Pension Calculation

rothers

Dazed_and_C0nfused said:

rothers said:

Morning all,

My wife is going to be retiring aged 55 in October this year (I am already retired). She will have a small NHS pension of around £4000 per year and she won't be taking the tax free lump sum (I don't think as it's only £12 per £1 that she commutes). She also has a SIPP that she will draw down from.

Our goal is to take out the maximum so she doesn't pay any income tax.

Taking into account the 25% tax free amount I believe that her total income can be £16,760 per year, my question is, how does that work in reality because she won't get 25% of her NHS pension tax free every year?

I had assumed that she would be paid her £4k from the NHS then take out £12,760 from her SIPP, 25% of which would be tax free (£3,190). If she didn't take her NHS pension now and just took the whole amount from her sipp she would get £4,190 tax free, another £1,000.

Is my thinking above right? Is there any way to take the full £4,190 tax free each year without having to defer her NHS pension?

Many thanks.

You are over complicating things, you need to start by looking at each pension separately.

If she has £4,000 pension from the NHS and hasn't applied for Marriage Allowance she will have £8,570 remaining Personal Allowance to utilise.

So taking £11,426 from her SIPP would be £8,570 taxable and £2,856 TFLS.

She could take the full 25% TFLS up front is she wants but then 100% of anything else taken is taxable, including 100% of any investment growth.

Thanks for your reply.

Basically, it would be more advantageous for her not to take her NHS pension yet because she could take more out tax free from her SIPP. When she does then take her NHS pension she would obviously pay more tax but the pension would be bigger as she wouldn't be taking it as early?

Dazed_and_C0nfused

rothers said:

Dazed_and_C0nfused said:

rothers said:

Morning all,

My wife is going to be retiring aged 55 in October this year (I am already retired). She will have a small NHS pension of around £4000 per year and she won't be taking the tax free lump sum (I don't think as it's only £12 per £1 that she commutes). She also has a SIPP that she will draw down from.

Our goal is to take out the maximum so she doesn't pay any income tax.

Taking into account the 25% tax free amount I believe that her total income can be £16,760 per year, my question is, how does that work in reality because she won't get 25% of her NHS pension tax free every year?

I had assumed that she would be paid her £4k from the NHS then take out £12,760 from her SIPP, 25% of which would be tax free (£3,190). If she didn't take her NHS pension now and just took the whole amount from her sipp she would get £4,190 tax free, another £1,000.

Is my thinking above right? Is there any way to take the full £4,190 tax free each year without having to defer her NHS pension?

Many thanks.

You are over complicating things, you need to start by looking at each pension separately.

If she has £4,000 pension from the NHS and hasn't applied for Marriage Allowance she will have £8,570 remaining Personal Allowance to utilise.

So taking £11,426 from her SIPP would be £8,570 taxable and £2,856 TFLS.

She could take the full 25% TFLS up front is she wants but then 100% of anything else taken is taxable, including 100% of any investment growth.

Thanks for your reply.

Basically, it would be more advantageous for her not to take her NHS pension yet because she could take more out tax free from her SIPP. When she does then take her NHS pension she would obviously pay more tax but the pension would be bigger as she wouldn't be taking it as early?

Which NHS pension scheme is she in?

I think an actuarial reduction is meant to be cost neutral, she gets a smaller pension for a longer period.  

But it goes against the grain for some people (often mistakenly referred to as a "penalty") and using her Personal Allowance just from income out of the SIPP would be a more popular choice with lots of people.

Especially as once she gets the NHS and her State Pension she will presumably have no spare Personal Allowance then anyway.  So now is the ideal time to empty the SIPP without paying tax on the taxable element.

QrizB

rothers said:

Basically, it would be more advantageous for her not to take her NHS pension yet because she could take more out tax free from her SIPP. When she does then take her NHS pension she would obviously pay more tax but the pension would be bigger as she wouldn't be taking it as early?

Your wife has a set amount of personal allowance between now and state pension age. All other things being equal, it makes no difference whether she uses that for her SIPP or for her NHS pension.

She either gets ths SIPP out tax-free now and pays more tax on her NHS pension later, or vice versa.

rothers

Dazed_and_C0nfused said:

rothers said:

Dazed_and_C0nfused said:

rothers said:

Morning all,

My wife is going to be retiring aged 55 in October this year (I am already retired). She will have a small NHS pension of around £4000 per year and she won't be taking the tax free lump sum (I don't think as it's only £12 per £1 that she commutes). She also has a SIPP that she will draw down from.

Our goal is to take out the maximum so she doesn't pay any income tax.

Taking into account the 25% tax free amount I believe that her total income can be £16,760 per year, my question is, how does that work in reality because she won't get 25% of her NHS pension tax free every year?

I had assumed that she would be paid her £4k from the NHS then take out £12,760 from her SIPP, 25% of which would be tax free (£3,190). If she didn't take her NHS pension now and just took the whole amount from her sipp she would get £4,190 tax free, another £1,000.

Is my thinking above right? Is there any way to take the full £4,190 tax free each year without having to defer her NHS pension?

Many thanks.

You are over complicating things, you need to start by looking at each pension separately.

If she has £4,000 pension from the NHS and hasn't applied for Marriage Allowance she will have £8,570 remaining Personal Allowance to utilise.

So taking £11,426 from her SIPP would be £8,570 taxable and £2,856 TFLS.

She could take the full 25% TFLS up front is she wants but then 100% of anything else taken is taxable, including 100% of any investment growth.

Thanks for your reply.

Basically, it would be more advantageous for her not to take her NHS pension yet because she could take more out tax free from her SIPP. When she does then take her NHS pension she would obviously pay more tax but the pension would be bigger as she wouldn't be taking it as early?

Which NHS pension scheme is she in?

I think an actuarial reduction is meant to be cost neutral, she gets a smaller pension for a longer period.  

But it goes against the grain for some people (often mistakenly referred to as a "penalty") and using her Personal Allowance just from income out of the SIPP would be a more popular choice with lots of people.

Especially as once she gets the NHS and her State Pension she will presumably have no spare Personal Allowance then anyway.  So now is the ideal time to empty the SIPP without paying tax on the taxable element.

She is in the 2008 scheme although that changed in 2015 to the care scheme. She would keep the 2008 scheme until 2022 due to the age discrimination case that the government lost.

I wonder if it would be better to delay taking her NHS pension until she has emptied her SIPP and take the NHS one then?

Dazed_and_C0nfused

rothers said:

Dazed_and_C0nfused said:

rothers said:

Dazed_and_C0nfused said:

rothers said:

Morning all,

My wife is going to be retiring aged 55 in October this year (I am already retired). She will have a small NHS pension of around £4000 per year and she won't be taking the tax free lump sum (I don't think as it's only £12 per £1 that she commutes). She also has a SIPP that she will draw down from.

Our goal is to take out the maximum so she doesn't pay any income tax.

Taking into account the 25% tax free amount I believe that her total income can be £16,760 per year, my question is, how does that work in reality because she won't get 25% of her NHS pension tax free every year?

I had assumed that she would be paid her £4k from the NHS then take out £12,760 from her SIPP, 25% of which would be tax free (£3,190). If she didn't take her NHS pension now and just took the whole amount from her sipp she would get £4,190 tax free, another £1,000.

Is my thinking above right? Is there any way to take the full £4,190 tax free each year without having to defer her NHS pension?

Many thanks.

You are over complicating things, you need to start by looking at each pension separately.

If she has £4,000 pension from the NHS and hasn't applied for Marriage Allowance she will have £8,570 remaining Personal Allowance to utilise.

So taking £11,426 from her SIPP would be £8,570 taxable and £2,856 TFLS.

She could take the full 25% TFLS up front is she wants but then 100% of anything else taken is taxable, including 100% of any investment growth.

Thanks for your reply.

Basically, it would be more advantageous for her not to take her NHS pension yet because she could take more out tax free from her SIPP. When she does then take her NHS pension she would obviously pay more tax but the pension would be bigger as she wouldn't be taking it as early?

Which NHS pension scheme is she in?

I think an actuarial reduction is meant to be cost neutral, she gets a smaller pension for a longer period.  

But it goes against the grain for some people (often mistakenly referred to as a "penalty") and using her Personal Allowance just from income out of the SIPP would be a more popular choice with lots of people.

Especially as once she gets the NHS and her State Pension she will presumably have no spare Personal Allowance then anyway.  So now is the ideal time to empty the SIPP without paying tax on the taxable element.

She is in the 2008 scheme although that changed in 2015 to the care scheme. She would keep the 2008 scheme until 2022 due to the age discrimination case that the government lost.

I wonder if it would be better to delay taking her NHS pension until she has emptied her SIPP and take the NHS one then?

That may be her best option but it isn't always the case.  Have you worked out roughly what each would be worth when she comes to retire?

7 years final salary on a 1/60ths accrual doesn't always beat 7 years in the CARE scheme as that is 1/54th accrual rate.  Especially when there is only two year difference in the schemes normal pension ages.  

And the CARE scheme has a pretty generous in service revaluation rate.  11.6% in a recent year I think!

rothers

Dazed_and_C0nfused said:

rothers said:

Dazed_and_C0nfused said:

rothers said:

Dazed_and_C0nfused said:

rothers said:

Morning all,

My wife is going to be retiring aged 55 in October this year (I am already retired). She will have a small NHS pension of around £4000 per year and she won't be taking the tax free lump sum (I don't think as it's only £12 per £1 that she commutes). She also has a SIPP that she will draw down from.

Our goal is to take out the maximum so she doesn't pay any income tax.

Taking into account the 25% tax free amount I believe that her total income can be £16,760 per year, my question is, how does that work in reality because she won't get 25% of her NHS pension tax free every year?

I had assumed that she would be paid her £4k from the NHS then take out £12,760 from her SIPP, 25% of which would be tax free (£3,190). If she didn't take her NHS pension now and just took the whole amount from her sipp she would get £4,190 tax free, another £1,000.

Is my thinking above right? Is there any way to take the full £4,190 tax free each year without having to defer her NHS pension?

Many thanks.

You are over complicating things, you need to start by looking at each pension separately.

If she has £4,000 pension from the NHS and hasn't applied for Marriage Allowance she will have £8,570 remaining Personal Allowance to utilise.

So taking £11,426 from her SIPP would be £8,570 taxable and £2,856 TFLS.

She could take the full 25% TFLS up front is she wants but then 100% of anything else taken is taxable, including 100% of any investment growth.

Thanks for your reply.

Basically, it would be more advantageous for her not to take her NHS pension yet because she could take more out tax free from her SIPP. When she does then take her NHS pension she would obviously pay more tax but the pension would be bigger as she wouldn't be taking it as early?

Which NHS pension scheme is she in?

I think an actuarial reduction is meant to be cost neutral, she gets a smaller pension for a longer period.  

But it goes against the grain for some people (often mistakenly referred to as a "penalty") and using her Personal Allowance just from income out of the SIPP would be a more popular choice with lots of people.

Especially as once she gets the NHS and her State Pension she will presumably have no spare Personal Allowance then anyway.  So now is the ideal time to empty the SIPP without paying tax on the taxable element.

She is in the 2008 scheme although that changed in 2015 to the care scheme. She would keep the 2008 scheme until 2022 due to the age discrimination case that the government lost.

I wonder if it would be better to delay taking her NHS pension until she has emptied her SIPP and take the NHS one then?

That may be her best option but it isn't always the case.  Have you worked out roughly what each would be worth when she comes to retire?

7 years final salary on a 1/60ths accrual doesn't always beat 7 years in the CARE scheme as that is 1/54th accrual rate.  Especially when there is only two year difference in the schemes normal pension ages.  

And the CARE scheme has a pretty generous in service revaluation rate.  11.6% in a recent year I think!

I should have put "could" rather than "would" keep the 2008 scheme until 2022. I haven't worked it out yet but I suspect that the 2015 scheme may be better in her case due to the factors that you mention. I was in the 1987 police pension scheme and keeping that until 2022 was by far the better option!

Thinking about it, what if she delays taking her NHS pension until she has emptied her SIPP (taking £16760 out each year), when she has taken that out she could apply for the marriage allowance so I could get more tax free and she could take her, slightly larger NHS pension then?

Say she started taking the NHS pension at 63 (4 years before state pension age) the 2008 pension would be reduced by 11% rather than by 40% if she took it at 55yrs.

The 2015 pension would be reduced by 20% rather than the 45% that it would have been if she took it at 55yrs.

Does that make sense?

rothers

QrizB said:

rothers said:

Basically, it would be more advantageous for her not to take her NHS pension yet because she could take more out tax free from her SIPP. When she does then take her NHS pension she would obviously pay more tax but the pension would be bigger as she wouldn't be taking it as early?

Your wife has a set amount of personal allowance between mow and state pension age. All other things being equal, it makes no difference whether she uses that for her SIPP or for her NHS pension.

She either gets ths SIPP out tax-free now and pays more tax on her NHS pension later, or vice versa.

But if she takes her NHS pension now none of that is tax free, it all counts towards her annual allowance. If she delays taking that she could take more tax free as she could take 25% each year tax free on top of her £12,570 tax free allowance.

Am I making sense??

QrizB

rothers said:

Am I making sense??

No, not really (sorry).

25% of her SIPP is tax-free. Regardless of when she takes it, it will always be tax-free. She could take all 25% on her 55th birthday and it would still be tax-free.

The other 75% is always taxable, just like her NHS pension.

Between 55 and 67 your wife will get 12 years of personal allowance. This can be used for NHS pension, for the taxable 75% of her SIPP or for any other ad-hoc taxable income she might have, but the total value will be the same regardless.

rothers

QrizB said:

rothers said:

Am I making sense??

No, not really (sorry).

25% of her SIPP is tax-free. Regardless of when she takes it, it will always be tax-free.

The other 75% is always taxable, just like her NHS pension.

Between 55 and 67 your wife will get 12 years of personal allowance. This can be used for NHS pension, for the taxable 75% of her SIPP or for any other ad-hoc taxable income she might have, but the total value will be the same regardless.

Please don't apologise for educating me

I just want to get as much out tax free as possible before her state pension kicks in and takes her over the annual allowance.

Lets say, for example, that her sipp is £130,000. Is it possible to get all of that out tax free whilst taking her NHS pension (also tax free) over 11 years? (I say 11 years as she will have earned over £12,570 in the tax year before she retires).

Edit, in answer to my own question it would appear that she would (almost).

£130,000 - 25% = £97,500

£97,500 / 11 = £8,863

£8,863 + £4,000 = £12,863 which is just above the annual allowance

QrizB

rothers said:

I just want to get as much out tax free as possible before her state pension kicks in and takes her over the annual allowance.

If the personal allowance doesn't change for the duration, 11 years of £12570 is £138270.

rothers said:

Lets say, for example, that her sipp is £130,000.

I'm going to ignore growth in the SIPP or the NHS pension for now.

Of that £130k, £32500 is tax-free.

That leaves £97500 that's potentially taxable.

Over the same 11 years, she'll receive £44000 of NHS pension.

£97500 + £44000 = £141500. So at some time in that period she'd have to pay tax on £3230.