Help me understand

newlease

Hello,

I need help understanding my private pension options. I have started reading this forum and gov.uk and intend to discuss with my pension provider, but I would feel better getting some advise here.

I am female, 37, single. I have been paying into my employer's private pension for 8 years. In short, I had been ignoring considering this and any other future topic as I battled cancer the last few years. All clear now! So I would like to get my finances and future on order.

Currently, my monthly numbers are approximately:

Salary 4,500
Pension -200
Total 4,300

Tax -850
NI -350

Net 3,100

My pension is "based on final pensionable salary" so what seems to be called "defined benefit". Numbers are approximately:

Pensionable salary 47,000

Annual pension as of statement 6,000

Annual allowance used in tax year 14,000

Estimate of pension at normal retirement age 33,000


My questions are

1) The 6,000 figure is listed as equalling 10% of the lifetime allowance which I thought was 1.25M so I do not understand this.

2) I also don't understand how I have used 14,000 of my annual allowance.

3) The pension estimate assumes I will continue to be a member until retirement. If I were to leave my employer and assuming my future employer did not offer this plan, would I get the 6,000 or a different prorate of the 33,000 number or something else?

4) The idea of adding more to my pension and increasing tax relief appeals to me. I can afford to increase my monthly contributions from 200 to approximately 800. Is there anything other than AVC I should consider or is this this the best option for me? Would there be any advantage in a separate SIPP instead?

5) My contributions are well under the annual 40,000 limit per year and I understand I can even carry forward from previous three years. Assuming I can pay a topup contribution as a lumpsum, would I then get back tax paid or is it too late?

6) With my retirement not for at least 3 decades and rules constantly changing usually for the worst, is there anything to be cautious about?

Thank you

Lisa

Linton

newlease wrote: »

Hello,

I need help understanding my private pension options. I have started reading this forum and gov.uk and intend to discuss with my pension provider, but I would feel better getting some advise here.

I am female, 37, single. I have been paying into my employer's private pension for 8 years. In short, I had been ignoring considering this and any other future topic as I battled cancer the last few years. All clear now! So I would like to get my finances and future on order.

Currently, my monthly numbers are approximately:

Salary 4,500
Pension -200
Total 4,300

Tax -850
NI -350

Net 3,100

My pension is "based on final pensionable salary" so what seems to be called "defined benefit". Numbers are approximately:

Pensionable salary 47,000

Annual pension as of statement 6,000

Annual allowance used in tax year 14,000

Estimate of pension at normal retirement age 33,000


My questions are

1) The 6,000 figure is listed as equalling 10% of the lifetime allowance which I thought was 1.25M so I do not understand this.

For lifetime allowance purposes the annual payment of a DB pension is multiplied by 20 to get an equivalent fund value. 20X6000 is about 10% of £1.25M

2) I also don't understand how I have used 14,000 of my annual allowance.

The £40K annual allowance include employer contributions. For a DB scheme these are hypothetical rather than actual and are based on the value of the extra pension .earned in that year. The employers contribution isnt included in the earned income limit.

3) The pension estimate assumes I will continue to be a member until retirement. If I were to leave my employer and assuming my future employer did not offer this plan, would I get the 6,000 or a different prorate of the 33,000 number or something else?

I believe that the amount of DB you have earned at the time you leave is increased by inflation until you take the pension. It may be worth checking wiuth the scheme rules.

4) The idea of adding more to my pension and increasing tax relief appeals to me. I can afford to increase my monthly contributions from 200 to approximately 800. Is there anything other than AVC I should consider or is this this the best option for me? Would there be any advantage in a separate SIPP instead?

You could look at a Personal Pension - it is simpler and possibly cheaper than a SIPP, though with a smaller range of possible investments. A SIPP or PP could be more flexible than the AVC as it would be completely independent of the DB pension. You could talk to an IFA about this.

In some DB schemes the tax free lump sum of the DB can be taken from the AVC which is a a worthwhile benefit. Check with the scheme rules.

5) My contributions are well under the annual 40,000 limit per year and I understand I can even carry forward from previous three years. Assuming I can pay a topup contribution as a lumpsum, would I then get back tax paid or is it too late?

You are still limited by the earned income limit. The tax relates to the current tax year, not previous ones.

6) With my retirement not for at least 3 decades and rules constantly changing usually for the worst, is there anything to be cautious about?
A DB pension is about as guaranteed as anything can be in this world. So barring global economic catastrophes you should be OK.

For DC pensions make sure your investments are well diversified and again you should be OK except for Armeggedon scenarios.

Government changes dont normally act retrospectively on benefits already earned..

Thank you

Lisa

Hope this helps......................

maximumgardener

Thanks Lisa & really well done for trying to get something in place!

you have a final salary pension worth its weight in gold....so hang onto that
and enhance it if you can.

I'd also say max out on s&S isas each year going forward ......that should give you a healthy sum
tax free of course.

do you have dependents /OH etc to factor in here? or is its purely your own situation you are planning for?

I will leave others to answer your questions raised as many more qualified than me
but you are in good shape health wise and also pension wise at age 37 . Thats great news.

best.
MG

maximumgardener

sorry ....just noted from OP you are single.

good luck. an IFA is def worth talking to , helps get head round options

atush

no4.

Do consider a personal pension for this extra money (along with S&S isas). As it can be taken from 55 (going up to 57 in the future) and you could therefore decide you wanted to retire before your DB pension pays out in full, using this pot of money to live on.

Congrats on being cancer free ( i used to work the the NCI in the US).

newlease

Thank you for replying.

Regarding 1, I understand now the 6,000 comes from pensionable salary 47,000 x 8 years/60. The 20 ratio is mentioned but not really explained anywhere. I know with DC there is an investment pot, whereas with DB it is guaranteed so does this 20 hint at expected life expectancy of 20 years after retirement? So, like saying pension pot should last 20 years.

Regarding 2, 14,000/12 is nearly 1,200 per month. My contribution is only 200 per month, so does this mean my employer is paying 1,000 per month (or equivalent in the case of DB hypothetical calculation) or does it include my indirect contribution to state pension?

Regarding 4-5, 40,000-14,000 leaves 26,000 remaining annual allowance which is more than I could afford to invest in one year. I would, at least to begin like to put the amount that pushes me into higher rate tax which is currently about 3,700. If I invest this 3,700 I'm paying in the 40% rate in some pension scheme (AVC, SIPP, PP) would HMRC give me a 40% refund? Or alternatively, could I invest 3,700 / 0.6 or 6,200 instead without a refund from HMRC?

The last 3 year allowance rule seemed interesting if it would allow me to do same on previous years amounts of salary that attracted 40% income tax. These were around 3,000-3,700 each year, in total just over 10,000 for 3 years. 10,000 is both under my remaining annual allowance and less than 100% my salary, so could I now invest 10,000 and get back tax relief going back to these years or is it too late? Have I completely misunderstood?

My scheme only mentions AVC and not buying additional years which seems to be generally recommended in later years in life but otherwise not always worth the expense. My statement doesn't detail what type of AVC is available so I don't know yet, I will ask.

I was hoping to increase my contribution to get higher guaranteed pension amount in my DB but if I have understood correctly this is not how a DB works. If I want to contribute more it will be in something else, not my main DB.

Regarding 6, I will look into PP as well as SIPP and AVC. It seems these are all similar to having a DC, so there is no option for increasing guaranteed rate like DB offers. As I read more, AVC does not necessarily seem to be best. My main concern is reliability of the investment (I don't like risk) and secondly tax efficiency.

Is tax relief on all really the same, with only difference of AVC with my employer being it is deducted at source whereas with others (if I go alone, not with my employer's) I would pay from net and then get refund from HMRC?

A major government change I notice is the drastic reduction of the lifetime allowance. It will be 1M next year, almost half the 1.8M it was a few years ago.

bigadaj

1. The 20 multiplier figure is nothing to do with life expectancy, it's just an assumed value of the pension worth, coming from a time when annuities might pay 5%, in recent times this figure would much higher, which would adversely impact your ability to contribute more to a pension, so the 20 times value is a good thing.

2 is broadly correct but they don't actually contribute a figure just guarantee the laymen the in retirement, still it gives an indication of the value of the pension benefit.

4. You can put as much money as you want up to the maximum figure, many would consider that to be god if you are getting 40% tax relief.

You can't retrospectively put money into a pension, all you can do is contribute more than £40000 in one tax year if you haven't used your full allowance in previous tax years, but must have earned enough in that tax year to cover the contribution.

It's probably worth seeing if the avc can be taken to reduce the commutation of your final pension, it would avoid you having to take cash at retirement and so give better value, if not then separate pp or sipp might be better as this won't be limited as to when you can take it apart from normal retirement rules.

hyubh

newlease wrote: »

does this 20 hint at expected life expectancy of 20 years after retirement? So, like saying pension pot should last 20 years.

Not especially - it's just a standard multiplier used for lifetime allowance purposes.

14,000/12 is nearly 1,200 per month. My contribution is only 200 per month, so does this mean my employer is paying 1,000 per month (or equivalent in the case of DB hypothetical calculation) or does it include my indirect contribution to state pension?

Again, the multiplier used for annual allowance purposes (16) is just the multiplier used - it bears no bearing whatsoever on the actual employer contribution, which will depend on various factors.

Also, if the AA multiplier did depend on the employer contribution, that would be unfair, or rather, be overly kind to members of unfunded public sector schemes where the employer contributions made during the year will be inherently net of anything attributable to past service liabilities, and with no employer covenant concerns either.

If I invest this 3,700 I'm paying in the 40% rate in some pension scheme (AVC, SIPP, PP) would HMRC give me a 40% refund? Or alternatively, could I invest 3,700 / 0.6 or 6,200 instead without a refund from HMRC?

Could be sort of either - with an AVC the contributions might be taken before tax, reducing your taxable pay, otherwise your pay would be taxed as normal and an amount corresponding to the basic rate (20%) will be added to your pension pot by the provider; in the latter case, you would then claim the extra 20% on a self-assessed tax return.

The last 3 year allowance rule seemed interesting

If you are in a final salary scheme (or CARE with a protected final salary link), keep in mind you may come to need rollback relief if you get a promotion in the next few years.

My scheme only mentions AVC and not buying additional years which seems to be generally recommended in later years in life but otherwise not always worth the expense.

What scheme is it? The term 'AVC' can sometimes be used for both additional DB benefits as well as additional DC ones. Also, whether an added years option is good or not really depends, though if I was to have any rule of thumb, it would be the opposite of suggesting it to be 'generally recommended in later years in life'.

That said, assuming this is a private sector scheme of some description (including USS), the main risk of taking out an added years contract is the scheme closing and final pensionable pay for final salary benefits (including added years) being fixed to when the scheme closed, which for someone with many years left to retirement will mean them paying a contribution rate that covers a risk (to the scheme) that can never come to fruition (the risk, that is, of large salary increases between the contract being taken out and final pensionable pay being calculated).

I was hoping to increase my contribution to get higher guaranteed pension amount in my DB but if I have understood correctly this is not how a DB works.

Only if there is an explicit additional DB benefits option, be this in the form of added years, better accrual rate, fixed amount of additional pension, etc. Also, typically the additional contribution rate would be calculated completely differently to the employee rate for standard benefits, e.g. in the LGPS regular contributions are banded by the ability to pay whereas additional contributions for a fixed amount of extra pension are banded by age and sex.

Regarding 6, I will look into PP as well as SIPP and AVC. It seems these are all similar to having a DC

More exactly, a personal pension or SIPP would be a form of DC pension.

atush

re point 4, is 3700 the exact amount you will be over the HRT threshold? Does it include savings interest and benefits in kind?

If so, you put 3700- BRT- the pension provider will add this to your pot from HMRC. The extra tax relief will be returned to you by HMRC, either by cheque, changing your tax code or as part of your self assessment.

Al.

Lisa,

Well done for addressing things so early on. I would almost urge you not to become fixated on the pension; almost force yourself to take a step back from it.

Think about the bigger picture, the outcomes you want, want you want life to deliver to you. Then, extrapolate back and get an idea what you need to do now, to achieve that. Don't even think about solutions until you have pinned down your mission, the strategy and the tactics.

I have a client in her early thirties who has these sub objectives; health, home, retirement, wedding, children, boat for the Solent, horse, holidays and car, philanthropy, estate planning. She hasn't even met Mr Right yet! But each already has defined objectives, a unique allocation and investment strategy, suitable tax wrapper use and contingency built in.

Don't sweat the detail until you have an idea of the vision. 👍

newlease

Thank you everybody for the informative comments and words of encouragement. This thread has been very supportive whether you realise or not.

To clarify, the 3,700 number is the amount of annual tax I am currently paying at the 40% rate on top of 6,400 at the 20% rate. So, excluding NI I pay about 10,000 in annual tax and end up getting 37,000 net. Reducing my taxable annual salary by 3,700 / 0.4 = 9,000, so eliminating the amount which triggers 40% tax, is very worthwhile considering my lifestyle and expectations. I would rather invest this as 9,000 then receive as 5,400 now. Reducing my monthly net income from 3,100 to 2,600 would not change the quality or security of my life.

This is the response I received from HR regarding additional contribution options

"As of April 2006, the Plan’s AVC arrangement is closed to new contribution"

followed by a quote from an annex in our policy

"You can choose to pay additional contributions to an external provider to increase your overall pension benefits. These contributions are called Free Standing Additional Voluntary Contributions (FSAVCs) and they receive the same favourable tax treatment as your normal Plan contributions. You will be advised separately of your options by the external provider."

Fair enough, I see a lot changed following "A-Day" and I can look elsewhere. Is there any particular reason the policy mentions FSAVCs in particular and not other types like SIPP or personal pension? Is it just word choice or is there a particular tax benefit FSAVC offers others do not?

Thanks,
Lisa