Just lost out on early severance package - What Now

jamesd

You do know that you get free money from paying into a pension, I hope?

If you haven't paid into a personal pension yet this year for yourself get on with it. SIPP is a type of personal pension and a place like Hargreaves Lansdown can have one opened for you and money paid in by debit card in fifteen minutes or less. You can pick investments later or leave the money in cash.

You'll need to have some idea of the value of your employer's pension contributions for the year because there is an annual contribution allowance of £40k but you can carry forward unused allowance from the last three years and this year had two 40k periods so you'll have used less than you thought initially.

You are also capped by your earned income, you can't pay in your self more than your earned income in any tax year and there is no carry forward for this, it's year of contribution only. Unlike the annual allowance contributions by an employer don't reduce this.

You get the tax relief on the way in and you do not pay income tax on at least 25% on the way out. If you were to retire and live off the mortgage you'd have about nil in other personal income so you could in addition take out the whole over 10k of personal allowance from the pension tax free on top of the 25% you can take at the start. That personal allowance is available each year.

Say your income was 40k and you paid 25k gross, £20k net, into a personal pension this tax year. Then you retired before earning any money next year. You could take out 25% of the 25k as a tax free lump sum plus your whole personal allowance also tax free. That's tax free £6,250 (25% of 25000) + £11,000. And ignoring the increases in personal allowance you can continue taking out that tax free £11,000 a year until you have drained your pension pot.

What does this gain you? £5,000.

And more if you can pay in more. Get on with it and get it done, it's really free money for you.

There is one catch but it doesn't matter to you. Once you take more than the 25% tax free lump sum from a pension pot - any of the 75% taxable - your annual pension contribution limit is reduced to £10,000 and you can no longer use carry forward. This doesn't matter to you for two reasons:

1. You may retire anyway.
2. Even if you didn't retire you'd just confine yourself to taking out the 25% tax free lump sum and subsidise the rest temporarily by drawing on the mortgage current account. then when you do retire do the drawing on the taxable part of the pension.

So get on with it and take the free money that HMRC is willing to pay you while you still can. Fund it from those mortgage overpayments if necessary, but get it done.

And if you don't like investment risk, just leave it sitting there in cash until you take it out, the tax relief means that it's still a great deal.

Now, it's not quite that simple if you can pay in a lot, because you do eventually hit the point at which you can no longer take the money out tax free, because you've paid in too much to take it all out again before you do start to take the work pension at its normal retirement age. So you might pay 20% income tax on some of it. But that's OK, you've still made the tax gain on the 25% tax free lump sum, so you're just making less, not nothing.

jamesd

Assuming that your wife is also over the age 55 minimum for taking money out of personal pensions she can do the same thing, of course. Same limits apply, earned income mainly.

For you, timing does matter, you need to get the money in this year if you're to use the full potential of that available £140k of mortgage money. Well, unless you're a high enough earner to do it in just one year later, which you probably aren't, you probably need a couple of year at least.

jerrysimon

Oh dear lots more to think about.

These are my thoughts.

1. I should get as much into my wife's SIPP as possible. She is happy to work another 6 months (she will be 55 in october) that will be give us another 4K (her earnings) which I can top the SIPP up taking it to 11.5K. We will have put in 9.2K so that will make us about 2.3K courtesy of the tax man. We would not want to draw on this until a year later i.e. Sep 2017 to avaid any charges on the SIPP account

2. For me its different. I earn around 41K less about 3K penaion contributions so max I could put in would be 37K but I guess this would make me 7.4K.

Of course all the above would be funded by my paid off morgage which at the current rate (3.9%) would cost me about £151 interest only per month in morgage fees.

I would probably have to wait at least a year (which I am now thinking of doing anyway) again to avoid penalties for drawing out money.

For the first year we could have two lots of tax free income drawing out 11K each. At around a total of £1800 a month tax free we could live on that. I have worked out that all outgoings food, cash, social we need about £1300-£1500 a month. Of course I would still be paying the morgage at £151/m

The remainder left in my PIPP (22.4k) for me I could draw out the following year up £14.6k max without paying tax. I guess I could balance this take more out the first year and less out my wifes so as to spread the tax free across 2 years.

Of course this now means we have 43K extra in mortage which will need to pay off and of course any morgage rate increase would be bad news.

Delaying my pension by 3 years till I am 59 will of course increase it to about 21k and 63K lump sum.

Maybe as a minimum I should do another SIPP this year to 11K so by Sep 2017 we have 22K tax free to draw without any penalital for drawing early.

Anymore is really gambling with interest rates for the next 3 years till I can pay it off with my lump sum.

Unfortunatley this makes it look like working another 2 years is probably the safest route.

Of course if I got lucky and got an early settlement in the next 12-24 motnhs (reducing to 12 months pay now I think for CS) I could clear the mortgage with it.

A strategy of drawing a lot of mortgage out for a SIPP seems risky, but clearly a small sum to make some money on the relief does seem advantagous. For a smaller sum doing that now or after the tax year does not seem to matter for me.

I definately need to check out AVCs as well.

Jerry

kidmugsy

To keep your outgoings down until you draw your DB pension you could always use a 0% credit card.

jerrysimon

Yes mugsy I have discovered the beauty of interest free cards recently

That inital 22K we could open a high rate interest current account like santander 123 and make another £500

Jerry

kidmugsy

jerrysimon wrote: »

max I could put in would be 37K but I guess this would make me 7.4K.

No: it's even better. Consider a net contribution of £80; the taxman makes it up to £100. So your gain is £20 on £80 i.e. 25%. So your £37k would make you £9.25k. Trebles all round!

UPDATE: oh rubbish. Your £37k was gross not net so your arithmetic was right. Apols.

kidmugsy

Your daughters have left home. Consider taking a lodger: you might enjoy have a younger person around the house and you can pocket up to £7500 p.a. tax-free through the rent-a-room allowance.

jerrysimon

jamesd wrote: »

There are two different things:

1. Stopping work
2. Taking that pension.

You should not take that pension before normal retirement age but you can stop work now if you like, provided you can afford it. And you can help to afford it using the mortgage and the higher lump sum and income you get by waiting to take the pension later.

Excellent comments which makes me want to max my mortgage out on a SIPP lol

As I said that would be playing with mortgage rates though. Once in a SIPP you could not then get it all out at once to pay off the mortgage.

Jerry

jerrysimon

kidmugsy wrote: »

Your daughters have left home. Consider taking a lodger: you might enjoy have a younger person around the house and you can pocket up to £7500 p.a. tax-free through the rent-a-room allowance.

Lol you are joking two kids gone the last thing I need is a stranger in my house sharing my bathroom !!

Jerry

kidmugsy

jerrysimon wrote: »

Lol you are joking two kids gone the last thing I need is a stranger in my house sharing my bathroom !!

Actually, if you hope to stay in the house into old age, you may want to make it age-compatible, which often means having a downstairs bathroom. Do it now and have your lodger effectively pay for it!