Planning for retirement

Bemma

I like what you're thinking...
I wrote about this recently, you're a few years ahead of me, but you seemed to have very similar thinking...
https://forums.moneysavingexpert.com/discussion/6060068/borrowing-to-increase-contributions&highlight=bemma

It's all about the SalSac tax gain, which for me is a straight 57% uplift. Between 0% a 15% on the way out.

atush

If you would have to take out a loan to boost pension contribs, it sounds to me like you dont have enough emergency cash and non pension investments to hand.

concernedpharmacist

Thanks.

As may be clear, I am not at all expert or informed in financial planning!! But your post does very much reflect my thinking.

This is reassuring, that perhaps I understand more than I thought!!!

concernedpharmacist

Thanks Bemma

As may be clear, I am not at all expert or informed in financial planning!! But your post does very much reflect my thinking.

This is reassuring, that perhaps I understand more than I thought!!!

concernedpharmacist

Atush. You are absolutely right. I have no savings. But my final salary pension lump sum of £60k is just two years away.
That's why it seems unusual looking to take out a loan in order to increase pension contributions. But it seems that this could be very advantageous nevertheless.

kinger101

If not 100% sure how the pension recycling rules work, but could some advise whether OP's plans might be effected by these?

concernedpharmacist

Kinger. My understanding was that as the lump sum I will use is from a DB pension, then recycling did not apply.

Am I correct?

Malthusian

Tax free lump sums from DB schemes are subject to the recycling rules same as those from DC schemes.

The first two years' contributions or close to that are tax-free cash recycling and the OP faces a severe tax penalty if they carry it out. At least 40% of their tax free lump sum, possibly 55% if they are taking the maximum lump sum, plus a scheme sanction charge of 15% which the pension scheme is likely to attempt to recover from the OP. Depending on where their birthday falls in the year it may be slightly more or less than two years.

After they turn 60 and draw their DB pension, the contributions are not tax-free cash recycling as they are funded by the £20k of DB taxable income, not the tax free cash.

Taking out a loan to make pension contributions and repaying it with the tax-free cash is explicitly included in the definition of tax-free cash recycling by HMRC.

HMRC_PTM133810 wrote:

The scope of the recycling rule includes any transaction entered into for the purposes of recycling. For example, the taking out of a loan to provide the wherewithal to pay a contribution into a registered pension scheme, where that loan is to be repaid with the pension commencement lump sum.

For the contributions prior to the DB pension starting, all the necessary conditions are in place:

• tax-free cash > 7,500
• contributions have cumulatively increased by more than 30% (the OP hasn't stated their current contributions but an extra £20,000pa seems almost certain to be more than a 30% increase)
• cumulative contributions are more than 30% of the tax-free lump sum (40k / 60k = 67%)
• recycling is pre-planned

It is quite difficult to break the tax-free cash recycling rules but the OP will have managed it if they go ahead with this.

However once their DB pension is in payment they can do this because the pension contributions will be funded using the taxable DB income, not the tax free lump sum. "Recycling" taxable pension income back into a pension is absolutely fine (if you have enough earned income to make it tax-relieved).

However they can't increase contributions before they have the extra income from the DB pension, using the upcoming tax free lump sum to fund them (via a loan repaid using the tax free cash). Not to this extent.

atush

concernedpharmacist wrote: »

It seems odd contemplating taking a loan in order to maximise contributions to my pension scheme (and thereby reduce tax), but if I have done the maths right there are considerable savings to be made by doing this.

The reason I can contemplate this is because I will be able to pay off any short-term borrowing with part of my lump sum from the DB pension in 2 years time.

Of course even more saving with 0% credit card use (is this considered to be a form of "stoozing"?

Does this mean you have zero savings and investments outside of pensions?

concernedpharmacist

Malthusian.

I am currently paying 30% pension contributions (last 18months) and am proposing increasing to 55%.

Does this change your assessment?

Do you still think I should wait until DB pension is in payment before increasing?

If I did have a mortgage could I use my lump sum to pay this off without falling foul of recycling rules?

Your advice is welcomed

Simon