Increase DC pension contribution vs overpay mortgage?

AllyMac

I'm not NHS! Private sector but 9% contribution to the CARE scheme so yes it's close to £6K. We're in consultation for the inevitable change to DC and that will happen over the course of the 5 year period I'm looking at now - but the new employee % contribution isn't at all clear at the moment.

atush

I'd pay more into the pension, with your 40K emergency stash, plus mortgage paid off in 5 years time.

justme111

I know, paying higher rate of tax is annoying. If one has to pay £3000 in order to spend another £3000 that one wants to spend then so be it. It is about the balance and quality of life now is as important if not more as quality of life later. Besides op seems to have all nicely planned.
If I was in op's position I might even consider investments outside pension as 16 years is a long time for government to fiddle with retirement age of her db part of pension.

somethingcorporate

I'd go with pension. It looks like you don't need more cash and I would maximise that HRT relief whilst it lasts.

atush

If I was in op's position I might even consider investments outside pension as 16 years is a long time for government to fiddle with retirement age of her db part of pension.

Well I disagree. As changes to pensions are not backdated, so what you have already done before tends to be safe.

sure, the 25% TFLS could be taken away- by a govt who does not want to win the next election. Now with auto enrollment, it isnt just the rich who are gaining via pensions.

kidmugsy

I see that you have access to salary sacrifice. If you can make your ca £500 p.m. extra pension contribution that way, you'd get the advantage of avoiding 2% NIC and receiving any of the employer NIC that your particular employer chooses to share with you.

You'd want to balance that feature versus the advantage of a SIPP being independent of your employment scheme. Mind you, if you are going to end up with an employment DC scheme that might give you lots of money independently of the DB scheme anyway. Ditto selling a house.

Amateur afterthought: "childcare vouchers on salary sacrifice" - would paying more pension contribution give you access to more state doles for the children? Isn't there a cut off for something or other at £50k p.a.?

AllyMac

Child benefit threshold is based on total taxable income, so nothing doing there!

Thanks for the information about NIC saving if I use employer AVCs. The reason I don't want to do this is that I checked the scheme and AVCs cannot be taken before the DB scheme is paying out. The scheme age is 65 and my aim for my private pension is to bridge 60-65 so that I can retire early without a reduction.

There are so many variables!
I know in the end it comes down up personal opinion and things like appetite for risk. I don't like irreversible decisions hence shying away from locking it into pension already. You can see how I am from my like of offset mortgage instead of actual overpayment - I like the idea I can change my mind! I think I need it to be a real financial no brainer to go ahead with increasing pension.

Thank you all for your comments - it really helps to talk it through!

RickyB2000

AllyMac wrote: »

Child benefit threshold is based on total taxable income, so nothing doing there!

Thanks for the information about NIC saving if I use employer AVCs. The reason I don't want to do this is that I checked the scheme and AVCs cannot be taken before the DB scheme is paying out. The scheme age is 65 and my aim for my private pension is to bridge 60-65 so that I can retire early without a reduction.

There are so many variables!
I know in the end it comes down up personal opinion and things like appetite for risk. I don't like irreversible decisions hence shying away from locking it into pension already. You can see how I am from my like of offset mortgage instead of actual overpayment - I like the idea I can change my mind! I think I need it to be a real financial no brainer to go ahead with increasing pension.

Thank you all for your comments - it really helps to talk it through!

Child benefit is based on adjusted net income. So your taxable income after pensions payments. So reduce it below £50k using a pension and you can keep the benefit (as long as partner is also under £50k)

https://www.gov.uk/guidance/adjusted-net-income

jamesd

AllyMac wrote: »

I also have £40K in an offset against that - which I don't want to change for various reasons. It's partly my "instant access" money, and partly my back up in case life goes pear shaped - so I want it immediately available and low risk.

You really should learn about P2P lending. It's not no risk but it is quite modest in risk and gives rapid access if you pick the places with active secondary markets and/or short loan durations. Getting three quarters or more of the money out within a few days would be easy enough, with the rest in a week or two.

I don't have much in my own mortgage offset account because I can make much more with P2P, raw interest rates in the 10-12% and up range if you don't pick the biggest names.

AllyMac wrote: »

Twist to my mortgage: in 5 years time I will receive enough money to pay it off. I have a divorce related legal charge on a property. So any savings that I make by overpaying my mortgage are only for that 5 year period not the life of the mortgage.

Are you required to use the money to pay off the mortgage or can you use it for whatever you want?

I'm asking because paying off a mortgage early or overpaying usually makes someone poorer than they could have been due to the difference between mortgage interest rates and investment returns.

AllyMac wrote: »

Then after 5 years when I have the money coming to pay the mortgage off, I lift the £30K (5 years of £500 a month) from my offset account and stick it straight into my pension. If I'm over the annual limit of £40K with my work pension included, I think I can rely on rules of last 3 years allowance.
So I then get the 40% relief as well as having banked the interest saving.

Pension contributions are limited to your qualifying - earned - income in the tax year in which you make the contributions. Tax relief is at the rate applicable to the tax band that applies to that portion of income, so the portion at higher rate would get you higher rate but most would be basic rate.

In a salary sacrifice system you receive no income tax benefit from pension contributions for income within your income tax personal allowance. You'd need to use contributions to a personal pension instead and those would get basic rate relief.

Given the AVC restriction to being only available when the main pension pays out I doubt that it is desirable to use AVCs at present. A personal pension would probably be a better buy than the AVCs even with lower tax and NI relief because it's available sooner and can be used to help earlier retirement, bridging time between retirement and normal retirement age for the DB scheme.

AllyMac wrote: »

If anyone has got to the end and has a view, I'd be very grateful for your opinions

If child benefit is a factor, use salary sacrifice to reduce your income to below £50k so you still get it. If you can't afford this, do it say every other year and save the extra income from one year to afford it the second year. this way you get it for half the years instead of none. Or do it one year in two or three if that's what you can afford. Your 40k is a useful buffer for this.

An option to consider is use of VCT investing, particularly the lower end of the VCT risk range. This will let you eliminate most of your income tax bill if you want to do it. You could do something like this:

1. Buy £20,000 worth and ask HMRC to adjust your PAYE tax code to give you the VCT relief during the tax year. You'd get 20% relief on this, so £6,000 back from HMRC representing the first £6,000 of your income tax bill. You don't receive the relief if you don't pay enough income tax for it ,so ensure that the relief is no higher than the tax due, undershoot rather than overshooting.
2. In five years you can sell and keep the proceeds. Sell sooner than five years and you have to repay the 30%. Not desirable, but doable in an emergency.
3. The VCTs I buy tend to pay about 10-11% tax exempt dividends a year, some useful extra income.

£20k might be a bit much but it does appear that you can afford to defer receiving some of your income for five years. Perhaps £10k buy, net cost £7,000 with the £3,000 returned during the tax year. Five years of that would cost you £35,000 in tied up money then it'd just be net £7,000 in and £7,000 out each year and ongoing lower tax bill.

AllyMac

Wow! Such a long reply and so much to think about there - thank you for taking all that time!