Pension advice DB to DC

concernedpharmacist

Having just hit 60 years have just started drawing an NHS defined benefit pension of £25k p.a. which came with a lump sum of £75k.

I am now working as a self-employed locum earning £40k p.a.. With my pension this takes me well into the 40% higher tax bracket.

I believe I can afford to live for the next three years using the pension and lump sum alone.

My intention was to retire in 3 years time but in the meantime pay every penny of my current earnings of £40k (but no more, to avoid exceeding the annual allowance) into a NEST  defined contribution pension.

I believe I should get tax relief at 40% on about £10k and 20% on the remaining £30k.
In 3 years time when I retire I can start drawing the NEST pension with 25% tax free and up to £25k per year at 20% tax.

It seems that this would be much more tax efficient and effective than taking my earnings and investing for the future.

Is my thinking sound here? Is there any reason why I shouldn't/cannot adopt this strategy.

Any advice welcome 

Dazed_and_C0nfused

It seems that this would be much more tax efficient and effective than taking my earnings and investing for the future.

How are you going to achieve this?

Nest is a relief at source scheme so personal contributions don't reduce your taxable income and they aren't an allowable expense against self employment (or employment) income

concernedpharmacist

I admit to being very naive about pensions but isn't it the case that NEST will claim 20% relief from HMRC to add to the pension pot and I can claim a further 20% for the higher rate portion through my self assessment?

dunstonh

Nest is an unusual choice for a self-employed person.   Whilst they do offer plans nowadays, their primary role is to cater to auto-enrolment.   Their offering for self-employed is not that competitive compared to alternatives. 

concernedpharmacist

It doesn't necessarily need to be NEST,  but I just happen to have an existing NEST workplace pension.
But it was more the general principle I was exploring.

Dazed_and_C0nfused

concernedpharmacist said:

I admit to being very naive about pensions but isn't it the case that NEST will claim 20% relief from HMRC to add to the pension pot and I can claim a further 20% for the higher rate portion through my self assessment?

With a relief at source pension the pension company will add basic rate tax relief and your basic rate tax band will be increased by the gross contribution meaning more income can be taxed at 20% and less at 40%. 

But the personal tax saving depends on your overall tax position, you don't get a further 20% of the gross contribution.  You might only be due to pay higher rate tax on £1!

It came across (to me at least) that maybe you thought contributing to a pension would mean you didn't have to pay tax on your self employed income when it won't change that at all.  All it can do is change which tax rate you need to pay.  And if HICBC is a factor it could reduce the amount of that that is payable as well.

concernedpharmacist

I didn't think I could completely avoid paying tax on my income, but I did think that I could effectively avoid higher rate tax, and that I could also benefit from eventually taking 25% tax free when I retire. 

I just wanted to know if this was the best way of managing my finance over the next few years approaching retirement.

Is there anything stopping me putting up to £40k into a DC pension now that I am already drawing my NHS pension?
Is there a more effective way of managing finances over the next 3 years until retirement?

Children grown up so HICBC (had to Google that one!) not a factor.

xylophone

I just happen to have an existing NEST workplace pension.

You have never accessed income (sums in excess of the pension commencement lump sum) from this or any other DC pension?

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/money-purchase-annual-allowance-mpaa

This pension arose from a previous employment? What is the current value?

Have you checked your Lifetime Allowance situation?

https://www.moneyhelper.org.uk/en/pensions-and-retirement/building-your-retirement-pot/lifetime-allowance-for-pension-savings

Annual Allowance information here

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance

Higher rate tax relief here

https://www.unbiased.co.uk/life/pensions-retirement/how-to-claim-higher-rate-tax-relief-on-pension-contributions#:~:text=What is higher rate tax,every pension contribution you make.

Remember that when you contribute to a Relief at Source pension, you contribute the net amount.

Thus, somebody with relevant earnings of £40,000 would contribute  £32,000 and the provider would claim tax relief of £8000 and add it to his "pot".

Although you do not pay NI on your pension income, you will pay it on your earned income.

Have you checked your "self employed" status?

https://www.gov.uk/employment-status/selfemployed-contractor#:~:text=A person is self-employed,for its success or failure.

And have you obtained a state pension forecast?

https://www.gov.uk/check-state-pension

concernedpharmacist

I have only accessed income from a defined benefit pension.

It was from a previous employment and the value (I believe) would be £25k X 20 +£75k = £575k, so well within lifetime allowance. 

By contributing under  £40k p.a. I should be within the annual allowance. But thanks for tip about contributing net amount of £32k rather than £40k.

I realise that NI due on my earned income.

I have confirmed my self employed status.

And my state pension forecast is for £9661 p.a.

MX5huggy

It’s a good plan. 

But don’t use NEST they take 1.8% of your contributions. Then charge 0.3% which is on the lower end so for those that are invested for decades it’s not terrible but for short term use the high entry fee will not be offset. 

concernedpharmacist

Thanks. Given that this will be a relatively short term scheme, can you suggest other reliable providers with low entry fees?
I don't think I am sufficiently expert to self-invest so not looking for a SIPP.