Depleting savings to put more money in pension

Bemma

I currently Salary Sacrifice as much as I can afford into my pension scheme. Most of this would incur 40% tax. Any further SS would be 20% tax, 12% employee NI and 7% Employer NI. This results in a 57% uplift from my net salary sacrifice going into my pension.

I'm currently 50 years old and would like to try and boost my contributions in the run in to 55+.

I'm considering 'laundering' my savings through my pension. I would increase my SS and supplement my income from my savings. This will effectively boost my savings by 57% as they equivalent amount goes into my pension by salary sacrifice. (obviously staying within my annual allowance and SS minimum wage rules)

The main risk I can see is that I deplete my instantly accessible savings in case of emergency, but this is mitigated as I get closer to 55 as I will then be able to access my pension in some form of drawdown.

A lot of this would be withdrawn tax free using a flexi drawn down - worst case it would be tax at eff 15% when I'm retired: 57% uplift - 15% tax == 33% uplift, so still good value.

Anyone one else using or considering this strategy? Any pitfalls or considerations?

AnotherJoe

The main pitfall in your case woudl be if you depleted your savings too much and then you were made redundant, but otherwise yes i think theres a double benefit, first of all, 40% relief going in and from 0 - 15% coming out, plus I suspect the 40% wont last forever, so take it whilst its going before a future government says its unfair and reduces or removes it..

232607

It’s exactly what I’m planning to do.
I’m coming up to 53 and planning to go at 55.
12 months before 55 I plan to put myself on NMW & supplement this with savings.
This gets the savings in to the pension via the back door.
The treat of losing my job Ect isn’t a worry because as the savings are being depleted so is the timescale to 55.
Sal sac makes the a no brainier.

Albermarle

I think moving savings into your pension is quite a common thing to do .
Especially if other financial commitments are behind you ( mortgage , children etc ) and you have not many years of work left to take advantage of the tax relief.

You do not mention any investment strategy for your current pensions funds.
Obviously it is important that you are in the right kind of funds that suits your situation and risk appetite..

MEM62

AnotherJoe wrote: »

I suspect the 40% wont last forever, so take it whilst its going before a future government says its unfair and reduces or removes it..

There seem to be many that have this belief so I am also making the most of it while it is there. I currently SS my salary so that I suit just under the 40% tax bracket. I am currently 57 and it is nice to see my pension pot growing at a reasonable rate.

Ciprico

Keep an eye on the life time allowance, (LTA) factoring in organic pension growth in addition to your contributions.

The penalty for the above LTA portion of pension removes the tax relief you had going in, plus some...

This is particularly onerous if you only achieved 20% tax relief going in...



The amount of tax you pay depends on how you take the excess. If you take any excess amount above the lifetime allowance as a lump sum it will be taxed at 55 per cent. If you take it as income, for instance as drawdown or by purchasing an annuity, it will be taxed at 25 per cent. This is on top of income tax at your marginal rate.

from : https://www.investorschronicle.co.uk/managing-your-money/2018/04/26/avoid-falling-foul-of-the-pensions-lifetime-allowance/

Paul_Herring

Anyone one else using or considering this strategy?

Already doing it to get £40K/year into my pension.

But I'm fortunate in that what's left after sacrifice is a substantial proportion of what I need to get by, so I'm not exactly burning through my savings to do so.

Just make sure that you don't start eating into your 3-6 month emergency savings however.

Anonymous101

MEM62 wrote: »

There seem to be many that have this belief so I am also making the most of it while it is there. I currently SS my salary so that I suit just under the 40% tax bracket. I am currently 57 and it is nice to see my pension pot growing at a reasonable rate.

Agreed. I'm one of those that believe that the 40% tax relief won't last forever and have been pushing my SS as far as I dare (away from savings) for the last few years.


OP - I'd plan on leaving myself the bare minimum in terms of an emergency fund between now and 55 if I were you. As you say as you approach 55 the risk is hugely reduced. Certainly a good strategy to load up on pension prior to being able to access it.

Bemma

Thanks for the replies, seems like it's a common enough plan. Agree that before 55, keeping some savings back for emergencies, but post 55 (or when getting very close) I could see myself burning through savings as hard as I can within the rules. My emergency fund would be mostly my pension, as it would be accessible then.