Life's swerve ball - need to plan differently!

Triumph13

K6Chris and Michaels are spot on. I assumed you would pay voluntary NICs to get your wife up to the full £8300 SP and so your overall income long term is made up of:

• £17.4k from 4% drawdown on remaining 75% of your pot
• £8.3k from your SP
• £8.3k from wife's SP
• £7k from rental property
• less £3.6k tax on the above.

The cost to backfill for the 7 years when you don't get a SP is 7 x £8.3k x 80% = £46.5k. Only 80% as your drawdown will already be enough to use up your Personal Allowance so you effectively pay 20% tax on your SP when you do get it. (In reality HMRC will just up the tax on your drawdown, but impact is exactly the same as if the SP was taxed)

Rodders2409

Dooohhhh...got it...I think!



So, long term when I'm over 67 yrs and based on an estimated pot of £580K at 60 yrs...
£17.4k from 4% drawdown on remaining 75% of your pot
£8.3k from your SP
£8.3k from wife's SP
£7k from rental property
less £3.6k tax on the above.

....all gives approx £37K per year.

The period 60-67yrs...
Cash in 25% tax free = £145K
Use £45K to cover my SP = £6500p/a
Rental income = £7000
Mrs SP = £8300
4% draw down = £17.4K
Less tax = £3.2K....pure guesswork...how is this calculated?

...all gives approx £36K per year

Plus we use the remaining £100K to invest elsewhere, or get done the things we need or want ahead of the crap that's coming our way :-( ....which sounds favourite!

Am I getting there?

This is very different to the picture in my head before I entered this thread, and in a positive way, so thanks for sticking with me.

k6chris

Unlike the past, where many retirements were funded by the DB pension from one job, plus state pension, both of which occurred at the same time, today's retirees are pulling together their retirement income from a wider variety of sources. Mine (come the great day) will be made up of 2 x DB, 1 x DC, 1 x SIPP, a redudancy payment, some AVCs, a TFLS and some savings..add to that a couple of pensions and some savings from my other half and you get the monster spreadsheet that I have been building for the last year or so....I must have checked and rechecked the calculations about 30 times before I was happy that we could actually afford to retire...now I just need to pull the rip cord!!!

Good luck

Rodders2409

I wanted to add to my last post (63!) following a re-cap through the thread and all the lovely info you've given me....

I need to...

Either make payments into the Mrs' Prudential plan to make the most out of her tax, or transfer it to somewhere that will allow me to add new payments.

Top up the Mrs' tax contributions to get the max SP we can.

....do I still need to double check the 40% tax relief on my contributions or are we saying that, because it's all Salary Sacrifice, we don't need to because I'm not being taxed at source as it were?

Then the biggest thing is to stay employed and pour as much as we can into the existing pension.
Or is it worth starting up a SIPP?

I think that's it!

michaels

I think it is 'NI' contributions that are needed for your DW not 'tax' but this is terminology.

Your DW even with no earned income can add 3.6k gross (you pay 2880 govt pays the rest) into a pension so the bit the govt pays is pure gain but you need to consider when to draw out her pension, before her state pension age her income is only 7k so she can also draw 4k pension and not pay any income tax, once she has the state pension drawings from her pension will be taxable but there are also some rules on 'recycling' that you may need to be aware of.

With your pension being salary sacrifice for each £1000 you pay into the pension you are only giving up £580 of net pay as you would pay tax and 2% NI if you took the salary now. If you salary sacrifice below the higher rate tax threshold (45k assuming the rent goes to your DW) then each 1000 to the pension costs you 680 in take home pay (20% tax and 12% NI). You need to play about with the best way to use your wife's pension pot and your income/pension trade off to maximise what you get overall.

Triumph13

Rodders2409 wrote: »

The period 60-67yrs...
Cash in 25% tax free = £145K
Use £45K to cover my SP = £6500p/a
Rental income = £7000
Mrs SP = £8300
4% draw down = £17.4K
Less tax = £3.2K....pure guesswork...how is this calculated?

Am I getting there?

Close. It's actually:

• £8.3k Mrs SP
• 17.4k Drawdown
• £7k Rental
• £6.6k = £46.5k / 7 years
• -£1.9k tax

All of which gets you to £37.4k spendable. The tax is calculated on the assumption that you've shifted the rental to the Mrs, each have a PA of £11.5k (indexed for inflation) and basic rate tax remains at 20%.


Other than paying NIC for the Mrs and increasing your pension contributions for inflation each year you shouldn't need to do anything to achieve this.


If you DO want to do something extra to either retire earlier or have more money then you first priority should be increasing your own salary sacrifice contributions until you are no longer paying 40% tax. This gives much better value than either a SIPP for you (unless your works' pension has very high charges / poor funds) or contributions for your wife. Sal Sac for you turns £58 net into £100 gross which becomes £85 when withdrawn (25% tax free, 75% at basic rate). That's a 47% increase vs only 25% on contributions for wife even if you manage to get them out before her SP and therefore avoid paying any tax.

coyrls

Rodders2409 wrote: »

....do I still need to double check the 40% tax relief on my contributions or are we saying that, because it's all Salary Sacrifice, we don't need to because I'm not being taxed at source as it were?

No checking required, the salary sacrifice is being taken from your nominal gross pay (nominal because salary sacrifice means you are not actually ever "paid" the part of the salary that you are sacrificing) prior to any taxation, so there is no tax paid to reclaim.

Triumph13

k6chris wrote: »

Unlike the past, where many retirements were funded by the DB pension from one job, plus state pension, both of which occurred at the same time, today's retirees are pulling together their retirement income from a wider variety of sources. Mine (come the great day) will be made up of 2 x DB, 1 x DC, 1 x SIPP, a redudancy payment, some AVCs, a TFLS and some savings..add to that a couple of pensions and some savings from my other half and you get the monster spreadsheet that I have been building for the last year or so....I must have checked and rechecked the calculations about 30 times before I was happy that we could actually afford to retire...now I just need to pull the rip cord!!!

Good luck

Almost everything out there on retirement seems to be either this old-fashioned model of work / private pension plus SP starting at the same time, or the MMM or ERE model of you build a pile of investments then when it's big enough you retire and start drawing down. Not that helpful for people like k6chris or me where you have this crazy complexity of a couple with SPs and various bits of DBs all coming on stream at different dates - particularly if retiring before 55 so you can't even get at most of your funds at first. Add in LTA issues, if you're lucky enough to suffer from them, and it can definitely be described as a non-trivial exercise. The one thing that does make modelling slightly simpler is to split the pot between a long term drawdown pot that pays out from day 1, and a bridging pot that just fills in gaps until things like SP come on line.

jamesd

I'll expand on salary sacrifice a bit. First, it's ideal because you get income tax and NI saving automatically and you must not tell HMRC that it is pension contributions without also saying salary sacrifice, else you might accidentally claim double tax relief.

In salary sacrifice you agree to a contractual reduction in pay and your employer agrees to make employer pension contributions into your pension.

Because the sacrificed money is never pay it's not subject to income tax, employee or employer NI. The whole gross sacrifice goes into the pension. Since it never shows up as taxable pay it's never part of your taxable income. Sacrifice from 50k to 40k and you get deductions for 40k not 50k, automatically giving you all the relief you're entitled to.

But it's better than that. Below the higher rate band the employee NI you save is 12% not the 2% for higher rate. This is where it gets fun. You have 7k of non-work property income. Sacrifice to still be basic rate for income tax on the combined income and you get 52% relief:

40% income tax
12% basic rate range NI

This is because the NI is calculated just on pay so when pay is in the basic rate range you save the 12% NI even though you're saving income tax at 40% on your combined income.

But you can do even better. Income tax is calculated for a full year but NI is calculated for individual pay periods only. So you can increase the amount of 12% NI saving you get by sacrificing down to minimum wage in some months then just enough to get full employer matching for the rest.

Bet you didn't know you could get 52% relief on your property income!

Since the sacrificed pay isn't taxable pay it also keeps you out of the higher rate BTL relief reductions if you sacrifice enough to be a basic rate income tax payer.

The post below from michaels refers to an earlier work in progress version of this post that had 1 as a typo for 12.

michaels

12% not 1% so above hrt 40% + 2%, below 20% (basic rate tax) + 12% NI.

Once you are below higher rate tax it is less clear whether you pension contributions or the 3.6k for your DW make most sense as 75% of yours are likely to be taxed at basic rate (20%) whereas if she draws hers down before getting her state pension then all of hers might be tax free.