Partial Retirement - Should I take a reduced pension

rosieusa_2

Hi, I'm just about to take partial retirement from the Civil Service with a revised salary of £26K and a pension of £22K, I'm very fortunate that I don't need the full £21K just now as I have £18K from property investments so am in the higher tax bracket.  I was wondering whether I should (a) take the full £22K and my lump sum and put it into savings account; (b) reinvest £12K of my pension and lump sum into another pension scheme; or reduce my pension being paid now to £10K and take a reduced lump sum until I fully retire in 2-3 years time?   Are there any benefits to any of these options?

Andy_L

The lump sum is an appallingly bad deal at 1:12. Even paying higher rate tax on it I doubt any savings account will match taking the higher pension.

rosieusa_2

Sorry what do you mean about 1:12?  My lump sum is tax free as far as I'm aware!

NoMore

Its what is known as the commutation rate, for every £1 you give up in your annual income you get £12 in your Tax Free lump sum.

12:1 is not a good rate, my pension for instance is 23:1 and others can be even more.

Dazed_and_C0nfused

I think @Andy_L may have thought you were intending on giving up some of pension for additional lump sum.

The normal lump sum (and any additional lump sum) is tax free but taking additional lump sum from a civil service pension is usually one of the worst financial choices you can make (there are exceptions to the rule).

rosieusa_2

I'm definitely not planning on taking anything over my normal tax free lump sum but I do have the option to reduce how much pension I take and corresponding reduced tax free lump sum whilst I continue with partial retirement.  At the point when I finally retire, I'll receive my full pension of £22K (plus any CPI) and the remainder of my tax free lump sum.

By taking a reduced pension now, my annual amount of salary taxed at 40% will be less, but I didn't know if there is a way of taking the full £22K, staying in the higher tax bracket, and investing some of my lump sum and regular payments into another pension that is more tax efficient?

Secret2ndAccount

You've got the right idea of keeping your earnings at the 50k level to avoid paying 40% tax. Most people would open a SIPP and pay in their excess income, thereby claiming back the tax, and building up a separate pot. But most people don't have the option of a stepped pension as you do. So your choice is really between keeping all your pension in the DB (Civil Service) scheme, or splitting it between a DB ad a DC (SIPP). Here are the pros and cons:
Leaving it in the CS scheme you generate a higher guaranteed monthly income for life, index linked. The CS pension is about as good as it gets - full inflation protection, backed by the state. Many people would give their left arm for what you've got.
On the other hand, you have no flexibility - just a regular monthly payment. What if you need a lump sum for something? What if you decide you want to spend more now while you are fit, and have a bit less later? What if you find out that you have a life limiting condition and want to spend it all or give it all away in short time? Your SIPP is yours to spend as you please. Although there would be a tax bill, you could take it all out tomorrow if you wanted to. Leave it in and it passes to your chosen beneficiary, normally outside of your estate, so no inheritance tax or probate to worry about. On the other hand, the CS pension will likely continue to pay out a proportion to your spouse if you have one.
So you have a personal choice to make between two very positive options. There is no wrong answer here. Figure out what works for you.

rosieusa_2

Ok, thanks, I'll probably take the smaller pension whilst I continue to work part time. 

rosieusa_2

Just had a thought, although taking a reduced pension at this time will mean my salary is below the 40% tax bracket, when I add the £18k of property revenue it still takes me above the threshold, will I be able to make any tax efficiencies when I submit my SA on the pension contributions I will have made through my CS pension?

Dazed_and_C0nfused

rosieusa_2 said:

Just had a thought, although taking a reduced pension at this time will mean my salary is below the 40% tax bracket, when I add the £18k of property revenue it still takes me above the threshold, will I be able to make any tax efficiencies when I submit my SA on the pension contributions I will have made through my CS pension?

Assuming you mean normal contribution then definitely not.  

The civil service pension scheme operates the net pay method of contributing so if you earn a salary of say £20k and pay 5.45% your taxable income wil be just £18,910 and you will have already received the maximum possible tax relief.  You would never include net pay contributions on your Self Assessment return as that would be claiming double relief.

Secret2ndAccount

But if your total income exceeds 50k you can still open a SIPP and pay in the difference between your total income and 50k
Example:
Earn 26k
Pension  10k
Rental profit  18k
Total 54k
Pay 4k into SIPP. Enter this 4k in the appropriate box on your SA form. Your 4k in the SIPP gets topped up to 5k automagically. Also your higher rate threshold gets increased from 50270 to 55270 because of the pension contrib. So you save another 1k in tax (5k taxed @ 20% instead of 40%). So 5k in the pension at a cost of 3k to you.
You can withdraw 25% of the SIPP tax free any time. The rest will be taxed, but likely at 20% if you time it right. This is still worth doing if you feel it will be taxed at 40%, but less so.