Salary+Pension

s11ver

I'm 52 year old nurse who is almost at the point of taking early retirement benefits whilst continuing to work. Although the 25% lump sum is tax free, my annual pension will of course be subject to tax. Obviously, if I add my annual pension to my annual salary, I need to be careful that I don't hit the 40% tax band.

My annual salary is roughly £28,000 and my annual pension would be approximately £8,000. Am I right in assuming that although this equates to £36,000 deducting the personal allowance will mean that I do not have to pay the higher tax rate?

£36000 - 5225 = £30775

Or are these calculations wrong? Any help would be appreciated.

A_Nice_Englishman

That sounds about right.

You are probably suffering a big reduction on your pension by taking it early.Unless you need the lump sum and £36K pa now I would have waited until I actually retired. Sorry if this is irrelevant to you situation.

dzug

Your calculations are correct.

I'm surprised you can take early retirement benefits though - at least not without changing employer. Are you sure you can do this?

And why do you need to be careful about not hitting the 40% band? You still get more in your pocket than you would if your income were less. Seems a pity to limit yourself artificially. (Remember you only pay the 40% on EXTRA income, not the whole of your income)

s11ver

A_Nice_Englishman wrote: »

That sounds about right.

You are probably suffering a big reduction on your pension by taking it early.Unless you need the lump sum and £36K pa now I would have waited until I actually retired. Sorry if this is irrelevant to you situation.

I've calculated that there will be a reduction but I'm willing to sacrifice that. My mortgage is currently £92,000 and runs until I am 64. My plan is to pay £30,000 off my mortgage which won't reduce the term but will reduce the payments by around £260 per month. I will then increase my monthly payments to bring the mortgage term down. In addition I intend to open an ISA.

Thanks for your reply

s11ver

dzug wrote: »

Your calculations are correct.

I'm surprised you can take early retirement benefits though - at least not without changing employer. Are you sure you can do this?

And why do you need to be careful about not hitting the 40% band? You still get more in your pocket than you would if your income were less. Seems a pity to limit yourself artificially. (Remember you only pay the 40% on EXTRA income, not the whole of your income)

No I don't have to change employer, that was one of the better things about pension changes. I hadn't realised that I would only pay 40% on income above the threshold but still, paying 40% on such a small amount would take half of it away and that's just a little too much. Luckily I can always reduce my hours should the need arise.

Thanks :-)

noh

Although Im sure you have thought about it. I don't understand your logic in doing this. By leaving the scheme and continuing to work you are giving yourself a pay cut of about 16% (the NHS leaflets say the benifits of the scheme are equal to 20% of salary at a cost of 3.5%)

Nigel

EdInvestor

I can't see the point of the strategy either.If you plan to retire at say 60 and just keep on going as you are, you will end up with a higher lump sum to reduce the mortgage and a higher pension for the rest of your life.

Before making this move, I suggest you get a forecast of your likely pension and lump sum at your normal retirement date.

While paying off the mortgage is a laudable aim, sacrificing comfort in retirement to do so, if it is not necessary, seems silly.

jamesd

s11ver, your calculations are correct but your overall plan is one that normally makes sense only if you expect to be dead before your normal retirement age.

Your pension will grow at a rate higher than the interest rate on any likely mortgage, so cashing in a pension to pay off a mortgage is a very poor choice that serves to make you substantially poorer.

You could reduce the large loss from taking the pension early by investing the money instead of paying the lump sum off the mortgage, but you're choosing one of the least efficient options there is by paying off the mortgage.

Short version: unless you have some massive problem that you haven't mentioned, your plan is very foolish and will very seriously harm your financial interests.

Is there some reason you have for wanting to do this? Perhaps we can find a less financially destructive way.

s11ver

jamesd wrote: »

s11ver, your calculations are correct but your overall plan is one that normally makes sense only if you expect to be dead before your normal retirement age.

Your pension will grow at a rate higher than the interest rate on any likely mortgage, so cashing in a pension to pay off a mortgage is a very poor choice that serves to make you substantially poorer.

You could reduce the large loss from taking the pension early by investing the money instead of paying the lump sum off the mortgage, but you're choosing one of the least efficient options there is by paying off the mortgage.

Short version: unless you have some massive problem that you haven't mentioned, your plan is very foolish and will very seriously harm your financial interests.

Is there some reason you have for wanting to do this? Perhaps we can find a less financially destructive way.

God forbid I should be dead before retirement age. A couple of points, firstly I am a psychiatric nurse and entitled to retire at 55. Even if I choose to take the benefits, I have accumulated just over 25 years at present. Luckily there is only me to worry about, since I am single and don't have children.

I work for a private healthcare provider and have a final salary pension scheme in line with that of the NHS, almost identical. In order to retire at 55, employees double their contributions once they have been in the scheme for 20 years.

The company has two schemes running, since it closed it's old scheme to new employees a few years ago. If I leave the old scheme, I can in fact join the new scheme and contribute at 3% with an additional percentage from my employer.

As to reasons I am seriously thinking of taking the benefits, here they are:

1. Due to doubling, I am taking home less than I was 2 years ago. I contribute 14% on average £378.00 per month.

2. My mortgage payments are crippling. £800 and that's on a fixed rate!

3. I want to utilise the opportunity to reduce my mortgage, tart up the house and put it on the market.

4. If I were to pay £30,000 off the mortgage I would at present have roughly £80,000 equity.

5. I plan to downsize or relocate to my home area, where property is much cheaper.

6. If I add my current pension contributions to the reduction in mortgage payments, it will free up £638 per month. This would enable me to save, contribute to the company's other pension scheme, increase mortgage payments and have a little left to enjoy myself, something I don't get to do at present.

Does all this make sense?

noh

The final salary pension scheme you have is a very valuable benifit. In your position, especially as you have less than 3 years until normal retirement age, I would continue working and continue membership of that scheme. I would sell the house without making any improvements to it. Save the £50000 equity in a high interest account and cash ISA. Then rent somewhere for the next two years and use the pension lump sum plus savings to buy a house in the new area.

Nigel

Biggles

If your scheme is in line with the NHS scheme, it will no doubt provide for abatement of pension when you become re-employed. Have you checked this out?

The basic rule is normally that, if your salary plus your pension exceeds your pre-retirement salary, your pension will be abated (reduced) pound-for-pound.

There is normally little point in taking retirement and continuing to work in the same employment full-time, as you would be no better off.