Retirement planning

Silvertabby

Stubod said:

..as per the comments above, getting your head around "no income and spending savings" v "take pension now" is a bit of a mental hurdle to overcome. But when we thought about it that is exactly what we had saved the money for when we decided to retire early! With hindsight, and now we are passed that stage and are taking the pension it was obviously the right thing to do.

We have the same dilemma / decision when the state pension is due to start. Heart says take it as soon as it's available, but head says defer it for a couple of years as you get a 5% uplift per year, (could never match that rate with savings?). For me on a deferred, (none index linked) DB pension this would seem to make more sense.

The 5% uplift sounds good - but have you factored in the loss of 2 years worth of pension payments before you even start raking that in?

We did think about this when Mr S reached SPA a while back, but decided against it for 2 reasons - one being the 17 years (approx) catch up period, and two being the fact that he would pay 20% tax on all of his State pension regardless of when he took it.

I'll be taking mine from SPA next year for the same reasons.  However, as I'm younger, I am topping my State pension up to the max by paying 4 years of voluntary Class 3 NI contributions.  Now, that scheme IS a no brainer!

AlanP_2

Bobinyorkshire said:

am I right in thinking that you have to subtract the pensions contribution you make to the DB pension (employers and employees) from your annual salary to determine the maximum you can put into a SIPP? If so, does anyone know what the NHS contributes? I know I contribute 9.3%

There are two HMRC imposed limits on pension contributions, one includes EMPLOYER's contributions and one doesn't - The effective limit is the lower of both calculations.

1) You are limited to ANNUAL SALARY (technically qualifying income but for most people they are the same thing) in the tax year you make the contribution. Employer contributions do not count, so earn £20k you can pay £16k in to a SIPP nett which is grossed up to £20k.

You will need to deduct the 9.3% you are contributing to your NHS pension first.

If you have more than £40k of taxable income eligible for putting in a pension then the AA comes in to play

2) Maximum £40k per annum (Annual Allowance) which is your contribution, employer's contribution and tax relief for a standard DC / money purchase pension.

You have an NHS DB pension so the calculation against AA is done on the basis of "how much has the value of the pension increased in the tax year * 16". Whether the employer has paid 10 or 20% doesn't matter. Your NHS pension statements should indicate the AA amount "used" that year although I have seen comments on here that NHS statements are woefully late in being issued which doesn't help.

If you want to exceed the £40k limit (and have the requisite salary) then Carry Forward can be used to "fill up" the last 3 years AA limits where any is unused.


If you are limited by (1) then nice and easy if you need to investigate exceeding AA let us know and we can provide more info.

Albermarle

if you have more than £40k of taxable income eligible for putting in a pension then the AA comes in to play

2) Maximum £40k per annum (Annual Allowance) which is your contribution, employer's contribution and tax relief for a standard DC / money purchase pension.

In fact AA can come into play if you have less than £40K taxable income . For example if the employer added £10K , then you would be limited to £30K gross.

pensionpawn

Stubod said:

..as per the comments above, getting your head around "no income and spending savings" v "take pension now" is a bit of a mental hurdle to overcome. But when we thought about it that is exactly what we had saved the money for when we decided to retire early! With hindsight, and now we are passed that stage and are taking the pension it was obviously the right thing to do.

We have the same dilemma / decision when the state pension is due to start. Heart says take it as soon as it's available, but head says defer it for a couple of years as you get a 5% uplift per year, (could never match that rate with savings?). For me on a deferred, (none index linked) DB pension this would seem to make more sense.

I will take it straight away on the basis of why erode your personal pension to boost a state pension when you could croak it a month before, after, 6 months after and have less of your personal pension to pass to family. The state pension, however large or small, dies with you....

Bobinyorkshire

Thank you again for you input.
So, in summary if I earn 30K per annum I could put 30k - 9.3% of 30k ie £27210 x 0.8 =£21768 into a SIPP and this will be enhanced by recovery of tax back to £27210 which could then be taken out in 2 consecutive years tax free after I had finished work as I would not be earning and hence below my personal allowance.
Apologise in advance if I have misunderstood this - needless to say my job in the NHS did not involve finances!!

GunJack

IF you wanted to pay no tax you'd have to go over 3 tax years, PA is only £12.571k, unless you used the 25% of each withdrawal being tax-free method.

Bobinyorkshire

It’s 14k a year as I’ve got some of wife’s allowance 

NSG666

With Marriage Allowance you can take £18440 tax free this tax year assuming no other income. I got it slightly wrong with my UFPLS this year as I added £1257 (10%) to my pa rather than the rounded up £1260. Initially deducted c. £4.5k tax but just been paid it all back and put on BR tax code.

bluenose1

Bobinyorkshire said:

Thank you again for you input.
So, in summary if I earn 30K per annum I could put 30k - 9.3% of 30k ie £27210 x 0.8 =£21768 into a SIPP and this will be enhanced by recovery of tax back to £27210 which could then be taken out in 2 consecutive years tax free after I had finished work as I would not be earning and hence below my personal allowance.
Apologise in advance if I have misunderstood this - needless to say my job in the NHS did not involve finances!!

Just checking you realise it is your net income that you can put into a SIPP. ie after tax etc. If you look at your P60 for last year it will say what your net income was so will give you an idea of how much for this year.

Also if considering taking pension early I would factor in affect of inflation as made a big difference to my calculations and taking pension early doesn’t seem quite as attractive.
If you are no good on spreadsheets I found running the various scenarios though guiide.co,uk helpful.

Dazed_and_C0nfused

Bobinyorkshire said:

It’s 14k a year as I’ve got some of wife’s allowance 

It's actually £12,570 a year plus a reduction of £262 off whatever your tax liability is.

Marriage Allowance does not entitle the recipient to any additional allowances, it is a tax reducer.

Can make a difference to some, particularly Scottish residents.