what to do with cashed in pension?

clive_e

Hi I'm 33 and currently work in Australia.

Early next year im returning to the UK and am entitled to cash in my pension contributions ('super') here (around $16,000). After tax this will leave around $10,000 which when transferred back to the UK with give me around GBP5,700.

I think because the high dollar is largely offsetting the australian tax liability of 35% this is a no brainer to do so long as the exchange rate remains at around 1.8.

So i would then have GBP 5,700 tax free (tax already paid in oz) which i would like to 'put towards my retirement'

I have a uk pension but since the no tax is payable on this amount the tax relief pensions offer is not applicable.

so should i just pay off some of my mortgage because this saving in interest is effectively 'growing' my money at a risk free guaranteed 4%?

Any thoughts?

jamesd

Don't expect the exchange rate to remain stable. The Ozzie is a natural resources currency and you can expect it to increase or decrease in value in part due to the regional demand for coal and iron ore. So think about that demand if you want to try to work out what will happen to the exchange rate. Then think of UK monetary policy, particularly the potential end of fiscal easing and normalising of interest rates here. I'd say that there's a fair chance that you will end up gaining from foreign exchange movements over the next two to five years and the two effects might offset eachother a fair bit.

4% isn't a very good investment return. The long term average for the main UK market is about 5.2% plus inflation, around 8-9% total. But you might be able to do better than that if you have a loan to value above 75%. Then you can potentially remortgage to lower LTV and save interest on the whole mortgage balance, not just the extra amount of equity. But I'm assuming a UK mortgage, don't know the Australian mortgage market if that's where it is.

I'm puzzled by your statement that no tax is payable and that somehow affecting the tax relief that pensions offer. In the UK you get the tax relief when you pay in the money. Depending on your income tax rate, whether it's a salary sacrifice scheme or not the tax relief can be anything from nil (not common), 20% (most people earning up to around £40,000), 40%, 45% and higher, well into the 60% and maybe over 100% in some cases for specific income ranges and circumstances.

clive_e

jamesd wrote: »

I'm puzzled by your statement that no tax is payable and that somehow affecting the tax relief that pensions offer. In the UK you get the tax relief when you pay in the money. Depending on your income tax rate, whether it's a salary sacrifice scheme or not the tax relief can be anything from nil (not common), 20% (most people earning up to around £40,000), 40%, 45% and higher, well into the 60% and maybe over 100% in some cases for specific income ranges and circumstances.

To clarify (hopefully) my thoughts were that if you have GBP5,700 net from uk wages that would have been about GBP8000 gross which, due to tax relief on pensions, would have all been payable into a pension under those cirsumstances. However in this instance I've already paid tax on the amount to extract it from australia so no tax would be due in the uk (double taxation agreement between countries) so i've already lost the main appeal of putting money into a pension in the uk. For that reason i thought that the money would be best served paying of some of my mortgage.

I dont want to leave the money in Australia because it will be worth about $20 a week in 30 years time as a pension and it seems a waste

jamesd

Ah, that explains it. That won't have any effect at all on whether you're eligible for tax relief in the UK. If you pay the £5,700 net into a UK pension as a basic rate tax payer and have at least that much earned income in the UK in that tax year you will get tax relief on the £5,700. If you did it into a UK personal pension the pension provider would add 25% to what you paid in automatically to get you the basic rate 20% tax relief.

clive_e

jamesd wrote: »

Ah, that explains it. That won't have any effect at all on whether you're eligible for tax relief in the UK. If you pay the £5,700 net into a UK pension as a basic rate tax payer and have at least that much earned income in the UK in that tax year you will get tax relief on the £5,700. If you did it into a UK personal pension the pension provider would add 25% to what you paid in automatically to get you the basic rate 20% tax relief.

Ah I see so if I wait until I'm a tax payer again ill actually get the tax equivalent back on this amount that certainly makes it tempting to do that rather than simply paying off mortgage, that you so much for the advice

kidmugsy

clive_e wrote: »

Ah I see so if I wait until I'm a tax payer again ill actually get the tax equivalent back on this amount that certainly makes it tempting to do that rather than simply paying off mortgage, that you so much for the advice

If the chance arises, put the £5700 into an ISA and hold it until you are a higher rate taxpayer or have some other feature of your job that makes pension contributions especially appealing, then withdraw it and put it into a pension.

Or, if your mortgage is the sort where you can overpay and then borrow it back again later, use the mortgage as a place to store the funds until a good moment arrives for making a pension contribution. Another possibility would arise if £5700 happened to be enough to reduce your mortgage's LTV through some important threshold, such as 75%, or 60%. Then using it against the mortgage could be very profitable.

clive_e

kidmugsy wrote: »

If the chance arises, put the £5700 into an ISA and hold it until you are a higher rate taxpayer or have some other feature of your job that makes pension contributions especially appealing, then withdraw it and put it into a pension.

Or, if your mortgage is the sort where you can overpay and then borrow it back again later, use the mortgage as a place to store the funds until a good moment arrives for making a pension contribution. Another possibility would arise if £5700 happened to be enough to reduce your mortgage's LTV through some important threshold, such as 75%, or 60%. Then using it against the mortgage could be very profitable.

I'm already at 40% LTV so no better deal at this stage and its tenanted whilst i'm abroad so if i remortgaged it would be a BTL (currently residential with letting consent)

I usually do just scrape into the higher tax level when working in the uk so that sounds like a plan :j

FatherAbraham

clive_e wrote: »

Early next year im returning to the UK and am entitled to cash in my pension contributions ('super') here (around $16,000). After tax this will leave around $10,000 which when transferred back to the UK with give me around GBP5,700.

Entitled to cash in, maybe. But what future benefits would you be giving up if you did that?

More precisely, why isn't it a good idea to just let the contribs roll up inside the Australian scheme until retirement, and you draw on it? Doesn't that provide good tax deferral/avoidance?

Warmest regards,
FA

jamesd

The payment of capital gains tax on investments within Super makes it preferable to be in a UK pension fund instead for long terms. This includes CGT charges on transactions made by the funds themselves, charged each year as they happen, with the CGT rate depending on how long the investment was held before sale. Like the US, a higher rate for holdings of less than a year which taxes active management more than passive.

clive_e

jamesd wrote: »

The payment of capital gains tax on investments within Super makes it preferable to be in a UK pension fund instead for long terms. This includes CGT charges on transactions made by the funds themselves, charged each year as they happen, with the CGT rate depending on how long the investment was held before sale. Like the US, a higher rate for holdings of less than a year which taxes active management more than passive.

And from a practical point of view I'm british and have no right to remain the Australia. Since its a small amount of money it's unlikely to generate any substantial income in retirement and what it does will have to be moved internationally incurring fees etc