Civil Service Lump Sum

Turned_out_nice.

I know it's generally accepted to take the max pension and basic lump sum but I'm in a bit of a quandary.
I'm 60 next year and plan on taking my pension (38.5 years). I work for another employer for the past 4+ years and plan to carry on to at least 65, I like the work and workmates are good.
I have a reasonable wage with an annual pay rise and every two years a grade uplift, so effectively a double pay rise. Overtime is quite regular as well.
Next year, even on my basic wage and the max pension I will be well over the 40% tax threshold so is it prudent to take the max lump sum to lower the pension so less of it is taxed at 40%?
I plan to put some in an ISA and put some in my Wife's ISA. She is a non tax payer as lucky her she does not work.
I do have my daughter's wedding next year so that's some of it gone! 

Dazed_and_C0nfused

and put some in my Wife's ISA. She is a non tax payer as lucky her she does not work.

Would she be better off (financially) by going with a higher rate on a non ISA account though?

Or is she using all her Personal Allowance and 0% tax bands with existing interest earned?

Turned_out_nice.

At the moment only I have an ISA, thanks for your suggestion, sounds good but I get a bit muddle with anything but an ISA or premium bonds Just wondering if it's worth taking extra lump sum which will be around another £40,000 and let it work for us for five years. 

xylophone

Just wondering if it's worth taking extra lump sum which will be around another £40,000 and let it work for us for five years. 

Does your wife have no income at all apart from interest on her ISA?

Let's suppose that she doesn't.  She still has a  personal allowance of £12,570 so could earn up to that in interest on savings and pay no tax.

Let's suppose that her capital is such that she receives interest in excess of her personal allowance -  she would still pay no tax on that interest if it were under £6000 in total.

 If interest on ISA accounts is lower than  on non isa accounts, it could make sense for a person in the  above position to choose the higher interest paying non isa account.

Had your wife considered opening a personal pension? She could contribute up to £2880 (net) per annum and receive tax relief of up to £720 per annum. 

NedS

Turned_out_nice. said:

Next year, even on my basic wage and the max pension I will be well over the 40% tax threshold so is it prudent to take the max lump sum to lower the pension so less of it is taxed at 40%?

If it's a DB pension (and thus exempt from the MPAA limits), rather than 'reducing' the amount of DB pension you receive by taking a larger tax free lump sum, another option to avoid or reduce 40% tax is to increase your own pension contributions whilst you continue to work to bring yourself back down under the 40% HRT threshold (i.e, smoothing your income by take a little less income now whilst you are still working so you can take a little more income in retirement once you give up work, and avoid 40% tax)

The advantage of this strategy is that you are not reducing your DB pension income for the rest of your life, which may or may not be important for your income levels once you finish work in 5 years.

Or you could do a combination of both - take some lump sum to reduce the taxable pension income, and then make some extra pension contributions whilst working to get under the 40% HRT threshold.

But generally, if you don't need the cash, taking a lump sum from a CS pension just to reduce a little 40% tax for a relatively short period of time (5 years) is still probably not a great idea, especially when you can reduce that tax liability through other more efficient methods. If you are going to be a 40% tax payer throughout your retirement, maybe more so. Run the numbers and see how long you would need to live to break even or lose out.

Turned_out_nice.

Thanks all. I do contribute to a DC pension but they don't do a salary sacrifice. My wife has no income so I assume she could have a decent (tax-free) savings account.

If I take the extra lump sum it will be locked away so hopefully my wife's circumstances will cushion this a bit.

I intend to up my DC pension next year to 12% and firm will put in 8%. My wife is 7 years short on NI so those years will be bought before she's 67, she is 59 next January.

There may be a possibility (not guaranteed) of part-time working at 65 if you wish. A colleague will try this in 2-years-time.
Don't think I will be close to 40% during retirement.

Dazed_and_C0nfused

My wife has no income so I assume she could have a decent (tax-free) savings account.

As you're a higher rate payer Marriage Allowance isn't a factor so your wife would only pay some tax if her taxable interest exceeded £18,570/year.

Turned_out_nice.

Trying my best to keep it below this year so I keep the allowance for at least another year.
Going to be nowhere near £18,570 so looks like most savings will be geared towards her in the future.

She went back to work for 6 months last year and found that it didn't suit her!