Mrs GC's Pension

Grumpy_chap

Mrs GC finally agreed to look at her pension. 

She was always reluctant to have pension because the money is captive until retirement age.  Instead she did a BTL which is now paid and generates income after expenses around £12k.

In recent years, Mrs GC agreed with me to take employer pensions as there is free money you don't get otherwise, so her current pension provision comprises:

• state pension
• 3 years NHS pension, final salary.  Inclined to leave this as a separate provision.
• 2 small employer DC pensions with total value around £3k.  Possibly not worth combining into one because of fees that would attract plus may be possible to take advantage of "small pots exemption" but neither Mrs GC or I really know what the "small pots" exemption is.

Mrs GC is currently not working and has agreed it makes sense for her to make contributions into a pension at the permitted £3.6k (£2,880) in any case.  The reason she is no longer so worried about money being held captive is that she only has 5 years until withdrawals can start if needed.

Mrs GC is currently on JSA and looking for another job, so expect she'll be in employment soon.

Making contributions of the £3.6k seems like an obvious thing to do, even though there are not so many years remaining to make contributions.

For info. I am currently maxing Annual Allowance through SS to NMW.  As of next tax year, I'll have exhausted carry-forward so capped at £40k AA.

I suggested Mrs GC should max out contributions to 100% of salary (when she gets a next job), but Mrs GC is not entirely convinced.  Mrs GC will be capped for AA by salary rather than £40k.  AIUI, there is no carry forward to allow unused salary from previous years to now become pension.  Is that correct?

One of the benefits I see in Mrs GC having pension is that it means we can make best use of personal and basic rate allowances in retirement.

Are there any wise people with any pertinent thoughts on this situation?

MX5huggy

Seems a fair plan, if you can get Mrs GC to do it. 

NHS pension you have no options to do anything else just when to take it, probably available from 55 with reductions but the reduction is cost neutral. 

Small pots is £10k but as she’s not exactly going to have a big pot I’m not sure it’s relevant. There should be no fees for combining or transferring the small pensions. 

LHW99

Making use of tax free bands for both of you at retirement is a good plan. So is making joint plans - how do you each stand with pensions if one of you walks under the proverbial bus age 67? DC pensions pass all the unused pot on (easiest if you have filled in the nomination form) DB's usually offer 50% or some simiar proportion. State pensions are largely uninheritable now (except for a small amount of the protected pension if any)

Albermarle

Grumpy_chap said:

Mrs GC finally agreed to look at her pension. 

She was always reluctant to have pension because the money is captive until retirement age.  Instead she did a BTL which is now paid and generates income after expenses around £12k.

In recent years, Mrs GC agreed with me to take employer pensions as there is free money you don't get otherwise, so her current pension provision comprises:

• state pension
• 3 years NHS pension, final salary.  Inclined to leave this as a separate provision.
• 2 small employer DC pensions with total value around £3k.  Possibly not worth combining into one because of fees that would attract plus may be possible to take advantage of "small pots exemption" but neither Mrs GC or I really know what the "small pots" exemption is.

Small pots rule means you can take a pension worth less than £10K, without it affecting your ability to add more than £4K to a pension in future and there is no impact on LTA( not relevant in this case) . The taxation on the pension is not affected.

Mrs GC is currently not working and has agreed it makes sense for her to make contributions into a pension at the permitted £3.6k (£2,880) in any case.  The reason she is no longer so worried about money being held captive is that she only has 5 years until withdrawals can start if needed.

Mrs GC is currently on JSA and looking for another job, so expect she'll be in employment soon. 

Making contributions of the £3.6k seems like an obvious thing to do, even though there are not so many years remaining to make contributions.

For info. I am currently maxing Annual Allowance through SS to NMW.  As of next tax year, I'll have exhausted carry-forward so capped at £40k AA.

I suggested Mrs GC should max out contributions to 100% of salary (when she gets a next job), If the company operates a salary sacrifice system for pension contributions, there will be an issue as you can not salary sacrifice below the national minimum wage , something to look out for . but Mrs GC is not entirely convinced.  Mrs GC will be capped for AA by salary rather than £40k.  AIUI, there is no carry forward to allow unused salary from previous years to now become pension.  Is that correct? Yes

One of the benefits I see in Mrs GC having pension is that it means we can make best use of personal and basic rate allowances in retirement. That is a definite benefit .

Are there any wise people with any pertinent thoughts on this situation?

See in bold above 

Grumpy_chap

Thanks @Albermarle
Regarding:

Albermarle said:

I suggested Mrs GC should max out contributions to 100% of salary (when she gets a next job), If the company operates a salary sacrifice system for pension contributions, there will be an issue as you can not salary sacrifice below the national minimum wage , something to look out for . 

If I am correct, Mrs GC can make as much as possible as contributions via SS if available, or just the auto-enrolment level if that is all her employer facilitates.

She will then have a residual income, NMW or higher, that she paid tax on plus NI.

She could then make personal pension contributions of everything (salary) she receives after tax and NI.  That means the tax is recovered (as additional pension fund) but the NI is lost.  Is that correct?

That means Mrs GC could make pension contributions equal to 100% of gross salary, although not as smoothly as via SS.

Albermarle

Not quite.
Your net pay is not relevant to pension contributions, which are related only to earned income. ( Net pay could be affected by many different things) 
If she had £10K gross pay left after salary sacrifice, she could contribute £8K and tax relief of £2K would be added.

Audaxer

Grumpy_chap said:

Mrs GC is currently not working and has agreed it makes sense for her to make contributions into a pension at the permitted £3.6k (£2,880) in any case.  The reason she is no longer so worried about money being held captive is that she only has 5 years until withdrawals can start if needed.

It seems a no-brainer for Mrs GC to start a pension and pay in as much as possible from her salary when she gets a job. In 5 years when she can access her pension, if she has retired from work by then with no other income, she can draw out up to her personal tax allowance each year and reinvest it in an S&S ISA if she wishes. It is best to get as much out of her pension this way before she claims her State Pension which will use up a lot of her personal tax allowance.

"Making contributions of the £3.6k seems like an obvious thing to do, even though there are not so many years remaining to make contributions."
She can continue paying a gross £3,600 into a pension even after she retires until the age of 75

  

Dazed_and_C0nfused

She could then make personal pension contributions of everything (salary) she receives after tax and NI. That means the tax is recovered (as additional pension fund) but the NI is lost. Is that correct?

No.

There is no link whatsoever between the amount of income tax (or NI) she has paid and the pension tax relief added using the relief at source method of contributing.

She wouldn't be getting any of the tax she has paid back but would get a fixed amount (25%) added to any qualifying contributions she makes.

There are plenty of people paying no income tax and getting hundreds or thousands in pension tax relief each year.

Grumpy_chap

OK - so I am just checking my understanding.

If Mrs GC stays not working, she can pay £2,880 into a pension and get credited with £3.6k into the pot.

If Mrs GC starts working, say £25k salary.
3% employer contribution = £750
5% her contribution = £1,250 (assume this is SS?)
Salary remaining is £23,750 gross subject to income tax and NI.
Mrs GC can contribute £23,750 gross into a pension which means she would need to actually contribute £19k.
This £19k includes the £2,880 (?) but not the employer contribution £750 (?)
Total into the pension would be £23,750 + £1,250 + £750.
The £19k is not changing her income tax or NI liability for the current year because the amount is considered covered by the top-up on contributions.

Hope I have got that correct.

It would certainly make sense to do and I could reduce my pension contributions as that shares the income when we are both retired so we get to make best use of income tax bands.

german_keeper

Don't think this has been mentioned, apologies if it has.

There is also the marriage allowance to consider. So if Mrs GC doesn't end up with the full £12,570 pa at retirement (or whatever the PTA is at the time) she can give 10% of that allowance to you.

We have been stuffing max amount into Mrs GK's pension the last few years after paying off the mortgage. Next April when we both start drawdown on our modest DC pensions the plan is that she will take about £11,300 pa and give £1,257 of her PTA to me.

This assumes she can get another job as she has been recently made redundant. If not we will look at Plan B or Plan C. But the key to it is understanding the options and amending the plan when unexpected events come along. 

Albermarle

Grumpy_chap said:

OK - so I am just checking my understanding.

If Mrs GC stays not working, she can pay £2,880 into a pension and get credited with £3.6k into the pot.

If Mrs GC starts working, say £25k salary.
3% employer contribution = £750
5% her contribution = £1,250 (assume this is SS?)
Salary remaining is £23,750 gross subject to income tax and NI.
Mrs GC can contribute £23,750 gross into a pension which means she would need to actually contribute £19k.
This £19k includes the £2,880 (?) but not the employer contribution £750 (?)
Total into the pension would be £23,750 + £1,250 + £750.
The £19k is not changing her income tax or NI liability for the current year because the amount is considered covered by the top-up on contributions.

Hope I have got that correct.

It would certainly make sense to do and I could reduce my pension contributions as that shares the income when we are both retired so we get to make best use of income tax bands.

If her employer is operating a SS scheme, she would be better to maximise contributions that way down to the NMW, and then add the remainder  separately. This is due to the NI gain. 
Apart from that her workplace pension maybe a good one, with low charges, so in this case there would no need to open a separate pension for additional contributions. 

This £19k includes the £2,880 (?) but not the employer contribution £750 (?)
The £2880 becomes irrelevant if she is working, and yes the employer contribution is separate.