Pension Plans and Tax

gupaw

I have an NHS 95 pension and will reach NRA of 60 next year. I am planning to reduce my hours and keep working PT as long as i enjoy it. I am mortgage free, no debts, no dependants and i am in good health. Wife is a couple years older, only income is £3kpa final salary pension We are both due to receive full new state pensions at 66. I also have a decent amount of savings already with no particular plans for. Few things i am trying to figure out.

First of all I am trying to figure out whether it is best to take the maximum PCLS or just take the normal minimum amount (or somewhere in between).

Minimum - £49,200p/a, £147,650 lump sum
Maximum - £39,540p/a, £263,800 lump sum

Obviously the commutation rate is terrible at 1:12, however the £1 of income is going to be taxed at 40% i would expect due to continued earnings through work and then SP at 66. Although i could also invest in a VCT in order to claim back the income tax, obviously that would come with other issues potentially.

I do not need the higher income and i do not need the higher lump sum, so it is more of a question as to what works out 'best' and gives me the highest return.

I have just been comparing the total return from the increased lump sum vs regular saving of the net monthly income, both at 5%. Is this a relevant comparison to do? I have ignored inflation for both calculations as assuming returns would be 5% above inflation, however should i be accounting for inflation increases in the net income contributions as well? Also assumed no tax on savings in either case as would either be in ISAs, in my wife's name and use our CGT allowances.

Anyway, based on my calculations it would take a long time to break-even by taking the higher income but i just can help feel that i am not weighting the advantages of a index linked pension enough.

Secondly, I am in the process of amalgamating my private pensions into a SIPP, this will be worth around £160k. I do not need this money so was considering just leaving it invested for inheritance. My understanding is that this would therefore avoid the LTA assessment until 75 (so maybe this will be gone by then), if i die before 75 then it gets passed on tax free (after any LTA charge), if after 75 then taxed at the beneficiaries marginal rate, again after any LTA charge.

Thirdly, I am in the process of applying for IP16 which would set my LTA at approx £1.16MM, either way i take the NHS pension this should be below the limit, however if i take the max PCLS option then the LTA % used up would be a little lower i believe? leaving some room to crystallize some of the SIPP up to my LTA, take the tax free sum and just leave the rest in drawdown - would this affect the plans mentioned above?

I guess these are all nice problems to have, but there are lots of things to consider, any comments would be appreciated.

Linton

You comparison assuming both the lump sum and excess income are invested is sensible. However I feel the assumption of a long term average return of 5% above inflation is rather ambitious.


Taking the PCLS gives your wife some extra protection should you die early.


Given your tax position and lack of money worries for the future I cannot see any good reason not to go for the higher lump sum.

kidmugsy

gupaw wrote: »

Wife is a couple years older, only income is £3kpa final salary pension ...

whether it is best to take the maximum PCLS or just take the normal minimum amount (or somewhere in between).

Minimum - £49,200p/a, £147,650 lump sum
Maximum - £39,540p/a, £263,800 lump sum

Obviously the commutation rate is terrible at 1:12

I'd be tempted to take the big lump sum and gift most of it to my wife so that she can save or invest it with the returns being tax-free because of her unused Personal Allowance. This gives you both time to move much of it it into tax shelters before her State Pension begins - personal pension for her, ISAs for both, and whatever else takes your fancy. Premium Bonds for you, perhaps?

gupaw

Linton wrote: »

You comparison assuming both the lump sum and excess income are invested is sensible. However I feel the assumption of a long term average return of 5% above inflation is rather ambitious.

Taking the PCLS gives your wife some extra protection should you die early.

Given your tax position and lack of money worries for the future I cannot see any good reason not to go for the higher lump sum.

Even at 3% returns i work break even to be 30 years, 4% to be 38 years. Again assuming 40% tax on the extra income. I believe my cohort life expectancy is 85, so it seems sensible.

kidmugsy wrote: »

I'd be tempted to take the big lump sum and gift most of it to my wife so that she can save or invest it with the returns being tax-free because of her unused Personal Allowance. This gives you both time to move much of it it into tax shelters before her State Pension begins - personal pension for her, ISAs for both, and whatever else takes your fancy. Premium Bonds for you, perhaps?

Yes, that would be the plan really. Gives a few years to funnel the money into ISAs from taxable investments.

Any thoughts on taking the higher pa amount and then just investing the required amount into VCTs to offset income tax liabillity? Is there any data on the historic returns of these investments, considering high charges and investment risk?

xylophone

Have you obtained a new state pension forecast?

Has your wife?

https://www.gov.uk/check-state-pension

https://www.royallondon.com/global/documents/goodwithyourmoney/topping-up-your-state-pension-guide.pdf

Above may be relevant.

Your wife no longer earns?

Had she considered contributing £2880 to a SIPP to get the £720 tax relief?

https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired

gupaw

xylophone wrote: »

Have you obtained a new state pension forecast?

Has your wife?

Above may be relevant.

Your wife no longer earns?

Had she considered contributing £2880 to a SIPP to get the £720 tax relief?

Yes, new state pension forecast obtained for both of us. She needs 3 more full years, currently receiving these through carers allowance NI credits. I have 7 more years to go due to being contracted out. I expect to continue to get these through work or NI credits for looking after grandchildren or paying the class 2 if it comes down to it and its beneficial.

Yes, i should have started a pension for my wife to take advantage of that however i have been a bit lag in that regard.

gupaw

So, i think i have my main point answered. In regards to 2 and 3, is my understanding correct? Any comments about these plans?