Working out what we need and how far away we are...

Temrael

Cheers Kid, I did register at the FT and try reading that blog, but sadly it surpassed my reading level a little.

Our plan though would be to (as we get a little closer to retirement) move funds from our current more speculative funds to bonds and things. Hopefully that helps mitigate the risks Mr. Smithers is talking about there? Let me know if not though and you think there's anything else we ought to think about.

Just going back to something you said in your first post...

In your shoes, if I were the beneficiary of salary sacrifice contributions, I'd exploit them to the max

...presumably there would be a big tax advantage to me making max salary sacrifice contributions? This would be materially better than DW making the same contribution and getting the tax relief presumably due to the NI saving?

I can't change my current amount (25%) again until next April now anyway so I'm just thinking ahead but the only limit is I can't go below minimum wage so there is certainly scope to massively increase that. The alternative being to up my wife's pension contributions or throw lots into NISAs.

Divorce etc. aside, would this cause us problems later though, i.e. if so much of our retirement funds was only in my name? Presumably I can't then take that accrued fund and buy two annuities out of it (one for me and one for her)?

What do people tend to do? Just get a single joint/guaranteed annuity? Or not bother and just draw down from the fund directly?

Sorry for all the questions,

greenglide

...presumably there would be a big tax advantage to me making max salary sacrifice contributions? This would be materially better than DW making the same contribution and getting the tax relief presumably due to the NI saving?

Your salary sacrifice contributions are worth more than you wife's if she cannot use salary sacrifice.

I can't change my current amount (25%) again until next April now anyway so I'm just thinking ahead but the only limit is I can't go below minimum wage so there is certainly scope to massively increase that. The alternative being to up my wife's pension contributions or throw lots into NISAs.

ISAs generally are for different things but you can, of course, do both.

Topping up your wife's pension is always a "good idea" and you always want to maximise employer contributions.

Divorce etc. aside, would this cause us problems later though, i.e. if so much of our retirement funds was only in my name? Presumably I can't then take that accrued fund and buy two annuities out of it (one for me and one for her)?

This depends on the strategy taken. If in drawdown a surviving spouse can inherit the complete pot, tax free, into their own pension scheme.

You cannot buy an annuity on someone elses life from your pension. You can, of course, have it on joint lives but starts to become expensive and nobody knows what the annuities market will be like then and whether annuities have withered and died?

atush

It would be a disadvantage, if your wife's fund did not provide enough to use her Personal allowance each year. While next year there will be a facility to transfer 1K of PA to a spouse, that isn't much.

So whacking in as much as Possible to hers, when you can't add more like this year is an excellent idea.

Temrael

greenglide wrote: »

Your salary sacrifice contributions are worth more than you wife's if she cannot use salary sacrifice.

Cheers for that.

Just to check my understanding, as I struggle a bit with this stuff...

Ignoring 40% limits etc. for now, if I compare paying in £100 into my pension under a salary sacrifice arrangement vs. DW paying in £100 into her pension (after pay) would the difference in how much it costs vs. how much ends up in the pension be just the NI saving gained through salary sacrifice? (Though that's obviously not to be sniffed at.)

As whilst I bypass income tax due to the salary sacrifice, DW has tax relief added which amounts to the same thing?

Is that right?

kidmugsy

Temrael wrote: »

Our plan though would be to (as we get a little closer to retirement) move funds from our current more speculative funds to bonds and things.

That makes sense if your plan is to buy an annuity. But if you plan not to, or to defer doing so until you're 75 (say), then different measures might be called for. See Wade Pfau's blog.

kidmugsy

Temrael wrote: »

...presumably there would be a big tax advantage to me making max salary sacrifice contributions? This would be materially better than DW making the same contribution and getting the tax relief presumably due to the NI saving?

What matters is the difference between the tax-&-NI you avoid going in, and the tax you pay coming out. So if you were avoiding 20% + 12% on the way in, and paying 15% on the way out (i.e. nil on 25% of it, and 20% on the rest) you gain 17% (ignoring growth, inflation and so on). Now if your wife avoids only 20% on the way in and also pays 15% on the way out, obviously the pair of you gain more contributing to your pension. BUT if your wife has a low enough income in retirement that she pays (say, for illustration) nil on the first 25% TFLS, then nil on the next 75% because it's less than her personal allowance against income tax, then she gains 20% which beats your 17%.

There's a lot of crystal ball work involved; I suggest that if it looks close, contribute for the one who will have the lower income in retirement. That maximises your chance of avoiding (say) lower threshold for higher rate tax, withdrawal of benefits for "rich" pensioners, higher basic rate of income tax, and so forth.

Temrael wrote: »

if so much of our retirement funds was only in my name? Presumably I can't then take that accrued fund and buy two annuities out of it (one for me and one for her)? What do people tend to do?

People tend to talk wistfully of getting a strategic divorce, splitting their pension funds accordingly, and then re-marrying.

Temrael wrote: »

Just get a single joint/guaranteed annuity? Or not bother and just draw down from the fund directly?

I dare say that many people will use income withdrawal into their seventies; if you do phased withdrawal it gives a tax advantage to whichever dies second, because he or she "inherits" the uncrystallised pot tax-free from the other.

Temrael

Ok, sorry for yet another post, I'm starting to go a bit off the original topic now I know, but it's all the same issue really so hopefully it's ok...

The last few comments have got DW and I thinking about the fact that at the moment she won't be anywhere near her tax free allowance in retirement.

We're also wondering if it might be prudent to keep more of our long term savings accessible over the next 25 years. The thinking being that once it's in a pension it has to stay there, but if something were to happen (accident that leaves us unable to work or whatever) then it might be handy to have some sort of access to our long term savings (beyond the one year's living expenses we already have set aside). These "unknown's" feel particularly relevant given the impending likelihood of redundancy for me.

So how's this for a plan?...

We keep mine and DW's pension contributions as is for now (lots in my salary sacrifice one and a modest amount in her's) and instead increase our cash ISA usage and begin also to invest in stocks and shares ISAs.

We would view the stocks and shares ISAs as longer term investments (a bit of risk and therefore some growth in there) with a view to save £200k or so over the next 20 years.

Approaching retirement (or maybe at it) we buy outright a rental property in DW's name and rent it out. DW then gets the rental income in addition to her modest pension.

This provides...

a) A bit of diversity in our overall retirement strategy/portfolio.
b) A reasonable level of growth on our money (better than it just sitting in cash ISAs).
c) Keeps more of those long term savings accessible between now and retirement.
d) Avoids DW being inefficiently below her personal allowance in retirement.
e) Avoids the risk/exposure of having a BtL mortgage hanging over us (as we save first and then buy outright).
f) A tangible asset (the rental property) that could be passed onto the kids.

Any thoughts/problems with that as an approach?

kidmugsy

Temrael wrote: »

Approaching retirement (or maybe at it) we buy outright a rental property in DW's name and rent it out. DW then gets the rental income in addition to her modest pension. ...
Any thoughts/problems with that as an approach?

I don't think I'd like to have to learn the ins and outs of BTLs for the first time in my late sixties. If you are set on BTL, why not wait for the next property crash, buy a BTL on mortgage (the interest on the mortgage is set against your wife's rental income for tax purposes) and learn the ropes while you are young enough to have the energy, and also young enough to change course if you find BTL a business you don't enjoy? Do you have any competitive advantages in that field - legal knowledge, trade skills, source of good tenants....?

Remember that the capital gains on a BTL are subject to CGT, except at death. Do you want to hold such a property to death? Another line of defence, I suppose, is to buy a BTL that you think you might like to occupy yourselves as a retirement home, then you maybe could avoid CGT by holding to death.


If the tax rebate on a pension for a basic rate taxpayer increases to 30% under the next government (an idea that's been trailed from time to time), and the rebate for a 40% payer sinks to 30%, then pension contributions for your wife look a pretty irresistible deal. Seventy pounds buy a hundred? Yes please.

jamesd

A bit more on the salary sacrifice. One thing you can plan to do is take a 25% tax free lump sum when you get to 55 and just give it to her for her investing. That way you maximise the benefit of the salary sacrifice and also can end up using her income tax personal allowance.

I'd be planning on both of you managing to dodge all income tax in retirement if VCTs are suitable, or will be by the time you reach 55. You can pay money into a VCT and get 30% tax relief as a refund from HMRC, has to be repaid if you sell within five years. What you can do at 55 is start to take money out of a pension and pay it into a VCT to get back any basic rate tax paid in taking it out. Or whenever alter it makes sense to do it. What you can do this way is defer getting the income a bit and gradually move all of the pension pot into ISA investments instead of pension, except for enough pension to just top up your state pension to use your personal allowance.VCTs are smaller companies so not for everyone and not for a large part of your money at once.

On to your more recent question, you're getting the idea. What I did was try to as fast as I could get to the point where I could live until I could take pension money at 55, then live until I get the state pension, then live on the state pension and remainder of the investments for life.

I suggest forgetting a tangible property for the kids. By the time you to die they will already have whatever they need and will just sell the property. Too soon now to be planning your diversification into property at the age you're considering for it.

You might also look into permanent health insurance. If you are unable to work that will pay out a set percentage of your salary until you reach pension age. It comes in two main types, own job or any job. Own job pays out if you can't do your normal work. Any job pays out if you cant do any work, like bin collecting or call centre or whatever lowest paying work there is that you might be able to do. Any job is cheaper. This is useful protection for the years until you can sustain yourselves on your investments.