Does my plan make sense?

DBdoobydoo

jamesd wrote: »

There are a few things you can do:

1. look into mortgage providers that offer longer terms on standard mortgages, 85 and now maybe older is available
2. look at equity release since this can be very flexible. Not just pay nothing, there are also products that are interest only and accept repayments. If you even want to repay anything
3. you're allowed to defer your state pension once after claiming it. It's increased by 5.8% inflation linked for life per year of deferral. Maybe resume when no longer subject to higher rate tax
4. use pension contributions

Pension contributions are very interesting because you can pay in then rapidly take a tax free lump sum. Say you pay in net 24k at higher rate tax. 25% is added inside the pension to give you 20% basic rate relief taking the pension to 30k. You tell HMRC and they adjust your tax code to give you higher rate relief of 6k. You take a 25% tax free lump sum of 7.5k from the pension and put the 75% taxable into a flexi-access drawdown pot that you take nothing from until you stop work or are about to reach 75. So:

24k net in
13.5k out: 6k from HMRC and 7.5k out in lump sum
22.5k in drawdown pot for later

That 22.5k only cost you 10.5k so before tax on the way out you've more than doubled your money. Assuming you draw at basic rate it's 18k after tax for a cost of 10.5k.

7.5k of tax free lump sum is a specific number. There are restrictions on recycling pension lump sums and HMRC might think you're doing that. One thing explicitly permitted is 7.5k of tax free lump sum every rolling 12 months (not tax year).

There's the potential to greatly reduce the mortgage capital cost.

The lifetime allowance needs considering. DB pensions of 10k and 18k may have used 560k already. Current one is 4k (80k of LTA) increasing by 1.1k (22k of LTA) a year. So there does seem to be room to make pension contributions.

Thanks for the worked examples re pension contributions. I had come to much the same conclusions myself as to the best way of minimising tax & started a new thread for discussion https://forums.moneysavingexpert.com/discussion/6022325/minimising-tax-paid-in-run-up-to-retirement


Now that I'm receiving my state pension if I were to funnel it through a pension for the next four years for an effective 15% tax rate the gain by deferring four years is minimal at today's values ignoring inflation & index linkage.


I'm nowhere near the LTA as the 18K pension is not from the UK but from when I worked in the EU.

DBdoobydoo

DBdoobydoo wrote: »

Ah well. It is what it is. We do have a lovely house & I love my job but I am not getting any younger so would like to spend more time with my new wife who is ten years younger than me. I can reduce my hours some & still afford the mortgage but cashing in the DB pension that is not index linked seemed like an excellent wheeze to allow me to work just a couple of days a week while still being able to pay off the mortgage.


It seems I am exceptionally unlucky that my DB pension is not index linked. Since 1997 it has been a legal requirement for all DB pension schemes to be index linked but my service with the company ended in 1997. It was OK back in the day when the company was flush with money & was able to take contribution holidays for years but still offer index linking on a discretionary basis. However times got tough & the company was taken over then that company was taken over in turn & the DB scheme was closed. The current company refuses to make any discretionary increase despite it having been the practice of the previous incarnations of the company.

Another update. When I contacted the pension scheme administrators regarding transferring out they noticed that as 40% of my pension is post-1988 GMP that I should have received an increase last April now that I am post-SPA. It's not much but at least I know that in the future 40% of my pension will be increased by CPI to a maximum of 3%.