Balancing finances - am I putting too much into pension

longwalks1

Hi, I am after some advice please.

Age 44.  I have 2 x pensions, they are:

current employer one.  Defined Contribution.  Value £78k.  I pay my annual bonus and 10% monthly salary AVC’s into (both to avoid paying 40% tax).  Total going in is approx £1,100 a month including employers contributions.

2nd pension is a SIPP.  Value £700k.  I do not pay into it.  Invested in actively managed funds.  I’m expecting 5% a year growth on average

No children or dependents and I plan to retire at 57 (wanted to retire at 55 but the minimum age increases in 2028).  Have seen family members working into their late 70’s/early 80’s and don’t want to have to do that.

Should I keep making my 10% monthly AVC’s into my company pension scheme?  I’m doing it to avoid 40% tax, but realistically will I need so much in my pensions by the time I retire?  

I’m buying my home, current value of £560,000.  Approx £200k mortgage.  Would it be worth stopping my 10% monthly AVC’s (approx £460 before tax) and overpaying my mortgage, even though it’s at a very low rate (I think 1.6%).  I’d be paying 40% tax on what I overpay my mortgage with so it would only equate to about £280 a month.

I just feel like I’ve become a bit obsessed with building my pension and reducing the taxes I pay, if that makes sense

I realise I’m possibly in a good place already, retirement wise, but want some balance and unsure of what options I have. 

Albermarle

current employer one.  Defined Contribution.  Value £78k.  I pay my annual bonus and 10% monthly salary AVC’s into (both to avoid paying 40% tax).  Total going in is approx £1,100 a month including employers contributions.

For a normal workplace DC pension , you do not make AVC's . You make a % contribution that can be the legal minimum or a lot more . If you are specifically making AVC's then it would indicate it is not a standard pension . Can you just clarify that ?

2nd pension is a SIPP.  Value £700k.  I do not pay into it.  Invested in actively managed funds.  I’m expecting 5% a year growth on average

Are you expecting 5% before or after inflation ? It makes a significant difference. If it is after inflation that is quite ambitious/optimistic.

At first glance it would seem not sensible to not gain 40% tax relief to pay off a mortgage with a low interest rate .

It is possible higher rate tax relief will not last forever, so probably best to fill your boots now .

longwalks1

Good morning Albermarle, many thanks for your reply

So my workplace DC pension, we all pay in 5% and the company pays in 10%, for everyone.  I’m paying an additional 10% AVC on top of that.  Plus my annual bonus into it each year (approx £3k).  Forgot to say growth of the DC funds it’s in has been between 10-12% for the last 7 or 8 years. 

my SIPP.  The funds it’s spread across have previously grown by around 10-15% a year, obviously last year was different (as was 2008) and average was 5%-8%.  I’m expecting 5% after inflation, given they have performed previously nearer 10% for the last 10 or more years.  Granted there will be better years, and potentially worse so I use 5% as the average. 

I agree on the giving up 40% tax relief to pay off a 1.6% mortgage.  Do you think higher tax relief may go as the government try to claw some funds back to cover the last 18 months?

[Deleted User]

One issue you’ll need to consider is lifetime allowance. 

Future rate of return is unknown so I wouldn’t worry about it.

Having too much money isn’t something I would worry about. 

In general, its not an “either or”.  You can pay off your mortgage bit by bit and over contribute to the pension fund just at a lower rate.

hugheskevi

Age 44.  I have 2 x pensions, they are:

current employer one.  Defined Contribution.  Value £78k.  I pay my annual bonus and 10% monthly salary AVC’s into (both to avoid paying 40% tax).  Total going in is approx £1,100 a month including employers contributions.

2nd pension is a SIPP.  Value £700k.  I do not pay into it.  Invested in actively managed funds.  I’m expecting 5% a year growth on average

So that is total pension of £778,000 with around £13,200 per year being added, and expected increase in value of around £39,000 per year (5%).

On the figures above, you will be breaching the Lifetime Allowance at around age 49. The Lifetime Allowance is £1,073,100 and is frozen until 2026/27

No children or dependents and I plan to retire at 57 (wanted to retire at 55 but the minimum age increases in 2028).

Based on the recent HM Treasury consultation response, you will be able to transfer the pots to a protected scheme before April 2023 to get a protected pension age of 55 (and move them back if you like, they will retain protection).

Should I keep making my 10% monthly AVC’s into my company pension scheme?  I’m doing it to avoid 40% tax, but realistically will I need so much in my pensions by the time I retire? 

Even without any further contributions you are very likely to exceed the Lifetime Allowance.

Hence any contributions you make will have a 25% Lifetime Allowance charge due, and then be subject to income tax at 20% (or 40% depending on amount drawn). That will remove the tax advantage given when the contribution was made.

I’m buying my home, current value of £560,000.  Approx £200k mortgage.  Would it be worth stopping my 10% monthly AVC’s (approx £460 before tax) and overpaying my mortgage, even though it’s at a very low rate (I think 1.6%).  I’d be paying 40% tax on what I overpay my mortgage with so it would only equate to about £280 a month.

There is also investment ISA to consider (and possibly other vehicles, but investment ISA is the most obvious first alternative to consider).

longwalks1

Deleted_User said:

One issue you’ll need to consider is lifetime allowance. 

Future rate of return is unknown so I wouldn’t worry about it.

Having too much money isn’t something I would worry about. 

In general, its not an “either or”.  You can pay off your mortgage bit by bit and over contribute to the pension fund just at a lower rate.

Thanks Mordko - yes fully aware of the LTA, and I may well be hitting it at a relatively young age.  

I’ve had this ‘discussion’ with colleagues who say avoid it at all costs, do everything I can to miss hitting it.  But paying 55% tax on anything over it would still mean more pension for me, for doing very little (SIPP wise, it’s growing anyway.  I’m not actually physically working extra hours to build it up) 

longwalks1

hugheskevi said:

So that is total pension of £778,000 with around £13,200 per year being added, and expected increase in value of around £39,000 per year (5%).

On the figures above, you will be breaching the Lifetime Allowance at around age 49. The Lifetime Allowance is £1,073,100 and is frozen until 2026/27

Fully aware of the LTA and breaching it early, another reason I was thinking of reducing my AVC's (the 10% I currently contribute on top of my employer contributions)

Based on the recent HM Treasury consultation response, you will be able to transfer the pots to a protected scheme before April 2023 to get a protected pension age of 55 (and move them back if you like, they will retain protection).

Interesting, have never read about this.  I will search for more info.  Would it involve swapping out my SIPP from the current provider into a protected scheme, then back again?  I was thinking of asking my SIPP provider if I could still draw it at 55, because when I opened the SIPP with them, it was on the condition I could draw it at 55?

Even without any further contributions you are very likely to exceed the Lifetime Allowance.

Hence any contributions you make will have a 25% Lifetime Allowance charge due, and then be subject to income tax at 20% (or 40% depending on amount drawn). That will remove the tax advantage given when the contribution was made.

Makes sense.  I think I'm avoiding 40% tax currently, but in 11 or 13 years time, I will be paying tax on withdrawing it, so it isn't always a saving of 40% tax.

There is also investment ISA to consider (and possibly other vehicles, but investment ISA is the most obvious first alternative to consider).

I do have 2 self select S&S ISA's (Is that what you meant by investment ISA?)  Combined value of approx £80k.  1 holds the same fund as my best performing fund in my SIPP, the other is a number of shares I've followed for years.  I do not pay into either and haven't for several years.  The larger ISA growing on a combination of dividends and trading on support and resistance.

As a side question, is there any way of paying into an ISA directly from my salary, pre-tax?  

Good morning Hugheskevi - Many thanks for your detailed reply too.  Hope my replies have come out correctly, in italic font

dunstonh

Should I keep making my 10% monthly AVC’s into my company pension scheme?

Just for clarification, you don't appear to have an AVC.   An AVC is a specific pension plan type.   So, its probably best to stop referring to it as an AVC.      Making additional contributions is not an AVC.

I’ve had this ‘discussion’ with colleagues who say avoid it at all costs, do everything I can to miss hitting it.  But paying 55% tax on anything over it would still mean more pension for me, for doing very little (SIPP wise, it’s growing anyway.  I’m not actually physically working extra hours to build it up) 

Spouse/partner provision?

(wanted to retire at 55 but the minimum age increases in 2028).

Shouldn't be a problem.   There should be transitional rules but as a backup, you could divert some of the money to an S&S ISA and that could be used to fund the gap. 

hugheskevi

Based on the recent HM Treasury consultation response, you will be able to transfer the pots to a protected scheme before April 2023 to get a protected pension age of 55 (and move them back if you like, they will retain protection).

Interesting, have never read about this.  I will search for more info.  Would it involve swapping out my SIPP from the current provider into a protected scheme, then back again?  I was thinking of asking my SIPP provider if I could still draw it at 55, because when I opened the SIPP with them, it was on the condition I could draw it at 55?

The consultation response and draft legislation only came out last week, so there is still a lot to be worked through. Based on the contents of the response it does seem that if you are in an unprotected scheme you will simply be able to switch to a protected scheme (assuming you can find one and that it accepts transfers), which will give protected if done before April 2023. Then you could either leave it with the protected provider, or transfer again in which case the funds transferred (but not new contributions) would remain protected.

You do not get protected just because you could draw pension at age 55 - scheme rules have to specify age 55, rather than (for example) referring to the legislation setting the minimum pension age at 55.

I do have 2 self select S&S ISA's (Is that what you meant by investment ISA?)  Combined value of approx £80k.  1 holds the same fund as my best performing fund in my SIPP, the other is a number of shares I've followed for years.  I do not pay into either and haven't for several years.  The larger ISA growing on a combination of dividends and trading on support and resistance.

As a side question, is there any way of paying into an ISA directly from my salary, pre-tax?  

Yes, that is what I meant.

You cannot pay into ISA from pre-tax salary.

If you are wanting tax efficiency like that, you would be looking at things like Venture Capital Trust investment.

longwalks1

dunstonh said:

Just for clarification, you don't appear to have an AVC.   An AVC is a specific pension plan type.   So, its probably best to stop referring to it as an AVC.      Making additional contributions is not an AVC.

Morning Dunstonh.  Apologies, we've always referred to them as AVC's in work, 'making Additional Voluntary Contributions' . 

dunstonh said:

Spouse/partner provision?

I have a long term partner, but not married, so have never looked into the tax reliefs available (if any).  Their pension wont be anywhere near mine in terms of value so may be worth looking into

dunstonh said:

Shouldn't be a problem.   There should be transitional rules but as a backup, you could divert some of the money to an S&S ISA and that could be used to fund the gap. 

Sorry do you mean divert some of my money, my salary into an ISA to fund the gap? Or do you mean its possible to divert some of my SIPP to an ISA to fund the gap?

longwalks1

hugheskevi said:

The consultation response and draft legislation only came out last week, so there is still a lot to be worked through. Based on the contents of the response it does seem that if you are in an unprotected scheme you will simply be able to switch to a protected scheme (assuming you can find one and that it accepts transfers), which will give protected if done before April 2023. Then you could either leave it with the protected provider, or transfer again in which case the funds transferred (but not new contributions) would remain protected.

You do not get protected just because you could draw pension at age 55 - scheme rules have to specify age 55, rather than (for example) referring to the legislation setting the minimum pension age at 55.

Thanks again hugheskevi - I'll keep an eye out for the above, I'm assuming there would be fee's for the transfers?  Both into a protected scheme and back out of it (if I chose to return to my current SIPP provider, who im very very impressed with.

You cannot pay into ISA from pre-tax salary.

If you are wanting tax efficiency like that, you would be looking at things like Venture Capital Trust investment.

Ahh Ok, many thanks for clarifying.  I feel almost obsessed with avoiding 40% tax on my salary for some reason (within reason obviously)