Pension & drawdown query

ussdave

QrizB said:

Watsy said:

I'll make a small contribution from my savings as planned and hopefully when I see when I see my pension pot or wages adjusted it'll help me come to terms with how it works. Ideally I'd hoped if I added say the £400 to my pension pot then the tax relief would have been adjusted there rather than in my weekly wages.

If you are earning enough to still pay income tax, it would be better to increase your salary sacrifice by £500 then top up your spending money from your savings, rather than pay the £400 into your pension from your savings.

By increasing your salary sacrifice you will save on NI as well as on income tax.

Just repeating this for emphasis.  Definitely salary sacrifice the money rather than pay into the pension as a lump sum.  

Watsy

ussdave said:

QrizB said:

Watsy said:

I'll make a small contribution from my savings as planned and hopefully when I see when I see my pension pot or wages adjusted it'll help me come to terms with how it works. Ideally I'd hoped if I added say the £400 to my pension pot then the tax relief would have been adjusted there rather than in my weekly wages.

If you are earning enough to still pay income tax, it would be better to increase your salary sacrifice by £500 then top up your spending money from your savings, rather than pay the £400 into your pension from your savings.

By increasing your salary sacrifice you will save on NI as well as on income tax.

Just repeating this for emphasis.  Definitely salary sacrifice the money rather than pay into the pension as a lump sum.  

Thanks folks for this tip and the emphasis on it. Couple of us in work around the same age were wondering whether to do this, so after reading this I'll see about getting that sorted. I'd hope to add some personal contributions as well due to having extra savings, is that still a worthwhile idea or not so much if I'm on salary sacrifice setup? 

adamcarvell

What is salary sacrifice? Can I do it working for the nhs ? What does it mean.

Dazed_and_C0nfused

adamcarvell said:

What is salary sacrifice? Can I do it working for the nhs ? What does it mean.

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/salary-sacrifice-facts/

I doubt very much the NHS would start offering salary sacrifice for a DB scheme.

jamesd

Salary sacrifice is great. I'm wondering how old you are Watsy and what savings and rough income you have? That's to work out whether you can profit from making even higher pension contributions and have easy access to the money if needed by being 55 or older.

There are limits on recycling pension tax free lump sums into new pension contributions but you're allowed up to £7,500 per rolling 12 month period (not calendar or tax year). Since you can save both NI and income tax this could be quite a help in improving your retirement. You'd take up to £7,500 tax free lump sum from the pension and sacrifice the same or more to do this.

Best to use salary sacrifice instead of personal contributions, provided that you can do it while staying above minimum wage after the sacrifice. Your employer isn't allowed to go below minimum wage and some people need to use personal contributions to contribute more. Also, salary sacrifice below the income tax personal allowance gets you no tax relief so personal contributions can be netter in that part of the income.

Watsy

jamesd said:

Salary sacrifice is great. I'm wondering how old you are Watsy and what savings and rough income you have? That's to work out whether you can profit from making even higher pension contributions and have easy access to the money if needed by being 55 or older.

There are limits on recycling pension tax free lump sums into new pension contributions but you're allowed up to £7,500 per rolling 12 month period (not calendar or tax year). Since you can save both NI and income tax this could be quite a help in improving your retirement. You'd take up to £7,500 tax free lump sum from the pension and sacrifice the same or more to do this.

Best to use salary sacrifice instead of personal contributions, provided that you can do it while staying above minimum wage after the sacrifice. Your employer isn't allowed to go below minimum wage and some people need to use personal contributions to contribute more. Also, salary sacrifice below the income tax personal allowance gets you no tax relief so personal contributions can be netter in that part of the income.

Hi James, almost 51 earning around 25k a year and due to being a beneficiary on a will reasonably recently have around 80K+ in savings sitting in bank accounts and premium bonds. Mortgage is paid off and we have one young lad who's still at school so will need to see what his options are once he hits university age. There's a possibility we might move house in a couple of years but it won't be anything extravagant. 

cfw1994

Watsy said:

jamesd said:

Salary sacrifice is great. I'm wondering how old you are Watsy and what savings and rough income you have? That's to work out whether you can profit from making even higher pension contributions and have easy access to the money if needed by being 55 or older.

There are limits on recycling pension tax free lump sums into new pension contributions but you're allowed up to £7,500 per rolling 12 month period (not calendar or tax year). Since you can save both NI and income tax this could be quite a help in improving your retirement. You'd take up to £7,500 tax free lump sum from the pension and sacrifice the same or more to do this.

Best to use salary sacrifice instead of personal contributions, provided that you can do it while staying above minimum wage after the sacrifice. Your employer isn't allowed to go below minimum wage and some people need to use personal contributions to contribute more. Also, salary sacrifice below the income tax personal allowance gets you no tax relief so personal contributions can be netter in that part of the income.

Hi James, almost 51 earning around 25k a year and due to being a beneficiary on a will reasonably recently have around 80K+ in savings sitting in bank accounts and premium bonds. Mortgage is paid off and we have one young lad who's still at school so will need to see what his options are once he hits university age. There's a possibility we might move house in a couple of years but it won't be anything extravagant. 

With 'excess' cash lying around, I would personally put at least some of that into a S&S ISA, if you don't already have this year's ISA monies invested.

My personal preference would be to drip-feed it in, although history tells us that 2/3rds of the time you are better off just lobbing it all in at once....
For example, with 7 months of the tax year left, I would pop around £2,000 to £2,800 in each month to get it around the 20k mark by next April.

BUT - that would assume you don't need all 80k in the next few (5+) years.   You do mention a possibility of moving house, so perhaps cash/PBs (a couple could store £100k in PBs safely) may be wiser!

sevenhills

jamesd said:

There are limits on recycling pension tax free lump sums into new pension contributions but you're allowed up to £7,500 per rolling 12 month period (not calendar or tax year). Since you can save both NI and income tax this could be quite a help in improving your retirement. You'd take up to £7,500 tax free lump sum from the pension and sacrifice the same or more to do this.

I thought that "As long as you received no other tax-free cash in the previous 12 months, it would not be caught under the recycling rules" would mean that you could only do it every other year.

ussdave

Watsy said:

jamesd said:

Salary sacrifice is great. I'm wondering how old you are Watsy and what savings and rough income you have? That's to work out whether you can profit from making even higher pension contributions and have easy access to the money if needed by being 55 or older.

There are limits on recycling pension tax free lump sums into new pension contributions but you're allowed up to £7,500 per rolling 12 month period (not calendar or tax year). Since you can save both NI and income tax this could be quite a help in improving your retirement. You'd take up to £7,500 tax free lump sum from the pension and sacrifice the same or more to do this.

Best to use salary sacrifice instead of personal contributions, provided that you can do it while staying above minimum wage after the sacrifice. Your employer isn't allowed to go below minimum wage and some people need to use personal contributions to contribute more. Also, salary sacrifice below the income tax personal allowance gets you no tax relief so personal contributions can be netter in that part of the income.

Hi James, almost 51 earning around 25k a year and due to being a beneficiary on a will reasonably recently have around 80K+ in savings sitting in bank accounts and premium bonds. Mortgage is paid off and we have one young lad who's still at school so will need to see what his options are once he hits university age. There's a possibility we might move house in a couple of years but it won't be anything extravagant. 

I'm sure jamesd will have a more comprehensive answer but my inclination based on those figures would be:

1. As cfw1994 suggests, contribute up to your ISA limit into a stocks and shares ISA.
2. Increase your salary sacrifce payments to take you down to the point of not paying tax on your earnings (so that would be around 50% of your earnings, assuming that still leaves you above minimum wage).
3. If this means you don't have enough money for day-to-day expenses, draw on your £80k (£60k after the ISA top-up) pot monthly to give you enough to maintain your current standard of living.
4. Continue this until you "run out" of the £80k pot.  Assuming that takes at least 2 years, make sure another £20k goes into an ISA next year.

5.Optionally: Also put up to about £10k into a cheap SIPP each year, which you can draw upon separately to bridge years if you require that.  Depending on the costs and conditions of your workplace pension this may be a better or worse idea vs just putting in additional lump sums into your pension.

The above assumes you have no significant debts.

Basically - you should maximise the salary sacrifice where possible as this is the most tax-efficient way to save into your pension by a large margin.

edit: Assuming you don't want to retire before an age that you can draw pensions at I would also consider draining the ISAs to allow more salary sacrifice once you have exhausted the main pot.

edit2: Do you have a partner?  What is their pension and earnings situation?  You may want to consider topping up their pension too as they want to at least be at a point where they can take advantage of the person tax free allowance, if possible.

Albermarle

All the above comments are good and by adding more now ( one way or the other ) your future self will appreciate it .

Once you have got your head around how best to increase contributions , you should turn your attention to how your money is invested inside the pension. Probably now it goes into a default investment fund but there will be other potential choices .

I suggest to start to investigate this at some point, and if you need more guidance /tips then come back to the forum. Probably best to open a new thread when you do.