Pensions in our 30’s

callmealan

My wife and I are both 35 and I would kindly appreciate others opinions on whether we are missing anything / making any obvious errors in our pension planning and if we are likely to reach our goals (crystal balls at the ready!).

I am 35 and earn 50k plus an annual bonus, so I am now a higher rate tax payer.  I have an auto-enrolment pension with work that has 7k in and monthly contributions are 292 gross (relief at source). My employers contribute the legal minimum. I also have a stakeholder pension, I started when I began working, which I contribute 250 gross per month.  Work pension has fees of 0.72percent and my stakeholder has a fee of 0.8 percent.  I claim back higher rate tax relief in my tax return and avoid some of the child benefit charge.

my wife has a work pension with a fund value of 43000.  She contributes 5% of her salary which is matched by her employers (this is the max) which is 180 pm via salary sacrifice.

At the moment as far as I can see it makes sense for me to contribute most to my pension to make sure we avoid high rate tax and child benefit charge.   Long term however I would like to contribute more to my wife’s pension to equal out what we each have.   As I am not very confident with investments all our pensions are in the default funds - is this a mistake? Should I get professional advise or at this stage is it not worth it?

At the moment we are working on boosting our cash savings with the present situation, but hopefully we will keep increasing our pension contributions (initially mine for the tax relief).   In due course would it be worth getting a sipp or Lisa for my wife or should she increase her contributions to her work pension via salary sacrifice (unmatched by her employer)?

Finally, our pension forecasts are pretty dismal reading and pension calculators vary wildly. I assume this means it is far from an exact science.   Back of a fag packet calculation (after tax earnings minus commuting costs, pension contributions and mortgage) we ideally need around 2800 pm in today’s money after tax when we retire. Are we likely to get anywhere near achieving that by the time we are 68?  Or should we be saving a lot more?

Marcon

Should you be saving a lot more...depends on whether you can afford to do so, knowing that the funds will be tied up (if invested in a pension) for 20+ years before you can access them. Have you done a detailed budget/kept a detailed record of spending over a period of some months to identify any areas where you might save some cash fairly painlessly? If not, it is worth doing.

Remember that children are one of the biggest and least predictable cost centres. If you add so much to your pension that you have to borrow to deal with a child 'crisis', that's not sensible planning.

Why do you need to equal out pension provision for you and your wife? If you divorce, pensions are taken into account when dividing assets. If you get to retirement and are in different tax brackets, then the person in the lower tax bracket (or a non-taxpayer) holds the investments so that investment income is 'theirs' for tax purposes.

callmealan

Thank you for your reply.  Not planning on a divorce, I just felt it would make sense to have more equal pension pots for our future income tax and when one of us dies and therefore loses one of our state pensions (assuming they still exist).  You are quite right about figuring out our spending we have spent lockdown looking at our expenditure and have made some savings, our short term goal is to get our cash reserves up but once we are happy we will likely have a little capacity to save a bit more into the pensions.   Now we have no more nursery/childcare costs we save for our children’s future in junior isa’s but of course you are quite correct that I’m sure there will be unexpected costs along the way!  Sorry for the waffle but I feel now is the time to start trying to understand where we should be with pensions when we still have time to make a difference. 

cloud_dog

callmealan said:

At the moment as far as I can see it makes sense for me to contribute most to my pension to make sure we avoid high rate tax and child benefit charge.  

Unfortunately, I don't believe adding more to your pension will lower your adjusted net income to at/below the CH £50k level with a RAS scheme.

If your employer offered net pay pension or salary sacrifice, this would reduce your income down for CB purposes.

dunstonh

Finally, our pension forecasts are pretty dismal reading and pension calculators vary wildly. I assume this means it is far from an exact science

Garbage in, garbage out.     

Plus, they are not forecasts.  Forecast is something that is likely to happen.  Pension projections are highly unlikely to happen.  And they also convert the figures to show it in today's spending power (not future money value) and they make assumptions that probably don't match your investment potential or your income draw requirement.  They assume pretty much the most expensive income option that most people do not buy.

callmealan

cloud_dog said:

callmealan said:

At the moment as far as I can see it makes sense for me to contribute most to my pension to make sure we avoid high rate tax and child benefit charge.  

Unfortunately, I don't believe adding more to your pension will lower your adjusted net income to at/below the CH £50k level with a RAS scheme.

If your employer offered net pay pension or salary sacrifice, this would reduce your income down for CB purposes.

So it sounds like I have been misunderstanding the child benefit charge and relief at source . Last tax year I got a 6k bonus so my total salary and earnings for the year were 56k.  My pension contributions were 346 pm paid from my salary after tax had been deducted, the pension provider added tax relief so the gross amount of contributions was 5196 per year.   I thought this meant that when I did my self assessment tax return I could claim the higher rate tax relief on my pension contributions and as such that it would bring my net adjusted income down by 5196? So I would only have to pay the child benefit charge on 56k - 5196? And get higher tax relief on pension contributions.

barnstar2077

Your pension contribution sounds a bit low to me considering how much you are earning.  You may also want to consider setting up an S&S ISA so you have more flexibility in later life (money you can live on before you can access your pensions.)  I have a friend in her late fifties who suffers from terrible arthritis now, but can't afford to retire until state pension age.  It is always good to have options.

cloud_dog

Hi

You are mixing up two different aspects.

As a HRT payer in a RAS scheme, you are correct that you claim the missing HRT component back from HMRC.

Unfortunately, a RAS scheme contributions do not lower you adjusted net income, i.e. it does not deduct the contributions from your adjusted net income, lowering it to or below the £50k limit for receiving CB without claw back.

A net pay pension scheme or SS would achieve this.

callmealan

Thanks cloud dog. All clear.

Dunstonh - thanks, the projections have been useful in focusing my mind on increasing my pension contributions!  Can’t hurt!

Barnstar2077 - Thanks, I think the last few months have shown us it’s a good to have cash available.  It’s become one of my priorities to have 6 months living money in cash, luckily for us saving hasn’t been difficult in lockdown.  A s&s isa is probably a good idea in due course for anything unexpected. Thank you.

xylophone

See https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/reduce-high-income-child-benefit-charge/

Case study 1: earnings

"Mr and Mrs A have 3 children under the age of 16. Mrs A claims the child benefit and receives £21.05 per week for the eldest child and £13.95 each for the second and third child. Mrs A does not work.

Mr A earns £48,000 and has also received a bonus of £5,000.

Total adjusted net income = £53,000

Total child benefit claimed = £1,094.60 for the eldest child and £725.40 for each of the other two children = £2,545.40

Tax charge for child benefit =	£53,000 - £50,000 = £3000/100 = 30
	30 x 1% = 30% of £2,545.40 = £763.62

Mrs A will still receive the child benefit of £2,545.40. However, Mr A will suffer the tax charge of £763 (the charge rounded down to the nearest whole pound).

Therefore the effective rate of taxation between £50,000 and £53,000 is 65.43% (£3,000 taxed at 40% is £1,200, add on the £763 HICBC means that the tax is effectively £1,963 which is 65.43% of £3,000).

How can this charge be mitigated?

If Mr A makes a net relief at source pension contribution of £2,400 then this would be grossed up to £3,000. This £3,000 is deducted from the taxable income leaving an adjusted net income of £50,000. This would mean that there is no tax charge to pay. He would then be able to claim another £600 back as higher rate relief applies. Therefore, the pension contribution would actually cost £1,800.

The total tax saving is £1,200 plus £763 = £1,963.

So, the effective rate of tax relief is 65.43%."

callmealan

Thanks xylophone