Just lost out on early severance package - What Now

jamesd

jerrysimon wrote: »

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

That's why I wrote that you should. It's easy money and you aren't going to get much better deals than the one offered by those lovable folk at HMRC.

jerrysimon wrote: »

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.

Sure you can, since the pension freedoms were introduced last year. Now you can take out 100% of a pension pot whenever you like from age 55 on up.

The 25% tax free lump sum is there and the rest is taxed as normal income in the year in which you take it. It's actually very unlikely that mortgage rates will go up enough to make you lose compared to the tax gain you can make. If rates do go up enough to make it necessary you can draw one the money faster and pay the income tax but at 20% it'd just be better to keep the mortgage payments probably. Then continue to clear at normal retirement age for the work pension. You'd just make less depending on how much rates go up by.

jamesd

By the way, there are rules relating to recycling pension lump sums that can include borrowing to make pension contributions to make higher payments then take out a lump sum. I didn't mention it to you earlier because it doesn't seem likely to matter to you because your plan is to use the lump sums as income replacement in the time between stopping work and taking the work pension at normal retirement age.

There is a two year window that is considered for whether contributions to a pension have been increased because of taking a lump sum, including borrowing to increase the lump sum with the intention of using the lump sum to repay the borrowing. You do not get caught up int hat because:

1. You will use the lump sum on the personal pension for living costs before you reach normal retirement age for the work pension.
2. The work pension lump sum will be taken after the end of the two year window and in any case the work pension hasn't been increased, so the fact that the work lump sum is what is going to be doing much of the mortgage repaying won't matter.
3. The other part of the mortgage paying off will be done out of pension income, preferably not before NRA for the work pension so that you have the money from the personal pension available if needed for other contingencies.

If you did want to use personal pension money to reduced the mortgage sooner, use the wife's personal pension. This is because one of the limits that means that the recycling doesn't matter is if the amount of the tax free lump sum is no more than £7,500. That is measured over a twelve month running period, so say 1 Feb one year to 20 Jan next. Your wife either won't get a tax free lump sum that high or can just time things to not go over it within a twelve month period.

You could actually do the same thing to stay within the £7,500 if you wanted to. £7,500 of tax free lump sum means total benefits taken (though not necessarily withdrawn from the pension pot) of £30,000. The £22,500 taxable three quarters is over the personal allowance so your plans aren't much affected by taking out the £7,500 plus personal allowance. If you want more, just take out a bit more and pay 20% income tax on some of it. Then one year and one day later or more take another chunk of £30k with £7.5k tax free lump sum, repeat until it's all crystallised.

You don't have to take benefits from all of a personal pension at once. The part you don't take anything from remains uncrystallised (no benefits taken) and the other part crystallised (meaning benefits taken and no more tax free lump sums allowed). HL would split this into two pots, one uncrystallised still and one crystallised.

jerrysimon

OMG thats really confusing. Need to read the link thanks.

In summary I think what it means is that you must not use any money gained by the tax advantage to then pay off the debt (in my case mortgage equity) used to purchase it, up to £7500 ?

Jerry

jamesd

It really means don't worry about it because it doesn't matter for your situation.

But if you do want to worry, it means don't take more than £7,500 in tax free lump sum each year, ensuring that there is one year and one day between times you take that £7,500 of tax free lump sum money.

jerrysimon

So it only applies to the 25% portion not the rest of it for which you would pay tax if it was more than 11K ?

Jerry

jerrysimon

I could not see myself putting in more than 25.2K for me and 10K for my wife. Total out would be 44K if you include 20% tax enhancement. I would put in as much from my salary over the next year or two (I reckon about 10-15K) plus top up the rest with my mortgage equity.

That would fund two years salary 22K (no tax if split between my wife and I) to defer my pension. If done over two years that would not exceed the 7.5K rule I dont think ?

I would then probably use my lump sum from my second pension to clear any outstanding mortgage.

I need to check my AVC option first, but will ensure I top my wifes new SIPP up to the max allowable on her earnings before she leaves.



Jerry

jamesd

jerrysimon wrote: »

So it only applies to the 25% portion not the rest of it for which you would pay tax if it was more than 11K ?

That's right.

jerrysimon

Reading this on the HL website I think I may have paid too much into my wife's SIPP

"I'm a member of a defined benefit pension

The benefits you are building up each year are assigned a monetary value.
This value counts towards the annual allowance and could therefore restrict what you can contribute to another pension. You need to contact your pension administrator and ask for this value, including against which year's annual allowance it counts."


Seems like you have to take account of more than just your contributions into your work pension i.e. in my case my wife put in £500 and they put in £1500 and presumably any money it makes.


Jerry

kidmugsy

jerrysimon wrote: »

Reading this on the HL website I think I may have paid too much into my wife's SIPP

"I'm a member of a defined benefit pension

The benefits you are building up each year are assigned a monetary value.
This value counts towards the annual allowance and could therefore restrict what you can contribute to another pension. You need to contact your pension administrator and ask for this value, including against which year's annual allowance it counts."


Seems like you have to take account of more than just your contributions into your work pension i.e. in my case my wife put in £500 and they put in £1500 and presumably any money it makes.

Worry not! Your wife is nowhere near her annual allowance (£40k, less the added value of the DB pension): for her the governing consideration is just her pay minus her own contribution to the DB pension.

maximumgardener

individual pension contribs allowable is £40k max pa OR up to his/hers max salary pa. Right?