FIREside Chats

edinburgher

@Cheery_Daff - re. Buying out the reduction, I think the wording suggests the buy out is only temporary (I.e. for three years). Say you retire at 65 with a NPA of 68, that's a 9% reduction). It sounds like you can pay to get "full" pension for 3 years, but that it drops to the 91% figure (for example) forever after that. If I have understood correctly, you're basically buying 9% of one year of unreduced income, whatever this is?

Busy_Mee

Morning all. I have been busy claiming the tax relief on my contributions into my SiPP this morning, so I thought I would share the calculation here.

By way of background I am a Civil Servant with a good DB pension and tax free lump sum when I retire. I am very cautious and have been wary of investing in any additional pensions because  (a) I already have good pension provision and (b) I grew up with lots of horror stories about people losing their life savings in pension funds that went wrong.

However I was persuaded by some good people on here that a SIPP would be a tax efficient vehicle for savings, as I am a HR tax payer.

I invested in Vanguard Target Retirement 2025 accumulation fund in 2019 and 2020 and here is what has happened to my investments:

19/20.                 £12000+ 20% immediate tax relief from pension provider.                   =£14400
20/21.                 £15000+ 20% immediate tax relief from pension provider.                   =£18000
                                                                                                           Total.                      = £32400
                                                                                                    

                                                                                                     Fund is now worth.       =£37197.39

Tax relief claimed from HMRC on 40% £12k                                                                            555.00
                                                               £15k.                                                                           862.80
                                                                                                                      Total.          =.  38,615.19

The initial investment of £27k is now worth £38,615.19

However pension contributions attract tax relief on the way in, but you have to pay tax on 75% of it on the way out. Which should look like this :

Current fund.               £37,197.39
25% tax free.                 £9,299.35
Taxable.                        £27,898.04
Tax.                                   5,579.61
=.                                   £22,318.43
+ Tax free.                          9,299.35
+ Tax relief.                            555.00
+ Tax relief.                            862.80

Total.                               £33,035.58

Therefore the initial investment of £27k is now worth £33,035.58 after all the tax implications.

I hope that all makes sense and people find it useful to see some real figures on how this works.

Cheery_Daff

edinburgher said:

@Cheery_Daff - re. Buying out the reduction, I think the wording suggests the buy out is only temporary (I.e. for three years). Say you retire at 65 with a NPA of 68, that's a 9% reduction). It sounds like you can pay to get "full" pension for 3 years, but that it drops to the 91% figure (for example) forever after that. If I have understood correctly, you're basically buying 9% of one year of unreduced income, whatever this is?

Hmm... if you're right, that sounds a bit crap 😂 I'd read it as if you took it one year early, it would be reduced by 3%, so you could buy out of that, so you could take it one emyear early with no reduction - effectively making your normal pension age a year earlier. But I have no idea of that's right - I'm still getting my head round it all.

They have an extensive booklet with formulas and factor tables and worked examples so I'll take a proper look later and see what else I can figure out.

edinburgher

@Busy_Mee - so you won't pay higher rate tax in retirement? 

Busy_Mee

No, on current calculations my DB pension (reduced because of early retirement and some commuted to lump sum, will be around £26k. I worked part time for a number of years when the kids were little too. I should still be below when my state pension (£9k) kicks in.

Busy_Mee

 I will need to be careful to make sure I don't draw out amounts each year that push me over the HR tax threshold 

edinburgher

Busy_Mee said:

 I will need to be careful to make sure I don't draw out amounts each year that push me over the HR tax threshold 

You read my mind 

Retireinten

Fantastic idea for a thread, I think something like this has been long overdue. 

Why am I investing? 

Honestly, I have a love/hate relationship with my job and the older I get the more it sways to hate. I have less tolerance of the management rubbish, the politics and the stress as I get older.  I don't know about anyone else but I'm much more likely now I'm in my mid 40's to think 'I can't do this for another 10 years' if I have a bad week, when in my 20's or 30's I'd have just taken it in my stride and brushed that week off!


I've changed jobs a few times in the last ten years and that doesn't seem to do the trick, so I think the issue is very much part of the profession I am in at the level I work at.


So financial independence will give me and my other half the choice to either stop work altogether or dip in and out of the work we want to do.  


There are other things I'd rather be doing nowadays too. 

How much do I think I'll need?
When I turned 40 (I'm now 46) I became obsessed with two things, one of which was retirement planning. 


At the time I had the vaguest idea of retiring at 55 on £30k net a year with no clue how to achieve this or what we had already saved.  This is for a couple, hubby is very much on board as long as he doesn't have to do any thinking and I don't mention the words 'in today's money' to him:)


Six years on our figure is £36k net with a target lump sum of £100k for fun money/big purchases. 


I would say the pensions board, although scary at times, has transformed my finances.  It's through the people and the knowledge on that board that I have gone from no plan to a detailed plan and lots of confidence I can actually pull this off.. 



How am I going to get there? 
I've been working on the plan for a while now so it's pretty detailed.


I have an active LGPS pension of £14,500 per year plus £21k lump sum payable at 60.  This is what it's worth now, so that may be closer to £20k if I can stick at the job until retirement. 


Husband has a work DC pension. His company pay in the minimum but its salary sacrifice which helps.  He pays in 21% of his salary and we have pretty much doubled his pot value in the last four years as he plays catch up. 


We're saving into ISAs to bridge the 55-57 age gap and I am paying into a private pension to fund the 57-59 age gap before I draw my DB pension. 


We have solar panels too (a discreet, industrial system ) that should generate £3k per annum tax free until we're 62.


We will add to our cash pot once our investments are where they need to be.



Plan is for DH to drawdown up to his tax threshold, so not pay any tax if he can avoid it until he gets his state pension, when his drawdown will reduce.  I'm currently learning about crystallised and uncrystalised pension funds and various ways to drawdown. 


We have all the gaps covered, just need time to address them. 


A potential house move is on the cards also in our 50's and that could release a chunk of cash, though we're not relying on this to fund anything. 


How long do I have? 
Officially 9 years and 3 months for me and 10 years and 3 months for my husband (he's a year younger).  But we're on track for me to go in 7 years and 8 months and husband a year later with around £5k a year more than our target income. Told you my plan was detailed....


I will be happy if we achieve this within our original timelines though, so being slightly ahead of the plan just gives us a bit of leeway to manage any bumps in the road. 


For context, we're both basic rate tax payers though upper end (>£40k) of the bracket. And we have two children.  We hope to gift them some money for house deposits and help get them on the road, which is all budgeted for. And we're not very MSE by some standards, we're very keen to find a balance that works for us whilst on this journey. 

edinburgher

@Retireinten - spooky - you're like the future me! Basically same salary, likely DB pension size, targets, solar panels, interest in today's money

Still - how on earth are you getting £3k a year for your solar panels? I think we're on the "medium" rate for FITs and get about 2,500 kWh a year with our system (£400 give or take)

perfume_waggon

Retireinten said:

 I'm currently learning about crystallised and uncrystalised pension funds and various ways to drawdown. 

Please share your knowledge about this once learnt!