Is it worth topping up if it MIGHT push me into 40% tax

Tuftywufty

I have 3 years until state retirement and a DB pension that was contracted out. I am 2 years short on full state pension and always intended buying 2 years top up. However due to frozen personal allowances and having an indexed linked pension that increased quite a bit in the last couple of years due to inflation; will it still be worth it if it tips me into 40% tax?

badmemory

How does 60% of any extra compare to 100% of nothing.  Also consider whether the index linking when in payment is as good as the triple lock increase (so far).  Also have you any other way of "earning" the 2 years rather than paying for them.

Tuftywufty

badmemory said:

How does 60% of any extra compare to 100% of nothing.  Also consider whether the index linking when in payment is as good as the triple lock increase (so far).  Also have you any other way of "earning" the 2 years rather than paying for them.

Yes 60% of something sounds far more favourable but it’ll cost me £1731 for 2 years top up (‘22/23 £824 & £907 for ‘23/24) to get £368pa (£131pa after 60% tax). It’ll take me 13 years to make the money back so I’ll be 79 by then assuming I’ll live that long (aiming for at least 100 like my mum & aunties!!)  Choice of investing the £1731, spending it or buying 2 years of NI. Do I feel lucky? I suppose I’m more concerned of government now or in the future means testing the state pension & then I could be on the hit list if I’m a higher rate tax payer

squirrelpie

You don't sound very clear about probabilities. You say "I’ll be 79 by then" but that's probably below your life expectancy (you don't say how old you are so we can't tell) and then you say you have a family history of above average life expectancy, thus compounding the issue. And then you speculate that the government is going to do something it hasn't proposed and that would be contrary to its accepted practice and expect us to respond seriously?

pinnks

Also, his maths is a bit awry.  Each year adds £328 per year to the pension, so buying 2 years would add £656.  60% of that is £394 after tax, so payback is about 4 years 5 months, ignoring the TL annual increase in the pension.  Not sure where any of his figures come from...

If it is because the second year adds less than £328 per year because he hits the max, then the question is more about whether paying the second year is worth it... 

jem16

Tuftywufty said:

badmemory said:

How does 60% of any extra compare to 100% of nothing.  Also consider whether the index linking when in payment is as good as the triple lock increase (so far).  Also have you any other way of "earning" the 2 years rather than paying for them.

Yes 60% of something sounds far more favourable but it’ll cost me £1731 for 2 years top up (‘22/23 £824 & £907 for ‘23/24) to get £368pa (£131pa after 60% tax). It’ll take me 13 years to make the money back so I’ll be 79 by then assuming I’ll live that long (aiming for at least 100 like my mum & aunties!!)  Choice of investing the £1731, spending it or buying 2 years of NI. Do I feel lucky? I suppose I’m more concerned of government now or in the future means testing the state pension & then I could be on the hit list if I’m a higher rate tax payer

One year at £6.32pw would give you £328.64pa. If you’re only getting an extra £40pa for that 2nd year why not just buy one year? Payback, even with 40% tax would be just over 4 years. 

By the way your Maths seems a bit out even if that second year is only worth £40pa. £368pa after 40% tax (no idea why you’re using 60% tax) is £220.80 so payback is just less than 8 years not 13 years. 

molerat

1 year gives £6.32 pw, £328.64 pa gross or £197.18 after 40% tax and will repay the £907.40 in 4.6 years.  2 years payback depends on exactly how much that final year is worth.

jem16

molerat said:

1 year gives £6.32 pw, £328.64 pa gross or £197.18 after 40% tax and will repay the £907.40 in 4.6 years.  2 years payback depends on exactly how much that final year is worth.

Presumably if only buying one year he’d pay for the cheaper one at £824 rather than £907.40. 

molerat

True but my example was using a slightly worst case to counter the op's 13 years.

Tuftywufty

squirrelpie said:

You don't sound very clear about probabilities. You say "I’ll be 79 by then" but that's probably below your life expectancy (you don't say how old you are so we can't tell) and then you say you have a family history of above average life expectancy, thus compounding the issue. And then you speculate that the government is going to do something it hasn't proposed and that would be contrary to its accepted practice and expect us to respond seriously?

I said I was 3 years from state retirement age so thought it would be fairly obvious I’m 64 now everyone knows that retirement age will be 67 in 3 years time. I’m healthy with good family history of longevity but it’s an educated guess how long I’ll live. I’m not speculating that the government IS going to do something it hasn’t proposed. I’m merely stating my thinking around others speculation that means testing it could be a possibility as we know the state pension is unlikely to support everyone who has paid NI at the same level it does now. I have no expectation of your need to respond seriously or otherwise thanks.

Tuftywufty

pinnks said:

Also, his maths is a bit awry.  Each year adds £328 per year to the pension, so buying 2 years would add £656.  60% of that is £394 after tax, so payback is about 4 years 5 months, ignoring the TL annual increase in the pension.  Not sure where any of his figures come from...

If it is because the second year adds less than £328 per year because he hits the max, then the question is more about whether paying the second year is 

Yes you’re right my maths is off. I mixed up my 40% & 60% figures so the calculations came out wrong. Sorry for the confusion. Each year will add £197.18pa to my state pension after paying 40% tax. My investment of £865pa (or £1731 for 2 years as I intended) will therefore take 4.4 years to return which is a lot better than the 13 years I said.