Tax and savings question

lakelady

Sorry if this has been covered before; but a search is not showing anything.

I am 57, and looking at retirement sometime soon. My employer has been offering Voluntary Severance for the past five years or so, and i am hoping that when I am ready to leave (in 2 years, probably) that this will be on offer. If it is, and if I am accepted for it, I would be looking at around £37k. I should be able to take approximately £60k as a lump sum, if I max out the allowance and take a lower pension. My pension will be pretty dire, as I didn't start to pay in until I was about 36, as I was working part time until then and in those days was not allowed to contribute to a work pension (I was on short term academic contracts, and then looking after children, and have had periods of part-time working over the years).

if I am lucky enough to get VS, and add it to the lump sum, plus savings, I will have around £150k to draw down and supplement my meagre pension.

I am weighing up the possibilities, and am looking at either taking £15k a year which would last until I am 69, or £10k a year, which would take me to 74. At 66, I will reach sate pension age, and have clocked up the 35 years needed for a full state pension, so will be around £6k richer at that point

My question is, how will tax impact on all of this? VS is tax free for the first £30k; but when it becomes savings, will i have to pay tax on it? Should i keep it under the proverbial mattress, or is there a better way of looking after it? Similarly, will my savings be subject to tax if I am using them as a pension top-up?

I don't know at this stage if i can afford to retire before state pension age; so all advice would be very welcome, thanks.

kidmugsy

lakelady wrote: »

I would be looking at around £37k.

Then one possibility is to work far enough into the tax year that your earnings exceed £7k, and then contribute £7k gross into a personal pension of some sort. Bingo: no tax to pay on your severance pay.

How good a scheme this is depends on the size of your occupational pension: how much will it pay per annum? Until you answer, let me estimate it as £10400 p.a. The present government's ambition is to increase the Personal Allowance (vs income tax) to £12500 p.a.; that'll leave you about a couple of thousand p.a. to drawdown tax-free from your personal pension. So you could usefully contribute a bit more into your personal pension now, while you are still working. Say you stick to £7k p.a. gross: in a couple of years time you'll have about £21k in there; you can draw out £5k as a tax-free lump sum, and drawdown about £2k p.a. as tax-free income until your State Retirement Pension begins. In addition you can take a tax-free £1k p.a. of interest from savings for 2016/17 onwards, and up to £5k p.a. of dividends. And if a good chunk of your savings is in ISAs (as it jolly well ought to be) your dividends there are automatically tax-free.

So you could be looking at an income, tax-free, of ca. £18.5k p.a. Add to that any capital you choose to spend, remembering that spending capital will penalise your income. Once your state pension begins you should be on an annual £7.5k + £10.4k (i.e. ca £18k p.a.) plus any interest/dividends from your remaining capital. You'll want a bit of income from your capital if only to pay your income tax.

So the question is whether you can get along on £18k p.a. or so. If not you'll have to spend capital instead of having it as a comfort blanket. But you are hoping to have £150k of capital so it's a lot less bleak than it will be for many people. One thing I suggest is that you try living on £18k p.a.(after tax, NICs, pension contributions, travel-to--work costs and so on) for the next couple of years. If you hate it, think again.

neilvw

Worth getting a State Pension statement (https://www.gov.uk/state-pension-statement) to see if you have any contracted-out deductions from the full New State Pension (which you have time to recoup through working or paying voluntary contributions), or conversely if you have enough additional State Pension to have a starting figure above the new full amount, in which case you can't add to it through extra qualifying years.

The full amount of New State Pension will be at least £154pw (£8,008pa) from April 2016, and at least £170pw (£8,840pa) from April 2020. If average earnings or CPI inflation are above 2.5% in any of those years, it will be higher.

You will know your foundation amount within a few months after next April, but you might want to find out sooner.

FatherAbraham

lakelady wrote: »

My question is, how will tax impact on all of this? VS is tax free for the first £30k; but when it becomes savings, will i have to pay tax on it? Should i keep it under the proverbial mattress, or is there a better way of looking after it?

Well, yes, even if your savings are liable to taxation (on income generated from the capital), there is a better way than keeping it under the mattress.

Keeping it under the mattress will provide you with no interest whatsoever, and may carry security risks.

Putting the capital on deposit in a taxable interest-bearing account would mean that just a percentage of the interest would be taken by the state, leaving you with more than nothing.

Then there are cash ISAs, which pay tax-free interest, and in the next tax year, there will be a personal tax-free allowance for interest too.

Warmest regards,
FA

FatherAbraham

lakelady wrote: »

At 66, I will reach [state] pension age, and have clocked up the 35 years needed for a full state pension, so will be around £6k richer at that point.

You might not need 35 years to get a full state pension, or it might not be enough -- it depends upon your foundation amount. For many people who have contributed to the current system by working, their foundation amount will be based on their current entitlement, thanks to the contracted-out-deduction applied to their flat-rate-pension entitlement. For example, I think I'll need 38 years of contributions (30 in the old system, including a little bit of S2P, and 8 more at the new accumulation rate.)

In any case, I don't fully understand your strategy -- if you expect to have reached 35 years of contribs by then, are you expecting to keep working after you voluntarily leave your current job under this scheme? How many years of contribs do you have now?

You should probably get a state pension forecast to have a better idea of your potential foundation amount for the new state pension.

Warmest regards,
FA

bigadaj

There needs to be more detail on the pension and the lump sum that may be available, and the commutation or conversion factor which may reLease the £60k.

The calculation should be working up towards a minimum and then desirable income, and indeed the ability to achieve this is likely to determine when retirement is likely to be possible.

lakelady

Thanks everyone for your help. At this stage, I don't really have a strategy - I am just considering my options. I don't know if the VS will be on offer when the time comes, and if not, I will have to work for longer.

I have wondered about paying additional contributions; but thought that I had left it too late. I should have said that my pension is final salary, and will be around 10k when I reach 60. I am currently on a salary of around £50k, so it will be a huge drop; but the house is now paid for, so I have around £500 a month that I have been used to paying out that could be paid into something. Currently I am using it to build up my Premium Bonds, so it is not being frittered away.