Should I defer my DB pension?

RADDERS

Camster wrote: »

jamesd, thank you for your detailed reply to my post.

Could you please clarify a couple of the points that I don't have correct?

1. I could also use the carry forward rule to put more into my new pension for the current tax year and the three previous tax years, and would receive tax top ups from HMRC into the pension fund at my normal tax rate of 20%.

Correct but only up to your qualifying income this tax year. You can carry forward unused annual allowance but not income.

Sorry if I'm being a bit dense here, but I'm not sure if I understand what this means. I was thinking that if I had unused allowances from previous years, I could use savings I had to make additional payments up to the amount of my unused allowance for this year and the last three years into a new personal pension and this would get HMRC tax relief. I thought this would be equivalent to me doing this over the last four years of working, but I was just doing it all at the same time before my employment ended in early May.

2. If I estimated my unused allowance of £40,000 for the current year and the previous three years as £32,000 a year, I could put in £128,000 (4 x £32,000) and would get a 20% contribution from HMRC of £25,600, giving a total pension pot of £153,600. I could then take a 25% on off tax free withdrawal of £38,400, leaving a pension pot of £115,200.

Not quite right. It would be £160,000 because you add 25% to give 20% basic rate relief, but you're right about carry forward amounts and how to calculate the others. But you would need at least £128,000 of qualifying income this tax year.

My gross income this year is £44,400 and my pension contribution plus my employers contribution comes to around £7,500, so I would have about £36,900in unused allowance for this year to put in to a new pension fund. Again as in point 1 above, I thought I could do the same calculation for the three previous years and put that amount into the pension fund from my savings and I would receive the HMRC top up on these amounts.

I don't have £128,000 of income for this tax year, so I'm not sure how I work out how much I can put into the new pension to use up my unused allowance from previous years?

You can only pay into a personal pension the amount of earned income, so even if you have allowance left over you have to have the total amount of income. So you would be able to pay in this year 80% of £36,900 and get the tax relief on this amount.
Unfortunately you will not be able to utilise the unused allowances.

Camster

Radders, thanks for the explanation.

So I don't understand the point of being able to carry forward unused allowances for the past three years if they don't allow you to increase your pension contributions.

jamesd

Dazed_and_confused wrote: »

Just realised you answered correct to op's opening assumption, are you sure he is going to be able avoid paying tax on the £15000?

Yes. Either it'll be taxed then they will get the tax relief or the employer will be one of those willing to pay directly into a pension without tax deducted. Either way the effect is no income tax paid on it.

jamesd

Camster wrote: »

Could you please clarify a couple of the points that I don't have correct?

1. I could also use the carry forward rule to put more into my new pension for the current tax year and the three previous tax years, and would receive tax top ups from HMRC into the pension fund at my normal tax rate of 20%.

Correct but only up to your qualifying income this tax year. You can carry forward unused annual allowance but not income.

Sorry if I'm being a bit dense here, but I'm not sure if I understand what this means. I was thinking that if I had unused allowances from previous years, I could use savings I had to make additional payments up to the amount of my unused allowance for this year and the last three years into a new personal pension and this would get HMRC tax relief. I thought this would be equivalent to me doing this over the last four years of working, but I was just doing it all at the same time before my employment ended in early May.

2. If I estimated my unused allowance of £40,000 for the current year and the previous three years as £32,000 a year, I could put in £128,000 (4 x £32,000) and would get a 20% contribution from HMRC of £25,600, giving a total pension pot of £153,600. I could then take a 25% on off tax free withdrawal of £38,400, leaving a pension pot of £115,200.

Not quite right. It would be £160,000 because you add 25% to give 20% basic rate relief, but you're right about carry forward amounts and how to calculate the others. But you would need at least £128,000 of qualifying income this tax year.

My gross income this year is £44,400 and my pension contribution plus my employers contribution comes to around £7,500, so I would have about £36,900in unused allowance for this year to put in to a new pension fund. Again as in point 1 above, I thought I could do the same calculation for the three previous years and put that amount into the pension fund from my savings and I would receive the HMRC top up on these amounts.

I don't have £128,000 of income for this tax year, so I'm not sure how I work out how much I can put into the new pension to use up my unused allowance from previous years?

There are two limits on what an employed person can pay into a pension each tax year and the lowest of the two wins:

1. Qualifying income for the tax year in which the contribution is made. This usually means gross pay. Interest, dividends don't count. Employer contributions don't count towards this.
2. The annual allowance, currently £40,000 a year. If this is exceeded unused allowance from the last three years can be used. Employer contributions do count towards this.

You can put in £44,400 gross (including the tax relief) this tax year. Deduct from this the gross value of what is going in to the work scheme from you. The contributions from your employer don't count towards your pay limit. They do count towards the annual allowance but carry forward of allowance takes care of that.

Unfortunately this means that you learned how good a deal this was a bit too late and don't have time now to get all of the savings into a pension.

jamesd

Camster wrote: »

So I don't understand the point of being able to carry forward unused allowances for the past three years if they don't allow you to increase your pension contributions.

They do allow an increase if pay is high enough, and you can use that a bit, just not for all of the allowance that you could carry forward.

The rule was really intended first for those who have defined benefit pensions and a biggish raise. The calculation of annual allowance used for DB is really the increase in the value of the benefits accrued in the scheme during the tax year times twenty. A biggish raise could end up going way over the allowance for one year. Letting the previous three years be used deals with much of that problem.

It's also common for people close to retirement to want to pay in more, in part because it's so near. The carry forward lets those earning close to or over £40k do big for them increases just as those on lower pay can, at least for a few years.

It's unfortunate that you don't have time to fully use the savings but at least you asked in time to do it for some.

Camster

OK Thanks I get it now.

I can benefit from this for this tax year, but not the previous ones. If I had known about this a few years ago I could have started a personal pension, paid in any spare cash up to the annual limit and got tax relief on these additional contributions.

This would have been a much better option that what I did - just keeping my spare cash in a Santander 123 account.

jamesd

On the other and, at least you do have the money, so you're in better condition than many we see who can't wait long at all and might be forced to take at least a year's worth of 6% a year cut.

Camster

I know financially I'm in a good position, but it could have been even better.

I suppose the question comes back to whether it worthwhile to give up the 18 months of gross pension income of around £33,750 by deferring the pension until 60, or to take the hit on the 6% p.a reduction and take the pension now.

I've estimated that by waiting until 60 I would have a pension of about £24,500, which would then increase by the rate of inflation up to a maximum of 2.5% a year. I think it would take around 12 years to make up for the pension income lost by not taking it early, and I'm not convinced that this is worth it.

AlanP_2

If you have enough in savings now why not get as much into a PP this tax year and then add the excess over £30k plus any other earned income in April / May into it?

As to take DB early or not that's a difficult one. Personally I probably would as the reduced DB could be topped up from the PP if required until State Pension kicks in.

jamesd

Camster wrote: »

I suppose the question comes back to whether it worthwhile to give up the 18 months of gross pension income of around £33,750 by deferring the pension until 60, or to take the hit on the 6% p.a reduction and take the pension now.

I've estimated that by waiting until 60 I would have a pension of about £24,500, which would then increase by the rate of inflation up to a maximum of 2.5% a year. I think it would take around 12 years to make up for the pension income lost by not taking it early, and I'm not convinced that this is worth it.

Male life expectancy at sixty is currently 26 years with a one in four chance of reaching age 94 and what looks like about an 87% chance of living at least twelve years.

Given the money you have and assuming £8k state pension, why not start paying yourself the equivalent of £32,500 gross now? Or more? You have the money, after all, so there's no need to wait to take your final income level, just a case of doing it efficiently by waiting on the pension until it's no longer reduced. If you're worried that you might not live that long and concerned about inheritance, term life insurance is very cheap, so you could buy enough to cover the capital drain if you die in say those first twelve years.

It's a bit crude but if you work out what you have left when you reach state pension age, you could add around 4% of that remainder starting now as well, assuming you invest it.

If you want more than that and don't care about inheritance there's always equity release to add some more and the equity isn't going to do you any good when you're dead.

If you have a spouse their planning can be integrated with yours if you like, to get a combined starting at the same time income level.