State pension reduction

BoxerfanUK

I seem to remember reading a few years ago, that if you had income in addition to your state pension, that took you over a certain limit, your state pension would reduce by £1 for every £2 that the limit was exceeded!

Does anyone know if this still applies? If so, what is the current limit?

I've looked on the Gov pensions website but can't find any reference to it!

The reason I ask is that as a civil servant in the 'classic' scheme the new rules will allow for an increased lump sum to be taken in return for a lower annual pension. Obviously if my standard pension coupled with the state pension (when it kicked in) were to take me over the limit, then the increased lump sum with reduced CS pension could well be the better option.

Hope this has all made sense, and grateful for any replies.

dunstonh

Does anyone know if this still applies? If so, what is the current limit?

It has nothing to do with state pension.

The figures is £20,900 this tax year and its all income. This includes savings account interest and dividends. If you earn over this amount, every £2 exceeded removes £1 of your age allowance.

BoxerfanUK

Now I'm being really thick here, so could you explain this more fully re this age allowance and the effect it could have?

Basically, I could go with a CS pension of 20K at age 55 + a 60K lump sum, or, about £16,100 plus another 47K lump sum on top of the existing 60K lump sum, or anywhere in between, so can't really decide whether to take max income or max lump sum....or somewhere in the middle.

Cheers

EdInvestor

How much state pension are you due to get in addition to the CS pension?

The age allowance clawback operates on income between 20k and 25k roughly.Sounds like you could be over that anyway, so too late to worry about it, just make sure you don't end up in the high rate band.

dunstonh

The age allowance is an increase in your personal allowance at age 65 and further at 75. At age 55, there is no impact as you have no age allowance.

You can basically ignore the age allowance as it isnt going to be an issue for you for another 10 years. Plus, there are investment options out there which you can utilise in the future which have no impact on age allowance. So, you can spend the next 10 years utilising these to reduce income which would be chargeable (10 years of ISAs at 7k p.a. takes £70,000 out of the tax environment).

BoxerfanUK

Thanks again for replies.

I will have full state pension on top of this as well at 65.

I'm trying to think ahead as am only 49 at the moment and just trying to look at options available to me.

I can go at 55 with 40/80ths of salary (20K) or if I work another 2.5 years I get another 5/80ths which takes me to absolute max of 45/80 + 3 times lump sum on top (each year over 20 counts as double for pension purposes)

May stay on and get the other 5/80 or may not just depends if I've had enough by 55!

Trouble is this extra lump sum option now introduced brings another dimension. Essentially i would gain £12 of extra lump sum and lose £1 in income. I know that if I live to a ripe old age then I guess the higher income is better, but taking into account the tax and NI that I'd pay if taking the higher income, plus the interest lost on the extra lump sum it's a bit of a dilemma as I would imagine this would stretch it to more than 12 years before I was onto a loser for giving up some income.

$64000 question...............................What would you do?

jamesd

Age allowance loss means you get effectively a 33% tax rate on the income between about 20,000 and 25,000, instead of 22%, but only once you qualify for it at age 65.

One option might be use of an investment bond with the maximum amount, a total of 107k, say at 106% allocation (6% more invested than you put in), then taking 5% of that a year as income on which no tax has to be paid. Taxed growth accumulates within the fund. Assuming the investments grow at at least that 5% you'd get 5670 a year in untaxed income from this.

You can accumulate the 5% allowances and use them in later years as convenient. Or use them to partially fund investing the maximum via funds in a stocks and shares ISA wrapper. Income from investment bonds doesn't count against age allowance.

There are potential inheritance tax benefits from use of the investment bond wrapper, possibly also care fees effects if you need that later.

Investing in funds and shifting them into the stocks and shares ISA wrapper each year is another option. Income from ISAs doesn't count against age allowance.

For both the investment bond and ISA options the underlying investment choices are key to the final value you get.

State and additional state pensions are a factor and might make it impossible for you to avoid age allowance reduction but reducing the pension to 16100 would give you a decent chance of avoiding at least some of it. Your own other income sources matter a lot in deciding whether you can practically avoid the effect of age allowance loss. If you're getting 10,000 a year from another pension, you can't really avoid it.

You'd need about 8.36% after inflation return on investment on the 47k additional lump sum to both match the income you lose to get it and preserve its value indefinitely. That's doable if you're using at least medium risk investing - the better UK equity income funds have done it. But not with much extra margin, something like 15% before inflation from the best. At 8.01% you'd have exactly nothing left 40 years later, assuming you live to 40 years. At 7.45% return you'd run out after 30 years. I'm assuming that the pension you lose is index linked and ignoring any spouse benefits - not an insignificant factor.

Forget NI on pensions. Pension isn't a job, no NI to pay.

It really comes down to what investment risk level you pick. I go with high risk for funds, so for me I'd go with the lump sum and invest it. Someone using cautious investments could have too low a chance to be better off for it to be worthwhile. So, how much up and down value in the capital could you live with each year as the stock markets do their up and down dance? If 40%, easy enough, take the money. 30%, pretty much the same. 10%? forget it. 20%? Hmm, that's harder to say. You pick the investments to match the target limit on downward variation and since higher volatility investments tend to grow more, the less variation you accept, the lower the benefit from the lump sum.

Easy choice: stick the maximum you can afford into stocks and shares ISA investments every year starting now. Ideally the full limit. That's tax free capital you can use for emergencies or to provide income. Its also five "practice" years of real investing to see just how comfortable you are with the way markets behave and how well your investments do.

EdInvestor

You don't pay NI on pension income

BoxerfanUK

Thanks for taking the time to reply guys, very interesting.

I'm very tempted to take the lump sum, but as you said my spouses pension (50%) would be something I would have to consider. Yes the pension is index linked.

You mention no NI payable on pension income, so am I right in thinking that when I draw my pension I will only pay NI on earnings from any other job I take! Also, when I reach the point whereby I have my full qualifying years for the state pension does this mean I no longer pay NI at all? Or do I still ALWAYS have to pay NI on any earnings irrespective.

Thanks again

roddydogs

dunstonh wrote: »

It has nothing to do with state pension.

The figures is £20,900 this tax year and its all income. This includes savings account interest and dividends. If you earn over this amount, every £2 exceeded removes £1 of your age allowance.

But NOT any ISA/Tessa ISA interest!

roddydogs

BoxerfanUK wrote: »

Thanks again for replies.

I will have full state pension on top of this as well at 65.

I'm trying to think ahead as am only 49 at the moment and just trying to look at options available to me.

I can go at 55 with 40/80ths of salary (20K) or if I work another 2.5 years I get another 5/80ths which takes me to absolute max of 45/80 + 3 times lump sum on top (each year over 20 counts as double for pension purposes)

May stay on and get the other 5/80 or may not just depends if I've had enough by 55!

Trouble is this extra lump sum option now introduced brings another dimension. Essentially i would gain £12 of extra lump sum and lose £1 in income. I know that if I live to a ripe old age then I guess the higher income is better, but taking into account the tax and NI that I'd pay if taking the higher income, plus the interest lost on the extra lump sum it's a bit of a dilemma as I would imagine this would stretch it to more than 12 years before I was onto a loser for giving up some income.

$64000 question...............................What would you do?

Martin

Always take the "lump Sum" its untaxed!