Draw DB Pension and work still

Lycoming

Hi Team,

New joiner -my details;

Age 59
Working - Salary circa £38k
Deferred DB pension - can be drawn from age 60 without reduction - approx. £23k pa- commencing September .
No DB restrictions.

Q. Is there any financial reason why I shouldn’t start drawing on my DB pension, whilst still working.  
It will no doubt take me in to 40% tax band but I will still be financially better off would I not ? 

Would not drawing it just be money lost as it’s a DB pension.

Q. Can I draw from a DB pension (which is taxed) and pay some into my company DC scheme… I don’t want to fall foul of recycling rules if they apply ?

thanks.

Secret2ndAccount

Take a close look at your DB pension. Some pay out at 60 because their normal retirement age is 60. If you want to delay taking it you can ask, and they might pay you a decent amount more each year when you eventually take it. This would be a reasonable option for you.  In many cases, the payout age is 65, but they allow you to take it at 60 without reduction. This is because of the mess caused by equalising men and women's retirement ages. This appears to be your situation. In this case you would be mad not to take the money, as you can't get it back later. 
So what you do is this:  Take the pension at 60, then increase your contributions to your current pension substantially. You can pay your whole salary into your pension if you've got enough other money to live on. This should enable you to pay enough of your salary in to get your tax rate back down to 20%. In other words, you can be on 50k/yr with the rest going into your pension.
Limits on pension contributions are two-fold:
1. No more than your relevant earnings each year. Relevant earnings means salary, but not pension. Either they deduct pension contribs from your salary before you pay tax, or you pay tax on the contribution, then the taxman gives you 25% extra. So, in the latter case, you could only pay in 80% of your salary, getting to 100% when the tax relief is added.
2. 60k per year, total of you, your employer and the taxman. If you are close to this limit get back to us as there are some options

HTH

BoxerfanUK

Bear in mind no NI deductions on pension income so take home pay will be better than if you are working and earning 23K. 

As earlier poster has said, use your pension income towards your living expenses and what you don't need from your earned income put it into your DC pension and gain tax relief.  Better still, if your employer runs a salary sacrifice scheme sacrifice as much as you can, so you save NI too and maybe they will pay some of their 'employer' NI savings into your pension too.  It's a no brainer if you are happy to carry on working. 

MY OH did salary sacrifice and her employer paid 10% of their employer NI saving into her pension too.  Her employer didn't operate a salary sacrifice scheme but at her request they started one up for all employees.

jimi_man

Hi. 

I’ve been doing exactly this since I was 51 (58 now). Every year I paid everything over the 40% tax bracket into my SIPP. Worked well for me. 

Lycoming

Thanks all, 

Apologies for
my ignorance … if I live on my DB pension and increase my work pension contributions why does that reduce my tax band to 20%. Also will this not mean my employers contributions go up - which they may not agree too?

Dazed_and_C0nfused

Lycoming said:

Thanks all, 

Apologies for
my ignorance … if I live on my DB pension and increase my work pension contributions why does that reduce my tax band to 20%. Also will this not mean my employers contributions go up - which they may not agree too?

If you contribute enough you will have less taxable earnings (net pay method) or a bigger basic rate band (relief at source).

Your employers contributions are likely to already pre determined in the sense they will (or should) have a policy which sets out what they will contribute.  Any matching of your contributions is likely to be limited, for example to a maximum of 10%.  Or they may only pay the statutory minimum.

Although I think one recent poster was getting 50% matched!  

Secret2ndAccount

Your employer probably won't contribute any more from their side, but that doesn't stop you from putting more of your salary into your pension. There are three possibilities: take a close look at your pay slip, and the order in which things are written.
1.  Maybe they take your pension contributions off your salary before they calculate the tax. Your lower salary, after pension deduction, never gets to the point where you pay 40% tax.      or...
2.  They take the tax off first (maybe some at 40%), then take the pension contribs after. In this case two things will happen. First, your pension will get topped up with tax relief, but only by 25% (that's equivalent to replacing the 20% tax you've paid). Second, HMRC will increase your tax allowances by the amount you've paid in to your pension. So instead of hitting the 40% bracket at 50k, you hit it at 60k or 70k. So instead of being taxed at 40% on the top part of your salary, you only get taxed at 20%. In total, you get the full 40% back on the top part of your salary, 20% into your pension, and 20% into your pocket. Obviously, this only works for the part of your salary that would otherwise have been taxed at 40%.             or...
3.  Your company offers salary sacrifice. They take off the pension contribs at the very tippy-top of your pay slip. The money goes straight from your employer to your pension. In effect you never earned it. This is good because you then don't pay any NI on that money either.

It can take time for all this to work its way through the tax system. You might see a pay packet that has 40% tax taken off, but you will get it back later.

Lycoming

Thanks Secret2nd. - a comprehensive answer for me to read and digest.

Pat38493

Secret2ndAccount said:

Your employer probably won't contribute any more from their side, but that doesn't stop you from putting more of your salary into your pension. There are three possibilities: take a close look at your pay slip, and the order in which things are written.
1.  Maybe they take your pension contributions off your salary before they calculate the tax. Your lower salary, after pension deduction, never gets to the point where you pay 40% tax.      or...
2.  They take the tax off first (maybe some at 40%), then take the pension contribs after. In this case two things will happen. First, your pension will get topped up with tax relief, but only by 25% (that's equivalent to replacing the 20% tax you've paid). Second, HMRC will increase your tax allowances by the amount you've paid in to your pension. So instead of hitting the 40% bracket at 50k, you hit it at 60k or 70k. So instead of being taxed at 40% on the top part of your salary, you only get taxed at 20%. In total, you get the full 40% back on the top part of your salary, 20% into your pension, and 20% into your pocket. Obviously, this only works for the part of your salary that would otherwise have been taxed at 40%.             or...
3.  Your company offers salary sacrifice. They take off the pension contribs at the very tippy-top of your pay slip. The money goes straight from your employer to your pension. In effect you never earned it. This is good because you then don't pay any NI on that money either.

It can take time for all this to work its way through the tax system. You might see a pay packet that has 40% tax taken off, but you will get it back later.

Regarding point 3 my scheme is salary sacrifice, but on the payslips it might not be immediately obvious - the "salary" is still my contracted salary and then there is an addition to the salary for the total employer contribution including employer NI sharing!  Then on the debits side I see the full pension amount labelled as SS.  I even see an amount under "employee pension" on the cumulative section.

So to the OP if your scheme is salary sacrifice it doesn't necessarily mean you will just see a reduced salary on your payslip as it depends on the technicalities of your payroll system.  

Lycoming

Thanks… yes just checked, my workplace scheme is SS.. described as an ‘an employer contribution’. So I assume if I pay enough in to ‘reduce my salary’ before they take Tax & NI then I should stay below 40% band. No need to claim back via SA. 

Albermarle

Lycoming said:

Thanks… yes just checked, my workplace scheme is SS.. described as an ‘an employer contribution’. So I assume if I pay enough in to ‘reduce my salary’ before they take Tax & NI then I should stay below 40% band. No need to claim back via SA. 

Correct as nothing to claim back as you will not have paid the tax in the first place.