Early retirement-funding the gap

Redsox64

Sorry I’ve got another question. I’ve only just increased my AVC contribution to £500 a month. Have been paying £300 a month for the last 12 months. If I open a SIPP how much could I put in before the end of this tax year? 

Secret2ndAccount

From April 6 2020 to April 5 2021 add up all the pension contributions you have made or will have made to LGPS. That's your monthly contribs + your AVC's. Subtract that from the total salary for the same period. Divide by 1.25. That's how much you can put in. The gov't tops up the SIPP, and the total into pensions = total earnings.

Made up example:

Salary  29780

Pension (employee contribs) 260/mth = 3120

AVC's 9*300 + 3*500 = 4200

Salary - Pension - AVC = 29780 - 3120 - 4200 = 22460

22460 / 1.25 = 17968

So you could put 17968 into SIPP

Quick check: Gov't freebie = 17968 / 4 = 4492

17968 + 4492 + 4200 + 3120 = 29780   perfect! Total money in = salary.

I normally put in a bit less. They don't come around and arrest you if you put in too much, but I would hate to have to fill in a form for the sake of a £5 refund.

Croeso69

Secret2ndAccount said:

From April 6 2020 to April 5 2021 add up all the pension contributions you and your employer have made or will have made to LGPS. That's your monthly contribs+your employer's contribs + your AVC's. Subtract that from the total salary for the same period. Divide by 1.25. That's how much you can put in. The gov't tops up the SIPP, and the total into pensions = total earnings.

Made up example:

Salary  29780

Pension (employer & employee contribs) 260/mth = 3120

AVC's 9*300 + 3*500 = 4200

Salary - Pension - AVC = 29780 - 3120 - 4200 = 22460

22460 / 1.25 = 17968

So you could put 17968 into SIPP

Quick check: Gov't freebie = 17968 / 4 = 4492

17968 + 4492 + 4200 + 3120 = 29780   perfect! Total money in = salary.

I normally put in a bit less. They don't come around and arrest you if you put in too much, but I would hate to have to fill in a form for the sake of a £5 refund.

I dont think this is correct.

LGPS is a defined benefit scheme. Employer and employee contributions not relevant.

Need to work out the increase in the defined benefit over the year and multiply by 16 I think to get the annual allowance cost.

I am not sure what the next step is - perhaps deduct this and total AVCs from the salary to give the maximum gross contribution available. Then multiply by 0.8 to get the net amount?

Redsox64

Thanks for comments so far. Is anyone able to confirm how to work out what I could put into a new SIPP if I open one before  before April 2021.

AlanP_2

You have 2 limits to consider, the first is based on your Annual Salary and the second is based on the Annual Allowance.

ANNUAL SALARY

The maximun you can pay in to any pension scheme is limited by what you earn. So (Annual Salary - Employee LGPS Contributions - AVC Contributions) will calculate how much you have left over £x. You can then contribute 80% of £x in to a SIPP and the tax relief will gross it back up to £x.


ANNUAL ALLOWANCE

HMRC restrict pension contributions to £40k per year. Easy enough for a DC / SIPP / AVC contribution as it is just the sum of all those contributions INCLUDING EMPLOYER CONTRIBUTIONS. Trickier with a Defined Benefit scheme as the "value" for AA purposes is based on the increase in value of the benefits over the year and not what has been paid in by either the employee or the employer.

Your LGPS statement probably gives you a figure for this but that will always be 4 - 6 months after the end of the tax year so you will need to do some calculations yourself by working out what your benefits will be as of 31/03/21. You can then use the calculator at https://www.lgpsmember.org/more/aa-quick-check-tool.php, plug in your estimates, last years values and your AVC contributions to get an AA value.

You then need to compare this to the £40k AA and see what you can contribute to a SIPP.

You can exceed £40k by using Carry Forward if you have spare AA from the last 3 years. Using a claculator such as https://www.hl.co.uk/pensions/contributions/carry-forward-rule/annual-allowance-calculator will help you to work that out.

michaels

Secret2ndAccount said:

From April 6 2020 to April 5 2021 add up all the pension contributions you and your employer have made or will have made to LGPS. That's your monthly contribs+your employer's contribs + your AVC's. Subtract that from the total salary for the same period. Divide by 1.25. That's how much you can put in. The gov't tops up the SIPP, and the total into pensions = total earnings.

Made up example:

Salary  29780

Pension (employer & employee contribs) 260/mth = 3120

AVC's 9*300 + 3*500 = 4200

Salary - Pension - AVC = 29780 - 3120 - 4200 = 22460

22460 / 1.25 = 17968

So you could put 17968 into SIPP

Quick check: Gov't freebie = 17968 / 4 = 4492

17968 + 4492 + 4200 + 3120 = 29780   perfect! Total money in = salary.

I normally put in a bit less. They don't come around and arrest you if you put in too much, but I would hate to have to fill in a form for the sake of a £5 refund.

If it wasn't DB, I think you would not need to deduct the employer pension contributions from salary in this calculation, they would only apply to the annual allowance limit not the 100% of income limit?

(Effectively they are treated as extra income for the purposes of the calculation)

Secret2ndAccount

There's a calculator here: https://www.pruadviser.co.uk/xpf_calculators/defined-benefit-pension-input-tool/

that might help.

A quick primer which you may or may not need:

Most company pension schemes today are Defined Contribution schemes. You pay in each month, and your employer makes a payment too. It's easy to see the numbers on your payslip. The money goes into your own personal pension pot. When you retire, you have a lot of choices as to how you take the money. You can take a bit more, or a bit less, but it is possible to run out if you overspend.

You appear to be in a CARE scheme? That's a DB or Defined Benefit scheme. It's harder to see exactly how much you and your employer are effectively paying in. All the money goes into one giant pot, shared with your past, present and future colleagues. The money is invested by elves (some people call them managers and trustees) who make sure there is enough in there to pay everyone's pension according to a set of rules which you should have been presented with. The great thing is that you get a payment every month for life, and it normally goes up with inflation. DB schemes are generally considered better than DC.

Sometimes when you pay in AVC's they are put into a separate DC pension. Sometimes they are used to buy extra proportion in your DB scheme. Again, you have to consult the scheme rules.

All this makes it a bit harder to figure out your effective contribution so you know  how much room you have left to contribute more. The same upper limit would apply to either a SIPP or increasing AVC's.

If you are a paperwork stickler you might have enough info to do all the working out. There are several forumites who are in the LGPS. Maybe they can contribute some info here. Do you have a work colleague who's a pension geek?

One strategy is to go in low. We've been talking about numbers like 15k into your SIPP. You could open a SIPP and put in say 5k before April. That's very unlikely to be more than your limit. Then you have a year to figure out a more accurate contribution for 2021/22, but at least you haven't missed out entirely on your 2020/21 opportunity, and you've given that money the longest opportunity to grow. We did mention that you might struggle to put in the max every year to retirement anyway, as it will add up to more than your savings.

Redsox64

Thank you. I’ve dug out an estimate that I got for if I retired last year at 56, gives the following:
LTA £1073100
value of crystallised benefits £344517
percentage used 32%

Total value used £344517
total percentage used 32%

Total value unused £728582
percentage unused 68%

PIP 6/4/20-5/4/21
pension input amount £1600
unused allowance £38400
taxable amount £0

I am really struggling to understand it all, I don’t know what a crystallised benefit is? Can I work out my AA from these figures?I’ve rounded the figures. Help...... thanks 

Bobziz

With salary sacrifice, is there not a minimum wage issue to consider too ?

AlanP_2

Redsox64 said:

Thank you. I’ve dug out an estimate that I got for if I retired last year at 56, gives the following:
LTA £1073100
value of crystallised benefits £344517
percentage used 32%

Total value used £344517
total percentage used 32%

Total value unused £728582
percentage unused 68%

PIP 6/4/20-5/4/21
pension input amount £1600
unused allowance £38400
taxable amount £0

I am really struggling to understand it all, I don’t know what a crystallised benefit is? Can I work out my AA from these figures?I’ve rounded the figures. Help...... thanks 

The crystallised benefit is a calculation based on the value of your LGPS benefits which is then tested against the HMRC set Life Time Allowance (LTA) which is the maximum value of all your pensions (excluding State Pension) before HMRC decide you are too well off and need to pay some more tax. At 32% you are a long way off that.

The Pension Input Amount is the AA charge, but by the sounds of it that £1600 is based on you retiring on a specific date prior to 05/04/21 which you didn't so not a lot of help.

When did you start work there, or tpo be more exact do you have any pre-2014 service?

If you don't then calculating the AA is fairly easy:

Salary * 1/49th accrual rate = Annual Pension accrued. Multiply by 16 to calculate AA and then add on your AVC contrinbutions.

NOTE - Salary is actually what you will earn in the tax year so needs to be adjusted for any overtime / payrises / promotions / part time working etc. where applicable.

If you have pre -2014 service it's a bit more complicated and Years / Days of service need to be factored in.