Anyone else had a letter from TPS for Faster Accrual?

FIRSTTIMER

My faster accrual % contributions (1/45) for next year tax year has shot up from 6.1% to 7.7%, which I wasn't expecting (yes an increase but not by that much).

So between this, 3 year buy out AND normal contributions, I am paying approximately 20% of my pre tax salary (circa £50k) into it, which is excessive. I can afford it, but I am beginning to think in 5 years time, it will suddenly be 25% and so on. I ultimately want to buy the maximum extra pension I can in the scheme (currently £7k between now and when I leave).

My plan is to draw this at age 65 not 68, hence buy out. But stop working at 60.
To avoid mamuth taxation, I am directing cash into a LISA monthly to bridge between 60-65 in addition to a CETV Defined Benefit Scheme I can draw my yearly tax allowance between 60-65 (current value is 75k).

As with paying nearly 20% into TPS I am presuming it will generate a good income at age 65 surely!!!! Or am I thinking it all wrong. The increase in % is what has shocked me really. Any thoughts?

hugheskevi

Change in cost is due to a change in the discount rate. The discount rate is effectively the assumed rate of return over time. The Govt. reduced this for 2019/20 onwards from CPI+2.8% to CPI+2.4%.

Obviously if contributions grow by less over time, you need to contribute more initially to meet a given future financial requirement compared to a scenario where the funds are growing at a more rapid rate.

You can read more about it at this link.

The same applies to all public service pension schemes, so anyone making voluntary pension contributions will either see an increase in the cost, or the amount they are purchasing will be lower.

Dazed_and_confused

And to add insult to injury you will no longer be benefitting from any higher rate tax relief on your contributions!

Unless you are Scottish resident for tax purposes or have other sources of taxable income.

FIRSTTIMER

I never knew that about Higher Rate tax relief! Is that across all pensions regardless.

I am really trying to bank as much of the £7k extra now to be fair (should take me around 8/9 years), so its cheaper for me now rather than in 20 years time trying to top up with much bigger rates because of age.

Dazed_and_confused

If you are paying via "net pay" you wouldn't really need to as you always get the maximum possible relief that way, there is never anything extra that can be claimed.

For example in the current tax year your "salary" might be £50k. And we'll assume you have no other income of note and aren't Scottish resident for tax purposes.

You have a Personal Allowance of £11,850 and the next £34,500 is taxed at 20%. So normally you would be paying 40% tax on £3,650 of your income.

But your pension contributions mean your taxable pay (the bit that goes on your P60) is only say £42,000. So you don't need to pay any 40% tax - that is how your pension contributions have saved you higher rate tax.

For 2019:20 the standard higher rate threshold is £50,000 (outside Scotland) so even if you weren't contributing to a pension you would no longer be paying any higher rate tax on your taxable salary.

Not trying to put you off contribution, it's still saving you basic rate tax and safeguarding your retirement

FIRSTTIMER

Thanks for this clarification. I am banking £1k which is the accrual rate every year with increase of CPI+1.6%. Hoping for a pension around 40-45k at age 65. I'll then take the max lump sum and reduced pension.

hugheskevi

Hoping for a pension around 40-45k at age 65. I'll then take the max lump sum and reduced pension.

Given the poor 12:1 commutation rate to exchange pension to lump sum, is there a reason for this (given you would have about 25 years life expectancy at that point, other things being equal)?

Wouldn't other methods of generating a capital lump sum possibly be better, eg, personal pension, LISA, etc.

FIRSTTIMER

Pay less tax and impact of more tax when State pension kicks in.

hugheskevi

Pay less tax and impact of more tax when State pension kicks in.

I think you may want to do some analysis of the impact of taxed pension income vs. untaxed lump sum. The penalty for exchanging pension into lump sum is significant, and unless there are other reasons, eg, Lifetime Allowance, financial need or health issues it will usually be the case that taking taxed income will lead to a much better outcome than tax free cash.

Tax-free sounds good and many don't look beyond that, but if it is a choice between getting £1000 and paying 20% tax (or even 40%) versus £500 tax free then it isn't a good deal.

You don't sound like you will have a great financial need, hopefully you won't have health issues, unless you have other pension savings the Lifetime Allowance won't be an issue for you, so I think you should carefully consider what the best financial decision is around pension vs lump sum so as to get best value and ensure you are investing in the most appropriate vehicles.

Note also that for the period between age 60-65 you will only get revaluation of CPI as a deferred member, so Faster Accrual becomes increasingly less attractive, eg, at age 59 you are paying a contribution rate which assumes CPI+1.6% revaluation beyond age 60, but which you will not receive. At some point, you may consider Added Pension a better choice.

FIRSTTIMER

Thanks for this, buy out takes me down to only 3-4k extra pension allowed and they have said faster accrual will also cease for me in around 10 years, as I will more than likely exceed the allowed limit for buying extra pension. So hoping to just be doing buy out until I retire. I may do half a day or so, to still be a member of TPS between age 60-65.

hyubh

FIRSTTIMER wrote: »

I am paying approximately 20% of my pre tax salary (circa £50k) into it, which is excessive.

Hoping for a pension around 40-45k at age 65.

A well-paid public sector worker writes! I'm glad hugheskevi has given you the technical answers, but really, the way you phrased the original question...