Classic Civil service Pension - buying additional pension

Yorkshireshrek

Hi I'm approaching 60 and about to retire. I am considering spending around £48,000 on additional pension for my classic civil service pension which would buy me £2,000 a year pension and a tax free lump sum of £6,000. I am a 40% rate tax payer so would only cost around £28,800 after tax relief, although my pension will then be taxable at 20%. I estimate it will take 14 or 15 years for my pension to complete recouping that investment and making money, by which point I will benefit from a state pension and income will be less of a problem by then. Just wanting to know from anybody the pros and cons of investing that money elsewhere rather than locking it away in my pension, Thanks.

Dazed_and_C0nfused

How have you calculated the tax relief you think is due?

If the tax relief is correct the payback period would be 11.4 years (£2,000 x 11.4 = £22,800 + £6,000 TFLS).

westv

Presumably the extra income is index linked too.

hugheskevi

Will you have £48,000 of income subject to higher rate tax? That would require taxable earnings (or other income) of a bit over £100,000 in 2021/22 once standard contributions are taken into account.

If so, you probably get 60% relief on the amount of taxable income over £100,000.

Do you have enough carry-forward of unused Annual Allowance to cover this purchase plus normal pension accrual in 2020/21?

Yorkshireshrek

Thanks for the responses. I calculated 40% tax relief back on £48,000 leaving £28,800 invested.I then factored in I get £6,000 lump sum immediately so £22,800 to recoup. For accruing pension I assumed £2,000 annually less 20% tax as retired basic rate tax payer leaving £1,600 additional pension £22,800/ £1,600 = 14.25 years. I currently earn and will earn next year considerably less than £100K and have plenty of unused annual allowance plus normal pension accrual for a £48,00 lump sum payment. Have  not  factored in investment interest rates or CPI pension increases. Have I worked this all out correctly or missed anything?

Thanks 

hugheskevi

Yorkshireshrek said:

I currently earn and will earn next year considerably less than £100K

So why do you think you will get higher rate relief on the full £48,000 contribution? Wouldn't you only get higher rate relief on the amount of your taxable income in excess of £50,000 (or whatever your personal higher rate threshold is)?

Dazed_and_C0nfused

Yorkshireshrek said:

Thanks for the responses. I calculated 40% tax relief back on £48,000 leaving £28,800 invested.I then factored in I get £6,000 lump sum immediately so £22,800 to recoup. For accruing pension I assumed £2,000 annually less 20% tax as retired basic rate tax payer leaving £1,600 additional pension £22,800/ £1,600 = 14.25 years. I currently earn and will earn next year considerably less than £100K and have plenty of unused annual allowance plus normal pension accrual for a £48,00 lump sum payment. Have  not  factored in investment interest rates or CPI pension increases. Have I worked this all out correctly or missed anything?

Thanks 

I don't think you can have understood how tax relief on pension contributions works.  Roughly what do you expect your P60 to show your taxable pay to be in the tax year you intend paying the £48k?

And will you have any other taxable income in the same tax year?

But can understand your thinking regarding how long the payback will be.

Yorkshireshrek

Thanks for the advice folks have not allowed for factoring in deducting pension payments from my taxable salary in current tax year which brings my annual allowance down below £48k. Think I have it right now and can ask HMRC and my pension provider a few informed questions

Dazed_and_C0nfused

This type of contribution to a public sector DB scheme is unusual in that it is paid gross with no tax relief whatsoever at the point of payment.

This is notoriously misunderstood by HMRC with there being regular posts from people who are unable to obtain the correct tax relief.  There are also occasional posts from people who have been very disappointed with the tax relief received as they did not understand the consequences before making the contribution.

For example in the current tax year a higher rate taxpayer could pay £7500.40.  Less than 40% of the tax relief you were expecting from your original post.

Are you absolutely certain you understand how this type of contribution works with tax?

Yorkshireshrek

Hi thanks Dazed and Confused Yes it is unusual paying gross and asking for it back from HMRC - I have spoken to HMRC and they confirmed that after deducting gross monthly salary contributions this tax year, I could contribute another £36,000 and get 40% tax relief on it, which I can reclaim at the end of this tax year on my tax return. Difficult decision as it is balancing short term gains in keeping the cash and investing in an ISA in the hope that currently falling savings interest rates will still make it worthwhile V longer term benefits in paying for additional pension knowing  that after just over 14 years, additional pension will start to acccumulate beyond initial investment, and factoring in too that pension goes up each year with CPI which is curently just higher than savings rates.

RetSol

Don't over think it. The benefits of the classic scheme are unobtainable elsewhere. lf you think that you can afford it, just do it. .