Absolute complete and utter pension dunce warning!!

wend33

I am a civil servant and have been in the pension scheme for just over 34 years. I'm nearly 53 and have decided that life is short and I want to make my escape! I have a very simple lifestyle, just me and the dog, no mortgage and low outgoings. I also have decent savings to the point I think I could survive on them until retirement.
This is where the dunce part comes in! Until now I had thought that when I messed around with the retirement modeller the age I selected related to the age I finish working whereas someone has told me it the age when you start claiming the pension. So if I resigned instead of retired and lived off my savings for a while I would be able to claim a larger pension - have I got that right?
Another suggestion was to throw as much money, including salary into an AVC as soon as I can to get the benefit of pension tax relief.
I just want to get a basic understanding in order to get my sums started before making a decision.

Dazed_and_C0nfused

There are a few factors to think about.

If you continue work until say age 60 you will accrue another 7 years.

If you stop work now you will have 7 years less pension to start with.

If you start taking your pension at say age 55 you will a reduction for choosing to take it early, it's not a penalty its to reflect the fact that you would be asking for it to be paid for a longer period i.e. from age 55 instead of age 60.

And that reduction will be starting from having 7 years less pension.

You won't be able to claim a "larger" pension but the longer you delay claiming it the less of a reduction there will be.

Take it at 55 and you might have maybe 22-23% reduction.  Take it at 58 and it might only be a 9% reduction.

Tax relief on pension contributions can be generous, if you paid say £4,000 into a personal pension or SIPP (and possibly the AVC) it will have £1,000 added in tax relief making a pension fund of £5,000.  Of which you could take 25% as a tax free lump sum and the remaining 75% will be taxed at your marginal rate.  Which may mean no tax if you take it out between stopping work and starting to get your civil service pension.

If you have one or more tax years with no (or low) earnings and civil service pension then contributing to a personal pension, SIPP or maybe the AVC can be extremely lucrative.

You should also check your State Pension forecast on gov.uk as you are likely to need to buy some additional National Insurance years to reach the standard new State Pension amount (£185.15/week).

When checking your forecast it is important to read the whole thing, don't just look at the headline figure.

p00hsticks

wend33 said:

This is where the dunce part comes in! Until now I had thought that when I messed around with the retirement modeller the age I selected related to the age I finish working whereas someone has told me it the age when you start claiming the pension.

I suspect the modeller may be assuming that the age you select is both when you leave AND when you start claiming the pension....

Tranboy

Isn't there also a warning about people who take a lump sum and it raises your taxable income. ..I could be wrong. ..

...coat on standby. ...

Secret2ndAccount

A Civil Service pension is as cast-iron safe as it gets. It has good inflation linking. So if you can afford to live on it today, you can afford to live on it for the rest of your life. You have your savings to fix the roof or replace your car. So put 55 into the modeler and see how much will drop on to the mat every month. Remember there will still be some tax to pay. If that's enough for you, then you can retire at 55, or before if your savings are that good.
If you can pay into a linked AVC that is almost certainly the way to go. Here's the explanation:
When you start your pension, you will receive a lump sum which is 3 years' pension. That is a lot less than the tax-free maximum permitted by law, but that's the rule in CS. If you put salary into a linked AVC tomorrow, you pay no tax on that money, or get the tax back if you pay it out of your savings. Then you can take it out again when you retire, to increase your tax free lump sum. So you live off your savings now, to boost your pension, then get it all back, plus 25% in a couple of years' time.
Your total pension contributions per year (you and your employer) cannot exceed your salary, so you likely won't be able to pay in as much as you might like to the AVC. At least not in one year.
Happy to provide a worked example if you like.
It's always tempting to work one more year. If you are happy at work, why not? If you hate work, and have done the sums, no reason why you can't quit. 

xylophone

Isn't there also a warning about people who take a lump sum and it raises your taxable income. ..I could be wrong. ..

 An example.

 A  standard rate tax payer (only income is his salary of say £30,000 a year)  decides on reaching age 55 that he will access an old personal pension pot of say £80.000.

He takes his tax free PCLS ( £20,000), but  thinks that he could use the balance to finance an extension.

The balance is taxable as income in the year of receipt.

His income for the year is now £90,000.

He will pay tax at higher rate on part of that income.

And having taken more than the tax free PCLS also means that he has become subject to the Money Purchase Annual Allowance in respect of his contributions to his DC workplace pension.

wend33

Dazed_and_C0nfused

You should also check your State Pension forecast on gov.uk as you are likely to need to buy some additional National Insurance years to reach the standard new State Pension amount (£185.15/week).

When checking your forecast it is important to read the whole thing, don't just look at the headline figure.

I have already checked this and I have to work/pay three more years to get my full state pension.

wend33

Tranboy said:

Isn't there also a warning about people who take a lump sum and it raises your taxable income. ..I could be wrong. ..

...coat on standby. ...

I don't know but I wasn't looking at taking anything at this stage if that makes any difference.

wend33

Secret2ndAccount said:

A Civil Service pension is as cast-iron safe as it gets. It has good inflation linking. So if you can afford to live on it today, you can afford to live on it for the rest of your life. You have your savings to fix the roof or replace your car. So put 55 into the modeler and see how much will drop on to the mat every month. Remember there will still be some tax to pay. If that's enough for you, then you can retire at 55, or before if your savings are that good.
If you can pay into a linked AVC that is almost certainly the way to go. Here's the explanation:
When you start your pension, you will receive a lump sum which is 3 years' pension. That is a lot less than the tax-free maximum permitted by law, but that's the rule in CS. If you put salary into a linked AVC tomorrow, you pay no tax on that money, or get the tax back if you pay it out of your savings. Then you can take it out again when you retire, to increase your tax free lump sum. So you live off your savings now, to boost your pension, then get it all back, plus 25% in a couple of years' time.
Your total pension contributions per year (you and your employer) cannot exceed your salary, so you likely won't be able to pay in as much as you might like to the AVC. At least not in one year.
Happy to provide a worked example if you like.
It's always tempting to work one more year. If you are happy at work, why not? If you hate work, and have done the sums, no reason why you can't quit. 

My savings are good! I am the product of wartime parents who drummed in the ethic of 'save, save, save'! I also had a long term abusive relationship that made me extremely cautious with what I spent. I checked my savings pot last night and I have a 6 figure sum tucked away in cash ISAs and another in fixed rate savings accounts that mature in the coming months. I have more than enough to live on until I hit 67!
Since this idea popped into my head I have envisioned a world where I give myself a Christmas present this year of leaving work for good. In the meantime I could, after one of my savings accounts matures in June, afford to shift all of my salary to AVC if that is the best way to go.  Another account matures in September so I could shift a lump sum then if that's how it works?
As I say, I really am completely clueless so apologies for my lack of understanding.

Linton

The total pension contributions you personally can make in a tax year and get the tax relief is limited to your gross earnings. So you will be ok if you simply divert your salary to AVCs.

There is another limit of £40k in a tax year for all pension contributions, including employer’s ,where things get more complicated, especially for db pensions.  Unused allowance can be carried over from the previous 3 years.  So unless you are very well paid you should be OK.

Dansmam

Linton said:

The total pension contributions you personally can make in a tax year and get the tax relief is limited to your gross earnings. So you will be ok if you simply divert your salary to AVCs.

There is another limit of £40k in a tax year for all pension contributions, including employer’s ,where things get more complicated, especially for db pensions.  Unused allowance can be carried over from the previous 3 years.  So unless you are very well paid you should be OK.

You can only pay in the equivalent of earnings above minimum wage though, so can't quite divert whole salary. 

I did more or less what you're planning in late 2020 as covid focussed my mind on priorities that didn't involve dragging myself to zoom meetings in a job I no longer loved. If I had planned better I'd have maxed the AVC in the years running up to that but it's difficult to plan for a snap decision! I did, though, manage to start and fill up a Sipp while I was still earning to see me through the first financial year and a bit. You could do that with as much of your current year earnings as you can (gross earnings less what's already going into pension, less NMW) to gain the 20%, access it at 55 and pay no tax if you keep withdrawals under the tax threshold. You have savings to dip into if you need to spend more than that. Only downside is that what you put in the sipp can't go in the avc but on the other hand you can't take the avc till you take the pension. 

You can live very well on less than you think when you free up your time. Best of  luck with whatever you decide to do 🙂