Thoughts on this rate?

theoldgreychap

Posting for a friend. He is working his redundancy notice and is an active member of a DB scheme. He has the option of sacrificing some of his redundancy payment (severance sacrifice) to acquire an increase in his annual pension. Contribution limited to unused AA from this year plus unused carry forward AA from prior years. They will be a higher rate taxpayer this year even after any severance sacrifice.

The alternative is to take the payment as cash, subject to tax & NI (aware that first £30k tax free).

Every £1000 sacrificed yields an extra £23.57, indexed linked for life with 50% spouses pension on death. Normal retirement date is age 60. No health issues.

He and wife already well catered for in pension & savings terms and no pressing need to access pensions early. He is 54.

Not convinced this looks like a good accrual rate but am interested in views of others on here.

Paul_Herring

From a quick reading of that, every £1000 not sacrificed will be income taxed (40%) & NI'd (2%) down to at least £580 by the time it reaches his bank account, less if it takes him into 45% IT territory.

So, £580 now, or £23.57 per year, indexed etc later on is probably the calculation that should looked at.

But then, putting that £580 into a personal (DC) pension fund could get it back up to £725 (20% rebate), with £145 back on self-assessment (the 40%-20% rebate), then, 25% of that tax free on withdrawal and the rest taxed at their marginal rate...

The sacrifice, (since the employer's NI saving of £138 per £1000 isn't relevant here,) doesn't look too attractive to me, given the other circumstances you've provided.

bostonerimus

Is that an extra £23.57 per week, month or year?

Paul_Herring

bostonerimus wrote: »

Is that an extra £23.57 per week, month or year?

It works out as 2.36% if per year, 28.3% if per month.

Given the title of the thread, and the fact it's been posted at all, I'm going to have a guess it's per year

kidmugsy

Suppose he accepts the tax-free £30k and sal sacs the rest. Where else might he get an index-linked income so cheaply? I suspect "nowhere".

So, the big deals: (i) how good is the inflation-proofing, and (ii) how will widow's pension increase too?

If it's full RPI-linking, and Missus gets 50%, I'd be tempted in his shoes if I were confident of paying Basic Rate income tax in retirement.

ffacoffipawb

Paul_Herring wrote: »

From a quick reading of that, every £1000 not sacrificed will be income taxed (40%) & NI'd (2%) down to at least £580 by the time it reaches his bank account, less if it takes him into 45% IT territory.

So, £580 now, or £23.57 per year, indexed etc later on is probably the calculation that should looked at.

But then, putting that £580 into a personal (DC) pension fund could get it back up to £725 (20% rebate), with £145 back on self-assessment (the 40%-20% rebate), then, 25% of that tax free on withdrawal and the rest taxed at their marginal rate...

The sacrifice, (since the employer's NI saving of £138 per £1000 isn't relevant here,) doesn't look too attractive to me, given the other circumstances you've provided.

You need to allow for tax on the £23.57 as well, but not NI.

theoldgreychap

Thanks for the replies so far. I can’t work out how to use the quote function on my mobile, so apologies for not doing so.

To answer some of the questions raised
1. The £23.57 is per annum
2. The pension increases in line with RPI
3. I said the alternative is to take cash but of course what he would do is take the cash and put it into a DC pension of some sort. So he’s trying to decide whether its better to take the (pretty much) risk-free and known uplift in his DB pension or go with the riskier, but more flexible and inheritable DC alternative.

He is likely to be a basic rate taxpayer in retirement.

Kynthia

I was in a similar situation, but am younger, and I went with putting enough into a SIPP to avoid most higher rate tax and child benefit rebate. With both myself and my OH having DB pensions we thought the diversity of havibg DC funds we could use to fund the gap between retiring and receiving much of our pension and state pension would be good. Plus it's fully inheritable by our children and I had a job offer from another employer with a DB pension scheme.

However it's a decision based on individual circumstances and individual goals. Do they want more guaranteed income and already DC pots, do they have enough DB pension to live on and children they want to inherit? Do they want to retire earlier than the scheme pension age?

Audaxer

It doesn't initially sound like a good idea to me to give up some of the severance payment for an increase in pension, but how much is the maximum severance payment?

I assume that the DB pension also has the option of taking a tax free lump sum. Even that is worth considering if there is a good commutation factor with the DB pension. Also, he may not know that if he takes the tax free lump sum, most DB pensions still allow spouses to still get 50% of the full pension on death of the pension holder, so worth checking the small print regarding that as well.

Albermarle

A common topic on this forum is whether to take the CETV often offered by DB schemes to buy people out of the scheme . If you were offered £1000 to give up only £23.53 of annual pension ( even if it is index linked + 50% spouse ) , then this would seem a very generous offer ( X 42) . So in these simplistic terms , the cash offer looks better.

kidmugsy

Albermarle wrote: »

A common topic on this forum is whether to take the CETV often offered by DB schemes to buy people out of the scheme . If you were offered £1000 to give up only £23.53 of annual pension ( even if it is index linked + 50% spouse ) , then this would seem a very generous offer ( X 42) . So in these simplistic terms , the cash offer looks better.

Good point, but with pension transfers most people will end up paying less than 15% tax on the money eventually. Here it's going to be at least 42% tax and NI, conceivably more.