SIPP and Teachers Pension Query

chris107

I am 57 and a part-time teacher who has taken actuarially reduced pension from the Teachers' Pension Scheme. I have elected to continue paying into the scheme so that I can take more pension when I eventually stop teaching completely. My P/T salary together with my actuarially reduced pension brings me into the 40% tax band and I would like to lose about £4000 per year into more pension payments to bring me under the 40% threshold. My options are:

• I could purchase £250 per year extra pension from the Teachers pension Scheme at a cost of £4370 lump sum less 40% tax relief.
• I think I could put £4000 less 40% tax relief into a SIPP and, as I understand it, Draw this out under a drawdown process at some stage (with 25% tax free)

My problem is that I do not fully understand the SIPP and my questions are:
Is the SIPP idea a sensible one or will the fees to do this make it a waste of time?
If it is sensible, who provides the most economical way of doing this and what type of fund would be the least risky?


Thanks

dunroving

chris107 wrote: »

I am 57 and a part-time teacher who has taken actuarially reduced pension from the Teachers' Pension Scheme. I have elected to continue paying into the scheme so that I can take more pension when I eventually stop teaching completely. My P/T salary together with my actuarially reduced pension brings me into the 40% tax band and I would like to lose about £4000 per year into more pension payments to bring me under the 40% threshold. My options are:

• I could purchase £250 per year extra pension from the Teachers pension Scheme at a cost of £4370 lump sum less 40% tax relief.
• I think I could put £4000 less 40% tax relief into a SIPP and, as I understand it, Draw this out under a drawdown process at some stage (with 25% tax free)

My problem is that I do not fully understand the SIPP and my questions are:
Is the SIPP idea a sensible one or will the fees to do this make it a waste of time?
If it is sensible, who provides the most economical way of doing this and what type of fund would be the least risky?


Thanks

My back of a fag packet assessment is that buying TPS pension is equivalent to getting an inflation-proofed annuity at a rate of 5.7% (250/4370), received from age 60.

The best buy tables for an inflation-proofed annuity taken at age 65 is something like 3.3%.

So purely in terms of regular/guaranteed income for a lump sum, the TPS deal is a better one.

chucknorris

chris107 wrote: »

I am 57 and a part-time teacher who has taken actuarially reduced pension from the Teachers' Pension Scheme. I have elected to continue paying into the scheme so that I can take more pension when I eventually stop teaching completely. My P/T salary together with my actuarially reduced pension brings me into the 40% tax band and I would like to lose about £4000 per year into more pension payments to bring me under the 40% threshold. My options are:

• I could purchase £250 per year extra pension from the Teachers pension Scheme at a cost of £4370 lump sum less 40% tax relief.
• I think I could put £4000 less 40% tax relief into a SIPP and, as I understand it, Draw this out under a drawdown process at some stage (with 25% tax free)

My problem is that I do not fully understand the SIPP and my questions are:
Is the SIPP idea a sensible one or will the fees to do this make it a waste of time?
If it is sensible, who provides the most economical way of doing this and what type of fund would be the least risky?


Thanks

I'm also 57 and a part time lecturer, I did both (SIPP and additional pension), but I prefer the additional pension, but as I have already bought the max allowed I can't buy any more, I wish that I could. But the reason that I prefer it is subjective, I like the fact that it is guaranteed and does not depend upon performance like the SIPP alternative. We can't say which is the most economical because you can't predict the SIPP performance. But as far as risk goes, the additional pension is less risky because you know exactly what you are buying and it is index linked.

Cardew

dunroving wrote: »

My back of a fag packet assessment is that buying TPS pension is equivalent to getting an inflation-proofed annuity at a rate of 5.7% (250/4370), received from age 60.

The best buy tables for an inflation-proofed annuity taken at age 65 is something like 3.3%.

So purely in terms of regular/guaranteed income for a lump sum, the TPS deal is a better one.

Have I missed something or shouldn't the £4370 be reduced by the 40% tax relief?

chris107

Thanks for the replies.
Just to clarify my reason for posting a little:
I calculate that it would take about 13 years to get my money back with the £250 lump sum option and paying 20% tax when I take this pension. I know the % level of return on the initial payment is good and it is an option not to be sniffed at.


My reason for enquiring about the SIPP and drawdown was to see if it would be possible, or even sensible given the small amount, to put the same pension contribution into a SIPP and therefore avoid a 40% tax charge and then when I stop work remove 25% tax free and the rest as taxed (at a lower rate because of lower income) cash.
In this second case I calculate that I theoretically could get more than my money back immediately at full retirement less any fees charged. [ie with a £4000 pension contribution made up of £1600 from HMRC and £2400 from me (40%). After drawdown I would get £1000 tax free plus £2400 {£3000 taxed at 20%} a total of £3400].
My question was to investigate whether this is possible and if so how large are the fees likely to be and what is the least risky way to keep the money in the SIPP so the capital doesn't fall.

dunroving

Cardew wrote: »

Have I missed something or shouldn't the £4370 be reduced by the 40% tax relief?

Yes, as it also would be if put into a SIPP, presumably.

Cardew

dunroving wrote: »

Yes, as it also would be if put into a SIPP, presumably.

My point was doesn't that 40% tax rebate on the £4370 invalidate this calculation you made:

My back of a fag packet assessment is that buying TPS pension is equivalent to getting an inflation-proofed annuity at a rate of 5.7% (250/4370), received from age 60.

i.e The £4370 figure you use to give a percentage of 5.7% is incorrect.

dunroving

Cardew wrote: »

My point was doesn't that 40% tax rebate on the £4370 invalidate this calculation you made:




i.e The £4370 figure you use to give a percentage of 5.7% is incorrect.

Why? The fact that the £4370 includes a tax rebate doesn't make it any different amount.

It's all in where you put the mental commas in the OP's description. I assume he is referring to £4370 of pay on which he would not have to pay 40% tax. So, still £4370.

If not, maybe show me what you think is the correct calculation.

Cardew

dunroving wrote: »

Why? The fact that the £4370 includes a tax rebate doesn't make it any different amount.

It's all in where you put the mental commas in the OP's description. I assume he is referring to £4370 of pay on which he would not have to pay 40% tax. So, still £4370.

If not, maybe show me what you think is the correct calculation.

As a humble engineer I readily admit that I may have got this wrong, however:

The additional pension calculator in the link below shows that an additional pension of £250pa for a 57 year old will require a lump sum payment of £4,370. However that is before the deduction of 40% tax which he can reclaim.

https://www.teacherspensions.co.uk/members/resources/calculators/additional-pension.aspx

Does that not mean his outlay is £2622 to achieve a payment of 250pa ?

Your calculation uses a figure of £4,370 to reach a figure of 5.7%

My back of a fag packet assessment is that buying TPS pension is equivalent to getting an inflation-proofed annuity at a rate of 5.7% (250/4370), received from age 60.

Should that not be 250/2622 = 9.5%??


Indeed in post #1 the OP states:

•I could purchase £250 per year extra pension from the Teachers pension Scheme at a cost of £4370 lump sum less 40% tax relief.

Freecall

Cardew wrote: »

The additional pension calculator in the link below shows that an additional pension of £250pa for a 57 year old will require a lump sum payment of £4,370. However that is before the deduction of 40% tax which he can reclaim.

The figure includes recovery of BR tax (by the pension scheme).

You will be able to recover the HR tax on your tax return (or get your tax code adjusted if you want).

jem16

chris107 wrote: »

My question was to investigate whether this is possible and if so how large are the fees likely to be and what is the least risky way to keep the money in the SIPP so the capital doesn't fall.

Ok to answer your question, you may find this thread useful which is pretty much what you're considering doing.

https://forums.moneysavingexpert.com/discussion/5041722

I assume when you're working out the £4k you have already taken into account your normal TPS contributions which will reduce your taxable pay?