Mortgage and Pensions

jamesd

FatherAbraham wrote: »

Nonsense. Money paid into a pension is tax deferred.FA

Lets use a real example, the roughly £10,000 part of my pay where I get:

1. 40% income tax relief. £10,000 into the pension, net cost £6,000 so far.
2. 12% employee NI saved because the higher rate income isn't from the job where the sacrifice is happening. Net cost now £4,800, £10,000 in the pension.
3. 6.8% added by my employer as part of their employer NI saving. Net cost £4,800, £10,680 in the pension.

I'm 55 or older so now:

4. I take a tax free lumps sum of 25% and place the 75% into flexi-access drawdown for later. £10,680 * 0.25 = £2,670 out, £8,010 left in the pension. Net cost now £2,130 with £8,010 taxable in the pension.

I can do this now, in and just after the current tax year, so you might not like the calculation, but it's reality for me and I do intend to do it.

5. Later, I draw out £45,000 a year of taxable pension money to be within the basic rate band, long before I reach my state pension age but when retired. £11,500 is tax free within my personal allowance and the remaining £33,500 is taxed at 20% so net out is £11,500 + 0.80 * £33,500 = £38,300. Effective tax rate on the £45,000 is (45,000 - 38,300) / 45,000 * 100 = 14.89%.

Applying that effective tax rate to the £8,010 from earlier that's £8,010 * (1 - 0.1489) = £6,817.31 after tax out from a net cost of £2,130, a pure tax and NI gain of £6,817.31 - £2,130 = £4,687.31.

£4,687.31 tax and NI gain on £10,000 of contribution by me, 46.87% gain on the money, after taking into account deferred taxation, before investment performance.

This is an unusually good portion of my income and most of my pension contributions don't do as well but it's no less real because it's unusually good. Definitely would be over-egging it to expect this on all contributions.

Then I'll eliminate the income tax on the way out with VCT buying.

It was good to see your posts today.

bonwitco

Hi. Another thing I have recently been made aware of about my defined benefit pension scheme is that you can take the cash equivalent. i.e. one option is as stated earlier. If the pot value is £320k. Option 1. An annual pension of £18k with no lump sum. Option 2. A reduced pension of £13k & 25% lump sum of app. £90k or. Option 3. Take the cash value or CETV which would be approximately £432k. I am told if I take the cash value then I get 25% tax free then pay tax on the balance. Currently I am a 40% tax payer so this would be a considerable amount to give away to the tax people! I have also been made aware of SIPP and SSAS. I’m becoming more and more confused! Is it possible to take the CETV without paying the tax, put it in the bank and allow yourself a set amount per year as a pension, paying the income tax monthly/annually? Or is it a must that you invest the money in a pension scheme? The reason I ask is. Personal pension schemes cost money. When I die (if I go before my wife) the defined benefit pension continues at 50% of what I was receiving. When my wife dies, the benefits stop. If I took the CETV and did not have to pay 40% tax on 75% of this sum then I could make the pension last over 28 years. Assuming I go before the pension fund diminishes to zero then there would be money left for my children but it’s becoming more and more apparent that you must purchase a pension from a pension provider. Could someone simplify the growing complexity of pensions for me to be able to maximise the money I have possibly available from my defined benefit pension?

kidmugsy

bonwitco wrote: »

my defined benefit pension scheme is that you can take the cash equivalent. i.e. one option is as stated earlier. If the pot value is £320k. ...

There is no pot: a DB pension consists of a set of promises not a pot of money. Why not tell us what the promises are? 50% widow's pension? Inflation-linking to what .. perhaps CPI uncapped? CPI limited to 2.5%? ...

bonwitco wrote: »

Option 1. An annual pension of £18k with no lump sum. Option 2. A reduced pension of £13k ... lump sum of app. £90k

Giving up an index-linked £5k p.a. seems an expensive way to buy £90k of capital even if you allow for the £5k being taxed and the £90k being tax-free. Unless the index-linking protection is feeble.

bonwitco wrote: »

Option 3. Take the ... CETV which would be approximately £432k. I am told if I take the cash value then I get 25% tax free then pay tax on the balance. ... Is it possible to take the CETV without paying the tax, put it in the bank and allow yourself a set amount per year as a pension, paying the income tax monthly/annually? Or is it a must that you invest the money in a pension scheme?

You are confused. If you took the CETV then you end up with a pension scheme with a pension provider. You give them instructions. For example you might tell them to pay you the whole Tax-Free Lump Sum (approx £108k) and a monthly (taxable) £2,000. You will also instruct them what the capital is to be invested in. If you choose a mass market provider your choice of investments will probably be narrower than for a niche provider but the charges you pay will be probably be lower. To effect such a transfer you are obliged to hire an IFA: he will explain to you how you might manage your new pension.

Quite possibly though, he will tell you that unless you have an objective reason to expect a short life for you and your wife you would be wiser to stay in your DB scheme. The multiple you are being offered, equal to 24, is rather underwhelming.

GunJack

What age can you take the DB pension without actuarial reduction??

jamesd

If you were to transfer it would be into a personal pension. Just like your other one you can take 25% of any portion of it as a tax free lump sum and you can take bits of the taxable 75% whenever you like, with the money you take added to your taxable income in the tax year you take it, administered via PAYE operated by the pension scheme.

24x multiple isn't particularly good, perhaps a public sector pension.

Drawdown: safe withdrawal rates has lots of information on income drawdown and how much income you could prudently take depending on the drawdown rules you choose. Starting at about 5% - £21,600 - but potentially skipping inflation increases or taking cuts beyond that if investments do badly, assuming you use the Guyton-Klinger rules.

xylophone

You would be required to take advice from a Pension Transfer Specialist before transfer of your DB pension to a DC scheme.

This would not be cheap.

Without a positive recommendation to transfer, your choice of pension
provider would be limited.

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/495377/pension-benefits-with-a-guarantee-factsheet-jan-2016.pdf

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pension-transfers-conversions/