Voluntary NI /SIPP/ future planning

changing_ways

I am retired and can claim my state pension soon. I can increase it by 5 years through voluntary NI contributions but that will be taxed at marginal rate of 40%. We don't actually need the extra state pension income for normal living. I had decided not to buy the NI contributions, but then it occurred to me that as my spouse has a much lower pension and my life expectancy is a bit below normal, I could use part of maximised state pension to invest £2800 annually in a SIPP for me. That way if I died before 75 OH would get it tax free. If I didn't die then I'd be stuck with the high marginal tax rate but at least the investment should have increased.

Is this a sensible plan or can anyone suggest something better?

Dazed_and_C0nfused

Assuming the fifth year is a part year and you have to pay c£4k for the five years you will be recouping maybe £1,170/year gross (£22.50 x 52), £700 net of tax.

So after 6 years, and ignoring the triple lock, you are in profit despite having to pay 40% tax.

Do you have any pensionable earnings or is your £2,800 figure a reference to the non earners limit of £2,880?

As far as I'm aware a contribution of upto £3,600 (gross) will extend your basic rate tax band even if you have no pensionable earnings so contributing to a SIPP may save you upto £720 off your personal income tax liability as well (£3,600 being taxed at 20% rather than 40%).

tacpot12

Your second sentence confused me for a moment, but I assume you mean that you are already a 40% tax payer due to existing retirement income, so any higher state pension payments would be taxed at 40%. So whether it is worth paying the voluntary NI contributions depends on what you will get back after paying 40% tax on it. 

If you put what you can into a SIPP, you will get 40% tax relief on the contributions, and as you say, if you die before you are 75, your OH gets the money tax free, and if not, well you end up paying tax at 40% again, so no real loss, but you do have the investment growth on the money and the tax relief. 
  
I think your plan is ok, but it might be simpler to put the money for the voluntary NI contributions into S&S ISA, and not save as much tax. 

Another option would be to use the money for the voluntary NI contributions to allow you to defer your state pension. I expect making the voluntary NI contributions will be the most financially beneficial route.

changing_ways

Thanks for the comments, it's helpful to have a sanity check. Yes, I meant to say £2880 - I have no pensionable earnings.  

I think I'll start investing when the state pension starts and I'll have surplus income. I'll leave deciding about the voluntary NI for a while because paying upfront in the hope of future gain may be the wrong tactics in a pandemic. All the missing years are 2016 on so I have a couple of years grace to decide. 

I wouldn't defer the state pension as my objective is to maximise spouse income if I predecease them.

Marcon

changing_ways said:

Thanks for the comments, it's helpful to have a sanity check. Yes, I meant to say £2880 - I have no pensionable earnings.  

I think I'll start investing when the state pension starts and I'll have surplus income. I'll leave deciding about the voluntary NI for a while because paying upfront in the hope of future gain may be the wrong tactics in a pandemic. All the missing years are 2016 on so I have a couple of years grace to decide. 

I wouldn't defer the state pension as my objective is to maximise spouse income if I predecease them.

If that's the objective, have you looked at insurance as a way of giving your spouse some sort of payment if you die first - possibly life cover or critical illness? Obviously much will depend on your state of health, but it might be worth at least looking at?

AlanP_2

Why not do the £2880 / £3600 SIPP for your wife as well to build her pot up a bit? 

changing_ways

Mostly because he (husband!) is not keen to do it. We'll  probably top up his S&S  ISA instead. 

changing_ways

Marcon said:

changing_ways said:

Thanks for the comments, it's helpful to have a sanity check. Yes, I meant to say £2880 - I have no pensionable earnings.  

I think I'll start investing when the state pension starts and I'll have surplus income. I'll leave deciding about the voluntary NI for a while because paying upfront in the hope of future gain may be the wrong tactics in a pandemic. All the missing years are 2016 on so I have a couple of years grace to decide. 

I wouldn't defer the state pension as my objective is to maximise spouse income if I predecease them.

If that's the objective, have you looked at insurance as a way of giving your spouse some sort of payment if you die first - possibly life cover or critical illness? Obviously much will depend on your state of health, but it might be worth at least looking at?

Thanks for the suggestion, I've had a look at insurance now but it looks like it's probably not a cost effective option for me.