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SIPP and Teachers Pension Query
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The figure includes recovery of BR tax (by the pension scheme).
No it doesn't.
The lump sum figure is for buying Additional Pension in a Defined Benefit scheme. There is no mechanism for adding tax relief.
Cardew is correct. The lump sum is paid to the TPS and 40% tax relief is claimed back from HMRC. Lump sums cannot be paid through your salary.0 -
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.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%
Should that not be 250/2622 = 9.5%??
Indeed in post #1 the OP states:
The clue is in the bold part. The same principle applies to calculating annuity rates from a SIPP. Either way, the TPS % is higher by far. Annuities are usually bought from "pension" investments, which all have similar pre-tax advantages.(Nearly) dunroving0 -
No it doesn't.
The lump sum figure is for buying Additional Pension in a Defined Benefit scheme. There is no mechanism for adding tax relief.
Cardew is correct. The lump sum is paid to the TPS and 40% tax relief is claimed back from HMRC. Lump sums cannot be paid through your salary.
So does the lump sum come from post-tax ("take-home") income?
If that is the case, Cardew seems to be saying the opposite (i.e., seems to be saying the same as I was, that the £4,750 figure was a pre-tax figure), just saying it in a different way:
"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."(Nearly) dunroving0 -
So does the lump sum come from post-tax ("take-home") income?
It would come from post tax income, yes. However unlike a normal post-tax pension contribution where the pension provider would add basic rate tax relief, no tax relief is given at all.
To get tax relief you must apply to HMRC and the full 40% is claimable for higher rate taxpayers as opposed to just the extra 20%.If that is the case, Cardew seems to be saying the opposite (i.e., seems to be saying the same as I was, that the £4,750 figure was a pre-tax figure), just saying it in a different way:
"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."
I think Cardew was basically saying that the £250pa Additional Pension was not actually costing £4370 but £2622 which is correct.
I haven't really thought about it from an annuity rate calculation as we don't know whether or not the OP included dependent's benefits in that although I think not from the figures.0 -
It would come from post tax income, yes. However unlike a normal post-tax pension contribution where the pension provider would add basic rate tax relief, no tax relief is given at all.
To get tax relief you must apply to HMRC and the full 40% is claimable for higher rate taxpayers as opposed to just the extra 20%.
I think Cardew was basically saying that the £250pa Additional Pension was not actually costing £4370 but £2622 which is correct.
I haven't really thought about it from an annuity rate calculation as we don't know whether or not the OP included dependent's benefits in that although I think not from the figures.
I agree 100% that fact is correct, but most annuities would be bought using "pension investments" (e.g., a lump in a SIPP, as suggested), which benefit from tax relief/tax reimbursement. Annuity rates are usually calculated on the "pre-tax" amount, because that is what is in the SIPP or other DC pension you have been paying into. If you have £100,000 in a SIPP and use it to buy an annuity, the annuity provider makes no adjustment whatsoever for how much the £100,000 cost you in terms of sacrificed take-home pay.
Annuity rates are based on the ratio of the annual annuity income to the lump paid for the annuity. They aren't adjusted for how much the money hypothetically cost in "post tax income". In a Best Buy table it may say that for a 65-year old person, inflation-adjusted, single life annuity, you'd get £3,300 p.a. for every £100,000 - so, an effective rate of 3.3% (as per my original post). The fact that there may have been tax relief on the £100,000 is neither here nor there for the purposes of the comparison.
My calculation of the equivalent return rate % (5.7%, as per my original post) for the TPS is therefore correct, and shouldn't be "adjusted" for what it cost in take-home pay any more than a SIPP should. That's not how annuity rates are usually calculated. The case for it only being £2,622 in post-tax income is irrelevant to my point (which was to calculate an effective equivalent annuity yield). It only confuses the discussion and comparison, because the exact same principle applies to a SIPP lump.
In other words, you shouldn't compare apples to oranges.(Nearly) dunroving0 -
My calculation of the equivalent return rate % (5.7%, as per my original post) for the TPS is therefore correct, and shouldn't be "adjusted" for what it cost in take-home pay any more than a SIPP should. That's not how annuity rates are usually calculated. The case for it only being £2,622 in post-tax income is irrelevant to my point (which was to calculate an effective equivalent annuity yield). It only confuses the discussion and comparison, because the exact same principle applies to a SIPP lump.
In other words, you shouldn't compare apples to oranges.
As I said in my last post, I wasn't looking at annuity rate comparisons and am not disputing how you worked it out.
My reply that Cardew was correct was to Freecall who said that the £4370 figure included basic rate tax relief when Cardew said that you would be able to claim the full 40% tax relief.0 -
As I said in my last post, I wasn't looking at annuity rate comparisons and am not disputing how you worked it out.
My reply that Cardew was correct was to Freecall who said that the £4370 figure included basic rate tax relief when Cardew said that you would be able to claim the full 40% tax relief.
Neither was the OP contemplating an annuity. He stated:
So I am unclear why either of those two options had to be compared to an annuity.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)
It seems to me the OP simply wanted to compare apples with oranges, and raising the issue of an annuity introduced a prickly pear into the comparison - and few people like [STRIKE]annuities[/STRIKE] prickly pears;)In other words, you shouldn't compare apples to oranges.0 -
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.Neither was the OP contemplating an annuity. He stated:
So I am unclear why either of those two options had to be compared to an annuity.
It seems to me the OP simply wanted to compare apples with oranges, and raising the issue of an annuity introduced a prickly pear into the comparison - and few people like [STRIKE]annuities[/STRIKE] prickly pears;)
OMG
I thought I made my reasoning pretty clear in the first post (bold). My comparison was only in terms of what a SIPP vs. TPS would mean in terms of "income".
As the OP doesn't by their own admission "understand a SIPP", I have no idea whether they think "drawdown" is the only income alternative.
So, last attempt to introduce clarity into my first post:
In terms ONLY of providing subsequent guaranteed income, the TPS option looks to be a far superior alternative because the return rate is much higher (regardless of whether that return rate is calculated based on gross or net income sacrificed).
(That's all I was attempting to say) Questioning my calculation of the return rate for the TPS option was irrelevant to the point of my post (see immediate bold, above).(Nearly) dunroving0 -
Thanks for all the responses above it has led me to this conclusion:
I have about £4000 of income attracting 40% tax. In my mind the way I deal with this pans out like this (ignoring NI contributions):
1. Do nothing and then I pay 40% tax (£1600) on £4000 so I walk away with £2400 cash in hand.
2. Put a lump sum of approximately £4000 into my Teachers’ Pension (effectively £2400 as I would otherwise have to pay £1600 tax). This give me £200 per year (after tax) extra pension after I retire so after 12 years I will be in the same boat as no. 1 above.
3. This is the bit I am not too sure about the mechanics of and what my question is trying to investigate---- Put the £4000 into an appropriate SIPP (effectively £2400 as above). Take the money out when I retire as flexible drawdown with 25% tax free (£1000) and the rest at 20% tax rate (£2400). This gives a total of £3400 less any fees.
I have just read the pension loophole discussion thread and although I would prefer to do no. 3 above it doesn’t seem that it will be that beneficial after paying fees. So I am probably going to do nothing and walk away with the £2400.
Thanks again for the help.
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