Pension/Investment Advice - Age 55 and Running out of Time!

TurnipHead

Hi all,

After some pension/investment advice please. I did 22 years in the military, then got a job in civvy street and just coasted along on workplace salary sacrifice pension contributions thinking that everything would be fine. Now I'm not so sure!?

I currently earn 90k a year, and also receive a military pension currently @ 8.6k a year, and this is set to increase when I reach age 55 (this month) ... not sure by how much ... maybe 1k or 2k more per annum (depending on CPI)? I'm obviously in the higher rate tax bracket and forking out tonnes of tax money but feel I'm not really optimizing my pension/plans for later life.

I currently pay 4% pension via salary sacrifice, and this is matched by my employer. Kids have left home. I have a mortgage to age 67 costing us 1.2k a month and cars (on PCP) about £800 a month. No other significant debts.

I should probably get some professional advice, but who to trust in this day and age!? Does anyone have any advice on how I should be tax efficiently investing for future life/pumping money into my pension without too much impact on my lifestyle?

Thanks,

Marcon

TurnipHead said:

Hi all,

After some pension/investment advice please. I did 22 years in the military, then got a job in civvy street and just coasted along on workplace salary sacrifice pension contributions thinking that everything would be fine. Now I'm not so sure!?

I currently earn 90k a year, and also receive a military pension currently @ 8.6k a year, and this is set to increase when I reach age 55 (this month) ... not sure by how much ... maybe 1k or 2k more per annum (depending on CPI)? I'm obviously in the higher rate tax bracket and forking out tonnes of tax money but feel I'm not really optimizing my pension/plans for later life.

I currently pay 4% pension via salary sacrifice, and this is matched by my employer. Kids have left home. I have a mortgage to age 67 costing us 1.2k a month and cars (on PCP) about £800 a month. No other significant debts.

I should probably get some professional advice, but who to trust in this day and age!? Does anyone have any advice on how I should be tax efficiently investing for future life/pumping money into my pension without too much impact on my lifestyle?

Thanks,

If you don't do something to increase your pension provision, then there's going to be a pretty significant impact on your lifestyle once you stop work.

Investing in your pension is automatically tax-efficient, especially for a higher rate taxpayer. There are limits on how much you can contribute, but if you hit those limits, your lifestyle is definitely going to be impacted! See https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/the-annual-allowance

Only you can decide how much you can pay in (by salary sacrifice, as you are already) without denting your lifestyle. Have you checked if your employer will pay more if you pay more?

TurnipHead

Hi Marcon,

Thanks for your reply. Yes, my employers contributions are capped at 4% so whilst I can contribute more, that's the most they will match. I do have about 100k pension pot from other employment since leaving the military but nevertheless there will likely be a shortfall ... depending on what happens between now and my retirement date (aka inheritance).

So, I think you are saying salary sacrifice is the way to go (most tax efficient). I used the MoneyHelper pension calculator this evening and it showed that to help make up the shortfall, I could probably increase my contributions to around 20%. A significant amount of money, and I'm not sure if that's even possible, but some careful thinking needed now!

Thanks

Merlin139

I can't help with how to increase your pension but I can give you an idea about how much your military pension will increase.

Based on you reaching 55 this month and working on the assumption that you left on your 40th birthday after 22 years.

Your original award before any resettlement commutation would be increased by the following figure:

Last day of service 22/08/08 to 21/09/08 1.4645

Last day of service 22/09/08 to 21/10/08 1.4595

Rates taken from:

https://www.gov.uk/government/publications/public-service-pensions-increase-2023

Bimbly

Everything you earn above roughly £50k gets taxed at 40% (assuming not Scotland). So, your employer pays you £100 - £40 goes to the taxman, £2 national insurance, and you get £58 in your pocket.

If you salary sacrifice that £100 into your pension, the whole £100 goes into your pension. As it looks like you'll be a basic rate tax payer in retirement, you can withdraw 25% tax free and be taxed 20% on the rest, which gives you £85 in your pocket. That's without any investment growth. You'll also have the tax free personal allowance, but that's likely to be used up by your military and state pensions.

So anything extra you can add to your pension is definitely worth it. It just depends how much extra you can afford to put away. For that, you'll need to do some sums. By a quick reckoning, and ignoring your military pension for simplicity, you could pay 44% into your pension and get higher rate tax relief on the lot. I'm assuming you can't afford that. So look at what you can afford. Find out if there are any restrictions on how many times a year you can change your workplace contributions. You could, for example, increase it gradually over six months to see how you get on. Or go for an ambitious figure and, if it's too much, reduce it again.

To help you, you can plug in the figures to https://www.thesalarycalculator.co.uk/salary.php . You put in your salary, then click on the pension tab, add a percentage, tick salary sacrifice and see how the figures play out.

Pat38493

Who to trust in this day and age - you can hire an Independent Financial Adviser (IFA) to do this.  As long as you make sure it's an IFA they are pretty highly regulated so they are obliged to give you appropriate advice for your situation, and they are no longer allowed to take commission based on the products they choose - they have to charge fees either as an amount or as a percent of your overall asset size.  They don't come cheap though, but if you really don't know what you are doing or you are the type of person who might make unwise investment decisions, they can save you more than what you will spend.

Alternatively you can do your own research by reading up about it on the internet, books, and on boards like this one and take more of a DIY approach.  This is what I am doing.

As regards the other points - as others have said, by far the moxt tax efficient way to increase your pension will be to salary sacrifice as much as you can into your employer pension - you will get 40% tax relief on up to 40K of contributions based on the salary you quoted.  You will probably pay 20% tax on the way out for 75% of the money, but you will struggle to beat that instant gain in any other way (including overpaying mortgage.

The other things to pay attention to : 
- Check your state pension forecast online and if you are not on track to get the full amount, make a plan to top it up manually.  
- Check the investments on your existing pensions - DC pensions are just a tax wrapper and inside the pension, your pension will be invested in on or more funds.  If you have never looked into this it will be invested in the default option proposed by your employer.  This may or may not be the best one for you depending on what you want to do with the fund when you want to use it, and when you plan to draw on it (how many years form now).
- Don't let your salary go above 100K gross taxable earnings by pay rises or bonuses as you will end up paying an effective marginal 60% tax due to removal of personal allowance.

Albermarle

Some very ball park figures.

So now you have an income of approx £100K. Probably after tax, you get about £60K to £65K pa, but do not spend all of it. So lets say you spend £50K pa

Lets say you retired at 62 but wanted to have a similar income. You will have approx £10kpa military pension and then around £10 K pa state pension at 66.

So you need 4 years of £45 to £50K pa ( before tax ) = £200K

Then from state pension age, you will need £30K pa after the military pension and the state pension.

To produce £30K pa safely for 25 years + you will need a pension pot of around £750K .

So £200K + £750 K = Nearly One Million Pounds needed . 

All these figures are in todays money and assumes pension payments will keep up with inflation.

Clearly a reduction in expenditure reduces the amount needed, as does delaying retirement beyond 62, but I think you should be able to see clearly that adding 8% to a pension is completely inadequate. Plus as others have said pension contributions are very tax friendly for a higher rate taxpayer.

Bimbly

Albermarle said:

Clearly a reduction in expenditure reduces the amount needed...

OP is spending £2k/month on mortgage and car loans. Assuming that's paid off and they'll keep their cars a good while, the amount needed in retirement is rather less than current spend.

The OP, however, should find those figures very helpful.

LHW99

Would be worth working out what you are likely to need at retirement, and how far your current provision (have you checked your state pension entitlement?) will come towards meeting it.

That will give you an idea how far short / how much belt tightening is in order

Ali660

For what it’s worth, friend just turned 55 and military pension increased from £10,000 to £14,300 so advance warning that this could push your income over £100k