Increase wife's teacher's pension contributions or my SIPP

james_09

I've been trying to get to grips with my wife's teachers pension, specifically whether it is worth her putting additional contributions via Faster Accrual vs me putting more money in my SIPP.

My wife is a basic rate tax payer and I am a higher rate tax payer.

The plan is to both retire in 20 years time at which point my SIPP becomes available (age 57) and the old final salary part of my wife's teachers pension becomes available to her (age 60).

The average salary part of her pension can be drawn 7 year's later when she is 67 and it is this part where the faster accrual contribution comes in.

The increase in pension I have been quoted for next year if my wife opts into the faster accrual rate of 1/45 would be a gross cost to her of £2,124 for the year (£1,699 after tax).
This would buy her an extra £222 a year at age 67. It is however index linked.

For the same net cost I could get £2,831 into my SIPP.

Any thoughts?

crv1963

james_09 wrote: »

I've been trying to get to grips with my wife's teachers pension, specifically whether it is worth her putting additional contributions via Faster Accrual vs me putting more money in my SIPP.

My wife is a basic rate tax payer and I am a higher rate tax payer.

Any thoughts?

I don't know the ins and outs of the teachers scheme, but would suggest looking at what pensions you will both have coming in at retirement and who will pay the most tax.

Index linking is valuable.

Look to the Survivors Pension when one of you dies.

We are saving into a SIPP for my wife for the very purpose of allowing her to retire at 55 instead of having to work to 60 or heaven forbid 67.

We plan to use her SIPP pot to draw down to zero by SPA along with a continuous income for life from her DC pot, which with the Survivors Pension she would get from my DB pension and then her SP would enable her to have a regular income and live a life.

We decided our income needs and worked backwards from there of which pots/ savings would allow us to have what we want and when. Doing this enabled us to work out retirement back from SPA to 60 and then back again to 57/54 respectively.

Just busy saving now and trying to future proof our home.

In the event she goes first I would have enough of my own income so I could just leave her pots to our heirs, draw a minimal income, or blow the lot (unlikely) or use it for care home fees if needed.

Good luck.

ex-pat_scot

we have a similar conundrum.

You should consider the relative tax - marginal rate of relief on contributions now, versus effective tax rate upon withdrawal in retirement.

1. you will also need to consider whether the strategy would breach AA or LTA
2. first thing is usually to contribute to the max level of company matching

Option 1 - pay into your SIPP.
If you are HR taxpayer, or blessed to be in the "lose Personal Allowance" zone, then your marginal rate of relief is 42% or 62% (or 47% if additional rate taxpayer.

if you expect to be BR taxpayer in retirement then your effective tax rate at withdrawal would be 15% (20% BR and 25% tax free).
So you are getting relief at 42% / 62% and paying tax at 15%.
That's a good deal.


Option 2 - fund your wife's pension.
BR taxpayer. I don't think teachers can sal sac, so she'd get 20% relief on contributions.
On withdrawal, if her existing pension uses up her personal allowance, then she'd be incurring a 15% effective rate on withdrawal.
if she uses it before existing pension kicks in, ie retiring early, then she'd have an effective 0% rate on withdrawal.

For us, my SIPP (62% relief in vs 15% out) wins over my wife (20% relief in vs 0% / 15% out). LTA considerations mean i need to keep this under review though.

As noted above, there are other considerations:
- are you likely to hit LTA?
- will the LTA change?
- there's an emotional challenge if all savings are in your name, even if it might be a sensible tax efficient approach.

Spreadsheet_Addict

The plan is to both retire in 20 years time at which point my SIPP becomes available (age 57) and the old final salary part of my wife's teachers pension becomes available to her (age 60).

The average salary part of her pension can be drawn 7 year's later when she is 67 and it is this part where the faster accrual contribution comes in.

Are you sure you can draw these two elements separately? It was my understanding (which I am happy to have corrected) that you have to draw them at the same time; so if your wife drew her pension at 60, then the FS part would be unreduced, but the CARE part would be reduced for early payment.

Also some posters are talking about payment of extra contributions in terms of it being like a DC pension. Paying in for faster accrual or extra pension will buy extra CARE pension which will give a guaranteed amount annually, index linked for life, so it is not the same at all; i.e. in a DC pension, you would get more tax relief on contributions for you than your wife, but what your extra 20% contribution will buy you in a DC pension might struggle to match the annual benefit of a guaranteed, index linked amount.

cobson

Spreadsheet_Addict wrote: »

Are you sure you can draw these two elements separately? It was my understanding (which I am happy to have corrected) that you have to draw them at the same time; so if your wife drew her pension at 60, then the FS part would be unreduced, but the CARE part would be reduced for early payment.

My understanding is that if you are taking one of your pensions at NRA (e.g. 60 for the teacher's FS scheme) then you can defer taking the other pension until a later date. It is only if you are taking the first pension before NRA (i.e. at 55-59) that all pensions have to be taken at once.

Spreadsheet_Addict

My understanding is that if you are taking one of your pensions at NRA (e.g. 60 for the teacher's FS scheme) then you can defer taking the other pension until a later date. It is only if you are taking the first pension before NRA (i.e. at 55-59) that all pensions have to be taken at once.

Thanks - interesting to note. My wife and I are planning on retiring at 55, which is probably why I thought this as it would apply in our case, but not the one here.