerances who won't even use investments, including investments in a pension. For others, it loses investment gains that are almost always greater than the amount of saved mortgage interest.

It's still fine as part of a mixture and some people will just prefer it even though it's not optimal from the point of view of making you better off overall. Some just want it gone and don't see having enough money in investments to pay it off at any time as better - more flexible and better growth - than having no mortgage.

Personally, I'd be happy to have a mortgage on the day I die rather than having dead money tied up in equity in a property.

We're all different James. There are many unhappy millionaires etc. also whilst investements are probabilistically the best way to go, based ona century worth of data there is no guarantee. And as I've pointed out before in probability terms the current base rate would be seen as a near impossibility a decade ago, based on three hundred years worth of data.