55 Conundrum

grocerjack

All...a quick update on how this all panned out. I opted for the UFPLS option on the DC fund. It was circa £73k and after tax I got around £52k. With this I cleared all the debts down and bought the mobile home.

The subsequent positive impact on my credit score allowed me to get a new deal with my mortgage provider, which has moved me from a standard deal on 4.8% apr to a new 5 year fixed on 1.89%. Actually my payment per month was £1900 ) so I'd got that original £1200 view very wrong as my other half does the day to day budget). However, the new deal is for £1550 per month saving us £350 per month.

The cleardown of the other debts, all of them including my wife's debts has left us £420 per month better off. I also switched banks but insisted on my zero overdraft ethos, but now getting 3% cashback on my normal utility bills including council tax. The account costs £3 per month but my bills come to over £400 so I'll be about £9 per month better off.

Whilst on this radical financial restructure I decided to use MSE to change utilities supplier as well and that saved me close to £20 per month. As things stand...I have a final salary pension scheduled to pay me around £40k per year when I retire in 10 years. My wife gets hers in 7 years time, circa £10k per year.

I have re-started a new DC scheme with my employer, where I pay 5% and they pay 10% in. This gives my 3 times my salary life cover but I will increase this to 5 times. I continue to contribute £375 per month into the 2 share schemes (a BOGOF and a 5 year SAYE scheme) . On top of this I have a pension with the Pru, given as a compensation for mis-selling many years ago. This fund is £14k and will be transferred into my new DC scheme.

So, all in all, I am around £800 per month better off, and we will be putting £200 of that per month into a savings account to allow an annual mortgage overpayment of £2400. My new DC pension should still buy me an annuity of around £8k per year by 2016 when I retire. So we have a decent income to look forward to provided the country is still reasonably economically OK. Prior to all of this I took the advice of an IFA from vouchedfor.com and after 2 hours of looking at my plans, he concluded that like me, he thought life was for living and the risks were small, in fact he complimented me on my planning and the detail I had gone into. Thanks to everyone on this thread for their comments, negative and positive. I'm pretty addicted to this money saving lark!

Triumph13

Congratulations on having turned your finances around so well. I might not have been so keen on paying all that tax on the pension you cashed in, but you do seem to be in a much better place now.
My key question to you is why on earth are you planning to use your DC scheme to buy an annuity? Working in today's money terms £8k of state pension and £35k of DB will put you on £43k pa. With £8k SP and £10k DB for your spouse that gives a combined post-tax income of £4,400 a month! Do you really need a very expensive extra £6kpa that would be taxed at 40%?


If you have kids you could just take the 25% from the DC and leave the rest untouched as a tax-free inheritance, but if I was in your shoes I'd be using the DC scheme to fund early retirement and heading over to France a couple of years sooner than planned.

hugheskevi

All...a quick update on how this all panned out. I opted for the UFPLS option on the DC fund. It was circa £73k and after tax I got around £52k.

Remember to make sure you fully understand your Annual Allowance position now.

It sounds like you now have an Annual Allowance of £10,000 and that your employer and employee pension contributions are extremely close to that limit.

If you exceed the limit you will probably not get any notification from your pension scheme or HMRC - the onus will be on you to declare if any tax is due. This is likely to be an issue for a few years down the track, when your salary has increased and you have little or no carry-forward available due to mostly using it up.

grocerjack

Good thinking, I will think about and investigate further :beer:

Triumph13 wrote: »

Congratulations on having turned your finances around so well. I might not have been so keen on paying all that tax on the pension you cashed in, but you do seem to be in a much better place now.
My key question to you is why on earth are you planning to use your DC scheme to buy an annuity? Working in today's money terms £8k of state pension and £35k of DB will put you on £43k pa. With £8k SP and £10k DB for your spouse that gives a combined post-tax income of £4,400 a month! Do you really need a very expensive extra £6kpa that would be taxed at 40%?


If you have kids you could just take the 25% from the DC and leave the rest untouched as a tax-free inheritance, but if I was in your shoes I'd be using the DC scheme to fund early retirement and heading over to France a couple of years sooner than planned.

jamesd

grocerjack wrote: »

All...a quick update on how this all panned out. I opted for the UFPLS option on the DC fund. It was circa £73k and after tax I got around £52k. With this I cleared all the debts down and bought the mobile home.

OK, your annual allowance for all money purchase pension contributions is now reduced to £10,000 a year for life and you are prohibited from carrying forward unused allowance from past years. Both your own and your employer's contributions must be within this limit or you will have a penalty to pay. Since 10% from your employer and 5% from you is 11k you may already have gone over this and be obliged to tell HMRC and pay penalties.

When you took the UFPLS the pension scheme you took it from was required by law to tell you:
1. that contributions to any money purchase pension in your name that goes over 10k would make you liable to the annual allowance charge on the excess.
2. that you are required by law to tell your work scheme and any other defined contribution pension schemes that you pay in to that you are subject to the reduced MPAA within 91 days of using the flexible access to take anything other than the tax free lump sum. You probably already broke this law so do tell them as soon as you can. You don't need to tell any schemes that you're not adding to.

Once you have notified a scheme that you are subject to the reduced MPAA that scheme is required by law to send you an annual statement for any year when you go over the 10k. They will also have to tell HMRC the same thing. In addition you are now required to fill in a tax return if you go over 10k gross to all money purchase pensions in a tax year, so you can tell HMRC how far over you went and they can give you the bill.

To calculate the annual allowance charge the amount over the £10k is added to your taxable income and charged accordingly. That effectively undoes the pension tax relief on the amount. However, if this got you increased employer matching you'd still be ahead, so it can make sense.

It's too late now but sticking to just the 25% tax free lump sum would not have reduced your money purchase annual allowance.

Congratulations on the restructuring, it seems as though at an absolute minimum the debt reduction has been good for you both directly and via the new mortgage deal!

Check that the Pru fund doesn't have a guaranteed annuity rate, it might. That could make it worth much more than its face value, depending on what the GAR level is.

As triumph13 wrote, state pension deferral pays something over twice the amount of a comparable inflation-linked annuity so it's usually a poor deal to buy an annuity when you can defer. Say the state pension is 8k and you have 72k to spend, you could instead draw on 36k for deferring for four years to match of beat the annuity income and get the extra 36k left over to use for something.

Your pot seems to be too big to allow that to be done, though, depending on the type of annuity that 8k value is. If it's level, no inflation increases, it might be based on perhaps 6% of the amount spent, implying a pot size of about £133k. So you might instead want to learn about managing drawdown since that's another way to expect to get more than an annuity.

atush

Congrats on the restructuring, but geez.

Paying tax on the pension and upgrading a depreciating asset was IMHO, madness. And then restricting future payments into pension. You may actually have to give up some of your employers free money to stay w/in your new limit?

25% of your 73K pension would have paid you 18,250 tax free. Which was more than your debt. So was really all you should have taken.

So you paid 40% tax on your pension just to upgrade your mobile home. Geez.

grocerjack

Yes because life is for living and not fretting over every penny. That mobile home will give me another 10-15 years of family holidays in a beautiful part of France with my grandchildren and my own 'kids'. Not to mention the many friends I've made there. The fact it's a depreciating asset says more about your attitude to money than mine.

atush wrote: »

Congrats on the restructuring, but geez.

Paying tax on the pension and upgrading a depreciating asset was IMHO, madness. And then restricting future payments into pension. You may actually have to give up some of your employers free money to stay w/in your new limit?

25% of your 73K pension would have paid you 18,250 tax free. Which was more than your debt. So was really all you should have taken.

So you paid 40% tax on your pension just to upgrade your mobile home. Geez.

Triumph13

jamesd wrote: »

state pension deferral pays something over twice the amount of a comparable inflation-linked annuity so it's usually a poor deal to buy an annuity when you can defer. Say the state pension is 8k and you have 72k to spend, you could instead draw on 36k for deferring for four years to match of beat the annuity income and get the extra 36k left over to use for something.

Unless Jack has very expensive tastes, I don't think I would be looking at state pension deferral here as he will already be very well provided with income from DB schemes and standard SP. Better to use the DC funds for either early retirement or future replacement of his infamous 'depreciating asset'!
The one possible exception to this is deferring his spouse's state pension as, depending on what spouse's pension his DB scheme offers, she could be looking at a very big drop in income if he predeceases her.

grocerjack

Hi jamesd, thanks for this, I've just calculated that my total contribution including my employers is £9750 per annum. I can reduce this to as low as 2% and they will double it. Their cap is 10% contribution even if I pay in 6 or 7%. As I'm now at the top of the salary scale for my grade, and the fact I'm 55 it's unlikely to increase through promotion. My salary increases from now on are likely to be 'cost of living; types only. This means constantly looking for better deals on just about everything, but MSE and being savvy is a great help (almost an obsession).

However I now have 1 credit card with zero balance (The Clarity card recommended by MSE for holiday money) , an empty Argos card and a current and savings bank account only. I used some money from a bonus last year to change the doors and windows in the house, have a new A rated boiler installed and TRVs all round the house. So I now also have a hugely energy efficient house. I usually only buy stuff online using my employers affiliation schemes for cash-back or reduced amounts. I use my share schemes to fund just about everything.

I'm unsure if the pension transfer from the other scheme with the Pru into the new DC scheme impacts that maximum allowance as this fund hasn't been contributed to ever. It was awarded as a result of a mis-selling of private pensions that impacted me, so has grown from £6.6k to its current level with no additional funds from me. If it will affect the maximum for this year then it can stay put! It just made sense to me to have everything in one place. I will check before any transfer to see if it has a GAR. I will look at other options aside from an annuity but it's a complex issue with seemingly many different products.

I realise the mobile home was a contentious issue for some, but we've had our old one 11 years and it has given us some wonderful times with our kids and family, and now we have grandchildren arriving (well one has arrived already) it was time to decide what we wanted to do for the next 10 years plus. It's on the Mediterranean , with no maximum age limit (they don't weather like they do here because they're basking in sunshine mostly and ice etc isn't great threat) The deal is the site owner gets to rent it for their customers for 5 continuous weeks in the peak season so our fees would be reduced to around £2k per annum and we still get the other 6 months to holiday as we choose. It's given us choice and for that £2k we can still go for the first 2 weeks in July and from August 19th onwards. It's a 5 year letting plan so when the youngest grandchild starts school properly we can still be there part of the school holidays.

Thank you for taking the time to compose a very useful, well structured and thoughtful reply. I will read again thoroughly and make sure I'm up to speed on each point.

:money::D

jamesd wrote: »

OK, your annual allowance for all money purchase pension contributions is now reduced to £10,000 a year for life and you are prohibited from carrying forward unused allowance from past years. Both your own and your employer's contributions must be within this limit or you will have a penalty to pay. Since 10% from your employer and 5% from you is 11k you may already have gone over this and be obliged to tell HMRC and pay penalties.

When you took the UFPLS the pension scheme you took it from was required by law to tell you:
1. that contributions to any money purchase pension in your name that goes over 10k would make you liable to the annual allowance charge on the excess.
2. that you are required by law to tell your work scheme and any other defined contribution pension schemes that you pay in to that you are subject to the reduced MPAA within 91 days of using the flexible access to take anything other than the tax free lump sum. You probably already broke this law so do tell them as soon as you can. You don't need to tell any schemes that you're not adding to.

Once you have notified a scheme that you are subject to the reduced MPAA that scheme is required by law to send you an annual statement for any year when you go over the 10k. They will also have to tell HMRC the same thing. In addition you are now required to fill in a tax return if you go over 10k gross to all money purchase pensions in a tax year, so you can tell HMRC how far over you went and they can give you the bill.

To calculate the annual allowance charge the amount over the £10k is added to your taxable income and charged accordingly. That effectively undoes the pension tax relief on the amount. However, if this got you increased employer matching you'd still be ahead, so it can make sense.

It's too late now but sticking to just the 25% tax free lump sum would not have reduced your money purchase annual allowance.

Congratulations on the restructuring, it seems as though at an absolute minimum the debt reduction has been good for you both directly and via the new mortgage deal!

Check that the Pru fund doesn't have a guaranteed annuity rate, it might. That could make it worth much more than its face value, depending on what the GAR level is.

As triumph13 wrote, state pension deferral pays something over twice the amount of a comparable inflation-linked annuity so it's usually a poor deal to buy an annuity when you can defer. Say the state pension is 8k and you have 72k to spend, you could instead draw on 36k for deferring for four years to match of beat the annuity income and get the extra 36k left over to use for something.

Your pot seems to be too big to allow that to be done, though, depending on the type of annuity that 8k value is. If it's level, no inflation increases, it might be based on perhaps 6% of the amount spent, implying a pot size of about £133k. So you might instead want to learn about managing drawdown since that's another way to expect to get more than an annuity.

grocerjack

Thanks for this. On the 'depreciating asset'....well I'm just one of those who doesn't see saving everything and being prudent/austere as really living. We have owned and loved our current mobile and it has given us some of the best holidays and times of our lives. We will do the odd cruise as well, maybe visit other places, but this is more like a second home than a holiday home. On retirement in 10 years or so I will be spending 8 months a year there! And for the rest....well i might just sell up and opt for the Med lifestyle.

Thanks for the comments and as with jamesd i will copy and keep the comments for future reference.

:)

Triumph13 wrote: »

Unless Jack has very expensive tastes, I don't think I would be looking at state pension deferral here as he will already be very well provided with income from DB schemes and standard SP. Better to use the DC funds for either early retirement or future replacement of his infamous 'depreciating asset'!
The one possible exception to this is deferring his spouse's state pension as, depending on what spouse's pension his DB scheme offers, she could be looking at a very big drop in income if he predeceases her.