Retirement savings

jimi_man

Hi

Just want to know if I’m on the right lines with my rough plans.

I can retire from my current job later on this year and I’ll be just over 51, so I aim to carry on working, albeit in a different role/organisation for a few more years yet. I could always stay in my current job but I would still have to pay pension contributions but without any further increase in my pension - I’m at the maximum.

1. I’m slightly unsure as to whether to take the lump sum. The pension which I get straight away, is £30K per year. It’s a Final Salary indexed linked pension, with 50% spousal benefits and the lump sum commutation rate 21.5 to 1, which gives around £151K. Whilst that seems better than most I’ve seen on here, it’s offset substantially that I’d be taking it at 51, meaning that I’d be giving up (with a life expectancy of 86 say) potentially 35 years of pension (£7.5K per year). On that basis it doesn’t seem great value to me. I’d also rather not have the temptation of dipping into it so it might be better left in the scheme. However the flip side is that the sum is tax free and the £7.5 K isn’t. Furthermore not taking the lump sum will make me hit the higher rate tax earlier. The spousal pension is 50% irrespective of whether any commutation is taken.

2. Assuming I get another job (I have one lined up) then anything earned over £13K would be taxed at higher rate. With my wife still working and therefore not really needing the pension, I was thinking of starting a private pension (I looked at the HL site and something like the Vantage SIPP) and taking advantage of the 40% extra contributions. As far as I can see if I have £1000 a month to invest in a pension (based on earnings that should be doable), it would only cost me £600, as long as I earned at least £12,000 into the higher tax band - £55K which I should do.

So eight years later when I’m 59 (I’d probably have had enough of work by then could net nearly £100,000 (which would only have cost me £60,000) - from which it seems I could pull out £20-25K tax free and then if I stopped working, the rest taken out over the following years taxed at 20%, as drawdown. Is that possible and is this Vantage SIPP suitable for me in this instance?

This private pension is purely a vehicle to provide an income for the years until my wife’s pensions kick in. For retirement provision I obviously have the above pension, my wife has a three final salary pensions amounting to about £12K which pay out at 60, 65 and 67 respectively and we both have our State Pensions - further £6K each. That gives a total of just about £54K index linked - around £3900 after tax per month, which, based on our current needs appears to be more than enough. So it’s just the years from 59 to 67 that we want to fund, hopefully by the above method.

kidmugsy

jimi_man wrote: »

The spousal pension is 50% irrespective of whether any commutation is taken.

When I retired I found that feature very attractive.

Does your scheme offer "Allocation" whereby you can surrender some pension so that your widow will eventually get more? That might help with your tax problems.

As for taking the lump sum, it's partly a question of what you would use it for. Have you any particular use in mind? Might one arise in the next twenty years? Would the new dividend and interest allowances make a having a heap of capital more attractive? Do you have a heap of capital already?

How sound are the finances of your DB scheme? How's your health? is your family long-lived?

jimi_man wrote: »

... eight years later when I’m 59 ... could net nearly £100,000- from which it seems I could pull out £20-25K tax free and then if I stopped working, the rest taken out over the following years taxed at 20%, as drawdown. Is that possible and is this Vantage SIPP suitable for me in this instance?

It would be up to you to ensure that you drew down slowly enough to avoid 40% income tax, but otherwise "yes". We use HL and think well of their service, but at £100k you could probably find a cheaper provider. HL are decent value up to somewhere about £40k or so. See the monevator blog, or the Telegraph's personal finance webpages.

Have you checked that you are at no risk from the Lifetime Allowance for pension contributions?

jimi_man wrote: »

State Pensions - further £6K each.

It might be worth checking that: maybe you'll get more, depending on years contracted out.

jimi_man

kidmugsy wrote: »

When I retired I found that feature very attractive.

Does your scheme offer "Allocation" whereby you can surrender some pension so that your widow will eventually get more? That might help with your tax problems.

As for taking the lump sum, it's partly a question of what you would use it for. Have you any particular use in mind? Might one arise in the next twenty years? Would the new dividend and interest allowances make a having a heap of capital more attractive? Do you have a heap of capital already?

How sound are the finances of your DB scheme? How's your health? is your family long-lived?



It would be up to you to ensure that you drew down slowly enough to avoid 40% income tax, but otherwise "yes". We use HL and think well of their service, but at £100k you could probably find a cheaper provider. HL are decent value up to somewhere about £40k or so. See the monevator blog, or the Telegraph's personal finance webpages.

Have you checked that you are at no risk from the Lifetime Allowance for pension contributions?



It might be worth checking that: maybe you'll get more, depending on years contracted out.

Hi

Thanks for the information, very useful.

I checked and I don't think there is the possibility of allocation.

The scheme is a public sector one (police) so the finances are as sound as any public sector pension I guess.

Health is ok, and family pretty good (unless you are a female heavy smoker from one side of the family. I'm neither).

I don't have a heap of cash other than an emergency fund and some odd bits of cash, savings, some shares and stuff and I have considered just taking a small amount £20-30K perhaps. I just worry that I'll dip into it and then it's gone.

The Lifetime allowance is strange. It seems you just multiply the pension by 20 to get the worth - £600K in this case. However it seems to be the same no matter what the 'value' of the pension is, as there doesn't seem to be any differentiation between £30K at age 51 or £30K at age 65, when clearly the actual value of both pensions is vastly different? Not sure if I read it right? I would have thought there would be a sliding scale based on age.

I'm not complaining obviously, it's just an observation. But it seems to be quite favourable to this type of pension.

I've been contracted out for 30 years and only contracted in between ages 18-21 so I don't suppose it will make a huge difference.

The Monevator blog was also very interesting. Knowing nothing about investing at all, it seem that the Vanguard SIPP might be suitable for someone like me. As a less than 10 years investor the 20% seems the best bet - which I think is mostly bond orientated, so presumably lower risk.

PensionTech

The Lifetime allowance is strange. It seems you just multiply the pension by 20 to get the worth - £600K in this case. However it seems to be the same no matter what the 'value' of the pension is, as there doesn't seem to be any differentiation between £30K at age 51 or £30K at age 65, when clearly the actual value of both pensions is vastly different? Not sure if I read it right? I would have thought there would be a sliding scale based on age.

Yes, you would think so - but for a defined benefit pension like this, the factor of 20 is used whatever your age. It is grossly unfair but it is the way it is, and as you say, it works out in your favour.