Late to the pension game

tobyj

Hi All,

As the subject says, I'm approaching 50 and until recently, haven't given much thought to retirement and pensions. Well, I have a pension which has laid dormant for > 10 years - I didn't have much money going spare at the end of each month and decided that it could be used elsewhere until recently.

All employees in my current workplace were setup with pensions April 2016, a small portion of our salary's, as well as a small contribution from the firm are paid in each month. As I fall into the highest rate tax band, I believe as it stands, I can only contribute £10K this year towards a pension. I have £40K in savings that I would like to stick into a pension and believe that I can make use of the "Carry Forward" scheme. I think this means that I can make use of the past 3 years allowance, which if I am not wrong means I have a total of £130K (£50k + £40k + £40K) minus any contributions which I have made in the last 3 years. Does that sound right?

I was thinking of sticking whatever money I could into a Hargreaves Lansdown SIPP, does that sound like a reasonable thing to do? Do I need advice from an IFA or can I glean enough information from the web to the right thing?

Many thanks for any replies.

Toby.

kidmugsy

What tax rate do you expect/hope to pay in retirement?

atush

Why can you only put in 10K? if your income is up to 40K or more (and it must be if you pay HRT) then you can out in up to 40K net (ie 80%) less your current personal and employers contribution this year.

I assume your employers contribution hasnt been high as you have only just been autoenrolled and those employers dont tend to b very generous.

How much over the threshold do you earn? How much will you and your employer together pay into your pension this tax year? Should be on your payslips.

xylophone

See http://www.hl.co.uk/pensions/sipp/pension-carry-forward

"What carry forward is and who could benefit

This year's pension annual allowance is as low as £10,000 for some high earners.

However, pension carry forward is a rule that allows some people to contribute more and receive extra tax relief.

Remember: tax rules can change and the value of tax benefits depends on your individual circumstances.

Pension carry forward rules - the basics

The principle is simple: if you haven’t used your full annual allowance in any of the last three tax years (see below), carry forward allows you to make up for that and contribute up to an additional £130,000 this tax year. If you're a 45% taxpayer, this could secure you up to an extra £58,500 tax relief.

However, there are some restrictions. To qualify for carry forward, you must also:

Have had a pension in each of the years from which you are carrying forward, even if you haven't contributed to it (the State Pension doesn't count);

Have earnings of at least the amount you are contributing. For instance, to make a contribution of £130,000 and receive up to £58,500 tax relief you must have earnings of at least £130,000 this tax year.

There are other factors to consider if you or your employer have contributed to other pensions in addition to your SIPP or you have been a member of a final salary scheme - please download the Annual Allowance & Carry Forward Factsheet for details."

tobyj

Hey guys, thanks for all the replies - really appreciate it :-)

I believe that the figure of £40k decreases by £1 for every £2 earnt over £150K, up until £210K (which equates to £10K). I also think I've seen it mentioned that this figure of £10K is going to go down to £4K next year?

The total amount paid into the company pension will be around £3K by the end of the tax year.

The main benefit to me as I see it, since I'm late to the game is that the £130K or thereabouts which I hopefully will be able to put in will effectively cost me £71,500 (as the government will put in 45p for every 55p I put in ) and when I want to crystalise the pension, I can take out 25% tax free.

If the above is correct, does that mean I can stick in the £40K which I have in my savings into a SIPP (which will effectively be worth ~ £72K after I file my tax return). How would I go about that? Do I need to enlist the services of an IFA or is it something simple enough to do, if so can someone point me in the right direction.

Also there seem to be many funds which one can invest money in. Is choosing one straightforward?

Sorry for all the questions and thanks again.

atush

the 40K allowance for this year should be reduced by the 3K paid in by you and your employer already.

Of the 37K gross remaining, remember to reduce to take acct of the tax relief you will receive.

xylophone

http://www.pruadviser.co.uk/content/knowledge/technical-centre/consultations-budget-autumn-statement/summer-budget-2015/reduction-in-pensions-tax-relief-for-higher-earners/

I also think I've seen it mentioned that this figure of £10K is going to go down to £4K next year?

Are you thinking of the Money Purchase Annual Allowance which applies to those who have flexibly accessed their DC pension?

http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/

https://www.employeebenefits.co.uk/issues/march-online-2017-2/government-confirms-reduction-in-money-purchase-annual-allowance/

OldMusicGuy

I've been in a similar situation. It's easy - you just pay cash directly into your HL SIPP. They add 20% automatically and then you claim the higher rate tax relief through self assessment and get a nice lump sum back from HMRC. No need for an IFA. All you need to do is make sure you aren't going over all your carry forward allowance and make sure you take into account what may have been paid in already this tax year.

Put as much as you can in. I significantly boosted my pension pot over the last 5 years by maxing out what I could put in and using carry forward. You are in the sad position though that the amount you can contribute is significantly lower than it used to be. And like you said above, watch the allowance tapering if your income is above the £110K level.

There is a good carry forward allowance calculator on the HL site.

tobyj

I may be confusing myself with the "Money Purchase Annual Allowance" which presumably means that as things stand, I can still up in £10K annually into the pension.

So I think I understand most of what's been said, just would like to clarify one thing.

"carry forward allows you to make up for that and contribute up to an additional £130,000 this tax year"

So I have a carry forward amount of £130K for this year (£50K + £40K + £40K). If I pay the £40K which I have into a SIPP (which equates to ~ £72K after rebate, etc) can someone tell me how much my carry forward allowance will be for next year? Sorry if this a straightforward question.

Let say I transfer money into a HL SIPP, is choosing a fund to invest in straightforward and do their returns generally match past performance?

Thanks again for all help, one step closer to pulling the trigger.

MoneySavingUser

tobyj wrote: »

I may be confusing myself with the "Money Purchase Annual Allowance" which presumably means that as things stand, I can still up in £10K annually into the pension.

So I think I understand most of what's been said, just would like to clarify one thing.

"carry forward allows you to make up for that and contribute up to an additional £130,000 this tax year"

So I have a carry forward amount of £130K for this year (£50K + £40K + £40K). If I pay the £40K which I have into a SIPP (which equates to ~ £72K after rebate, etc) can someone tell me how much my carry forward allowance will be for next year? Sorry if this a straightforward question.

Let say I transfer money into a HL SIPP, is choosing a fund to invest in straightforward and do their returns generally match past performance?

Thanks again for all help, one step closer to pulling the trigger.

Presumably, your salary is £200k + for you to be limited to £10k for MPAA.

If you pay in £40k this is grossed up to £50k which uses up the current year £10k first, then £40k of the oldest year but that oldest year also drops off so the remainder of that years allowance is wasted so you might want to put in £48k which is grossed up to £60k which uses up the current year £10k and the oldest years £50k.

Then next year you have £40k oldest year, £40k year after, None because you have used this years £10k and £10k as next years allowance so next year you have £90k which is £72k net to pay in.

I've ignored your £3k for the moment, but basically you take that off the £10k first, leaving you with £7k for this year and £50k from the oldest year, giving £57k gross which is £45,600 net to maximise use of allowances.

MoneySavingUser

tobyj wrote: »

Let say I transfer money into a HL SIPP, is choosing a fund to invest in straightforward and do their returns generally match past performance?

Past performance is never a guide to future performance!

You might want to consider index funds

http://monevator.com/low-cost-index-trackers/

http://www.marketwatch.com/story/warren-buffett-to-heirs-put-my-estate-in-index-funds-2014-03-13

My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.

Is the £3k inclusive of both your own and your employers contributions - you need to include both when testing the annual allowance limit.

The drop to £4k is the MPAA which is for people who have flexibly accessed their pensions.

The limit for you is the tapered annual excess allowance which stays at £10k.