Is my pension strategy sound?

ukjoel

I am 38 and currently have.

-A Frozen final salary one paying £6k a year inflation linked.
-50k of contributions earned since leaving the FS company.

Current employer pays 15% non contrib on basic (£6k) and I add to this with 15k a year through salary sacrifice. This is all benefiting from 40% back from the taxman (plus 11% national insurance back from my company)

My logic has always been that the combination of tax back, plus NI payments, make this a no brainer. We also picked up child tax credits (back on childcare) as a result which made it even better.

Kids now at school so tax credits have stopped.

My concerns are with goalposts being moved again and wondered whether putting all my eggs in the pension basket is wise.

I worry that at some point the tax rebate on pensions will be adjusted to one level so want to fill my boots while i can.

I know there is a 1.2 million cap on lifetime pot and had planned to continue with my current strategy until 50. At this point I would just use the company contribution, and existing fund growth to let it ride to the cap and retire either when it hit the cap or when I decided I was getting to old for it all.

At 50 I planned on putting more into ISA's once I knew the pension was at a comfortable level and would get close to max limit.

I wondered if there were any tricks I might be missing, or opportunities I should be looking at?


Thanks in advance.

AlwaysLearnin

A 40% tax lift with 2% and 11% personal and company NI returns is a very attractive proposition.

I'm not sure the lifetime allowance is too much of an issue as it stands though. I make it that you're currently at £170k (£6k DB x 20, plus the £50k), so plenty left. A 15% company contribution amounting to £6k makes £40k too (i.e. under the 40% tax bracket), so wasn't too sure how the numbers for current contributions worked. I'll confess to a rather fuzzy head this morning though, so could easily be missing something obvious!

Are you also saving outside of the pension? That would give added flexibility and potentially helps to mitigate against a certain amount of pension meddling.

In short it looks like a pretty good deal, but the usual rules apply of spreading things around so that all of your eggs aren't in just one basket.

jamesd

Assuming you use income drawdown, the pension pot will probably continue to increase to a value above the cap because the GAD limit is unlikely to allow you to withdraw enough to stay below it. At present at age 55 it's perhaps 3-4% a year too low for the value to be stable below the cap. So you should plan for at least ten years of that sort of growth before you're able to take out enough to stop the growth.

What that implies is that you're going to need to arrange to have your pension pot value well below the cap at both 55 and the time you retire.

You might want to consider some use of VCTs. The income from those is tax free and there's no capital gains tax (though for many gains are unlikely because they try to pay out all gains). There's 30% tax relief capped at the amount of income tax you actually pay in the year, paid by a refund from HMRC when you send proof of investment. You have to repay that if you sell within five years. You can sell after five years and recycle to get another 30% tax relief.

It appears that your non-basic pay is around £16,000 a year because the non-contributory 15% takes you to about the higher rate point. If it's significantly less or more than this there may be a problem with the numbers.

fizio

If it helps I am doing something similar, in order or priority
1. Maximum salary sacrifice into uk, ww, bond funds
2. Maximim S&S ISA into tracker and high dividendetf's
3. SIP for non working spouse
4. VCT

I also have a couple of properties for diversification

ukjoel

The concern with hitting the cap was based on not being 100% sure how the final salary pension is valued. As it is interest linked and also provided a spouse pension of 50% I think it could be worth 150-200k (based on the cost an annuity providing the same terms).

I am not sure how they are calculated as part of the 1.2 mill limit. If anyone could clarify I would appreciate it.

However If we assume its worth a combined 170k, then I would hope it would double and double again over 27 years (till I hit 65) which would lift it to £680k.

If I am also putting in 276k over the next 12 years (mine and company contributions) (and that also doubles over the following 15 years to £552k) That would make a total of £1232k at age 65.

This assumes I stop paying into pension completely at age 50.

The likelihood is I will continue to pay in but reduce the retirement age down from 65 in order to avoid going over the limit.

To clarify the 40k and 15% anomaly which you spotted - the 15% is paid on basic, however bonuses and P11d are taken into account for tax purposes and can be a significant amount.

Part of my gamble with salary sacrifice (which I don't like) is I have to fix it at the start of the financial year and guess what my bonuses will be for the year.

Cheers,

ukjoel

Thanks again - Original response was to alwayslearning and between typing and pressing 'send' a couple of very good other postings for me to investigate. JamesD - pretty much spot on with your salary calculations.

Also thanks for confirming my worries re hitting the CAP. The last thing I want to do is fall over that cliff and have all the hard work undone. I will definitely do some investigating into VCT's.

Haf 63 - Presuming you were born in 63 your at the age I will be when I planned to pull back heavily on pension and diversify. ISA's and spouses SIP were on my list of considerations (probably ISA's more so than SIP) but again VCT is something you both mention so I will get onto that over the xmas break.

Looks like current strategy is good for short to medium term but will be mindful of ensuring a better long term spread.

Many thanks

atush

Your spouse has a full PA to use in retirement. If they don't currently work or have a pension- starting one one now (not later) should be a priority.

Even if you stick to basic 2880 per year contribs which are grossed up to 3600. ISAs are important, esp if you plan to retire early, but they don't use up any PA so getting max tax free income using both PAs available should come first.

AlwaysLearnin

ukjoel wrote: »

I am not sure how they are calculated as part of the 1.2 mill limit. If anyone could clarify I would appreciate it.

It is calculated by applying a multiplier of 20 to the pension payment amount:

http://www.hmrc.gov.uk/pensionschemes/understanding-la.htm#1

http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm11104220.htm

...over 27 years (till I hit 65) ...

That would make a total of £1232k at age 65.

This assumes I stop paying into pension completely at age 50.

the lifetime allowance amount will presumably also be variable in that time too. You look to be aware of the main factors to keep your eye on the position over time though.

Part of my gamble with salary sacrifice (which I don't like) is I have to fix it at the start of the financial year and guess what my bonuses will be for the year.

Not ideal, but I can see how the NI saving makes it attractive still.

jamesd

ukjoel wrote: »

I am not sure how they are calculated as part of the 1.2 mill limit.

I suggest that you use a significantly lower limit, perhaps one million, perhaps £750,000.

Their most recent Liberal Democrat party proposal is a lifetime allowance of £1 million which was described as only affecting the wealthy. The allowance was £1.8 million until the cut to £1.5 million in 2012 and the planned £1.25 million in April 2014. Assuming a 3% RPI annuity rate some cap levels are equivalent to income of these values, assuming no lump sum is taken:

£1.8 million: £54,000
£1.5 million: £45,000
£1.25 million: £37,500
£1 million: £30,000
£750,000: £22,500

With one million already described as only affecting the wealthy, even though it's only enough to buy a guaranteed RPI annuity income of £30,000 a year, that does not bode well for the limit remaining even at a million.

It's unfortunate that the Liberal Democrat party is undermining the use of pensions for retirement income planning even for those who might want an average working level income in retirement but we have to live with that. At least it's better than their past proposals as recently as the last general election.

Use of other tax wrappers is one way around such legislative risks. You can also take benefits at 55 to get a lifetime allowance test then and withdraw money as the highest permitted rate so you are less likely to be over the later tests, like the one at 75. Market timing can also help if you do it at a time when values are reduced.

ukjoel wrote: »

Part of my gamble with salary sacrifice (which I don't like) is I have to fix it at the start of the financial year and guess what my bonuses will be for the year.

Nothing in the regulations relating to salary sacrifice requires this for pension contributions. Specifically:

1. It is entirely acceptable to have an employer pay in a bonus or any other variable amount or some percentage. My employer has this as a checkbox option.
2. It is entirely acceptable to change the pension part of a salary sacrifice at any time during a year. My employer accepts this, say to use all of my higher rate income, and specifically agreed to me making a change mid year for this purpose.

There used to be a rule limiting changes in the pension part (except for bonuses and such) to just once a year except due to life events. that rule prohibited the use of salary sacrifice for auto-enrolment, which mandates the ability of an employee to opt out at any time, so HMRC changed the rule in the summer of 2012.

The restrictions for non-pension contributions remain in effect.

It may be worth discussing these things and the change in HMRC rules with your employer, since increased use of salary sacrifice can save them more money at low cost if employees can use it more flexibly in the ways I've described.

ukjoel

That's great thanks. I have added the 20 x multiple to my calculator.

Am also very mindful of any changes that could come into the 1.2 million limit. The way the maximum annual tax free payments you could make have been reduced from unlimited down to 50k in such a short space of time was a real statement of intent.

Once I am 55 then I can always retire early if that change happens but its years 45-55 which terrify me as your money is committed and your too young to retire.

I hadn't considered my wife's PA and I should. She is well qualified but spurned the high earning potential of her job to focus on an element she loves but pays far less. I feel confident she will be able to put enough away to ensure she maximizes her tax free allowance.

I will query the salary sacrifice flex with my company. They do have the major life changes rule and the wording you use is almost identical to theirs so I suspect they are continuing with the current once a year rule due to admin simplicity. I will ask if they can review this.

Will definitely continue with the pension over payments and keep a close eye on these boards. Feel the pensions board is definitely the most informative.

Thanks once again

greenglide

ukjoel wrote: »

I will query the salary sacrifice flex with my company. They do have the major life changes rule and the wording you use is almost identical to theirs so I suspect they are continuing with the current once a year rule due to admin simplicity. I will ask if they can review this.

My employers flex scheme requires us to specify the level of "benefits" in November / December to be used in the following year (so I will be setting my contributions soon) but there is also a point in March when we can change the level of pensions contributions (both %age for DB scheme and contributions of DC scheme).

Your employer may do the same?