Inheritance and Pension

Kinclad

Albermarle said:

My mistake.
I googled it and found info on this very similar named investment.
blackrock 30/70 target allocation etf

No probs 🙂 

Kernowshep

Similar to someone mentioned above it's worth considering remortgaging at the end of your current term, for example a 5 year fix would take you a couple of years past your target retirement date and a 10 year fix could take you up to state pension age offering more flexibility before then.  Yes it costs a bit of interest, but you could quite easily make it back (and more) in tax savings and investment return from extra pension contributions. But you may value the feeling of being mortgage free more.

SVaz

I wouldn’t derisk for at least another 5 years and even then just switch contributions to ‘safer’ funds to build up a different pot that will be a buffer.  Then with 3-5 years to go,  if markets are high,  sell enough equity funds to give a few years income,  Gilts or a short term money market fund. 

Kinclad

Kernowshep said:

Similar to someone mentioned above it's worth considering remortgaging at the end of your current term, for example a 5 year fix would take you a couple of years past your target retirement date and a 10 year fix could take you up to state pension age offering more flexibility before then.  Yes it costs a bit of interest, but you could quite easily make it back (and more) in tax savings and investment return from extra pension contributions. But you may value the feeling of being mortgage free more.

Thanks, just so i'm correct in understanding your point regarding extra pension contributions. I'm presuming your suggesting that I would use the cash i would have used to pay of the mortgage to pay extra into my pension?

The only reason why i think that may not be the best is that I know i'm going to go to an interest rate that is going to be at least 3% more than what i have been paying for the last 5 years if i remortgage. Plus by paying off the mortgage, it enables me to increase my salary sacrifice contributions (as no mortgage payment).

My quick calcs suggest that i should be able to salary sacrifice (+ employer contributions) around 30K a year.

So im thinking.

Pay off mortgage at renewal next year
30K into pension via salary sacrifice
Fulfill the remainder of my 60K yearly pension allowance with cash.

Interested in thoughts on the above?

plus a couple more questions....

In the scenario above would i pay just 24K of cash to make up the extra 30K?, as 6K is added by SW?
and am i correct in saying i can use unused pension allowances from the previous 3 years to add more cash into my pension? 

Thanks
Mark 


 

vacheron

Kinclad said:

Kernowshep said:

Similar to someone mentioned above it's worth considering remortgaging at the end of your current term, for example a 5 year fix would take you a couple of years past your target retirement date and a 10 year fix could take you up to state pension age offering more flexibility before then.  Yes it costs a bit of interest, but you could quite easily make it back (and more) in tax savings and investment return from extra pension contributions. But you may value the feeling of being mortgage free more.

So im thinking.

Pay off mortgage at renewal next year
30K into pension via salary sacrifice
Fulfill the remainder of my 60K yearly pension allowance with cash.

Interested in thoughts on the above?

plus a couple more questions....

In the scenario above would i pay just 24K of cash to make up the extra 30K?, as 6K is added by SW?
and am i correct in saying i can use unused pension allowances from the previous 3 years to add more cash into my pension? 

In order to carry forward pension allowances you would need to earn that same amount this tax year, so if you earned 120K this year, you could use your 60K and carry forward 60K from the previous 2 years (if this remained unused). If you "only" earned 60K, you would not be able to carry forward. 

The same also applies to the standard 60K tax relief allownace in that you can only contribute the full 60K if you have earned more than 60K of "income" in this year. 

Re the salary sacrifice balance, Assuming your earnings are high enough as above, you can salary sacrifice all the way down to minimum wage (which is probably the best option). You can then use some of your savings to subsidise your income during this time too required. and then put the remainder into a SIPP or a direct cash transfer into your workplace pension if permitted. 

vacheron

Kinclad said:

Kernowshep said:

Similar to someone mentioned above it's worth considering remortgaging at the end of your current term, for example a 5 year fix would take you a couple of years past your target retirement date and a 10 year fix could take you up to state pension age offering more flexibility before then.  Yes it costs a bit of interest, but you could quite easily make it back (and more) in tax savings and investment return from extra pension contributions. But you may value the feeling of being mortgage free more.

Thanks, just so i'm correct in understanding your point regarding extra pension contributions. I'm presuming your suggesting that I would use the cash i would have used to pay of the mortgage to pay extra into my pension?

The only reason why i think that may not be the best is that I know i'm going to go to an interest rate that is going to be at least 3% more than what i have been paying for the last 5 years if i remortgage. Plus by paying off the mortgage, it enables me to increase my salary sacrifice contributions (as no mortgage payment).

It depends on your rate, but the reason for the suggestions are that pension tax relief will add at least 25% (or 66% of the higher rate contributions) as an immediate uplift into your scheme. Salary sacrifice would make this even higher (maybe 2-17% higher)

So even if your mortgage interest jumped from 7% to 10% it would take 6 years+ to exceed the 40% relief saving (plus any growth in your investments.. but lets disregard these for now as they are not guaranteed), compared with using taxed income to pay down your mortgage.

So the big question is: would you give up a 25% or 66% immediate uplift in order to save 3% per year? There is no wrong answer as for many the risk and the feeling of being mortgage free is worth it, but for some it won't be. 

Kinclad

vacheron said:

Kinclad said:

Kernowshep said:

Similar to someone mentioned above it's worth considering remortgaging at the end of your current term, for example a 5 year fix would take you a couple of years past your target retirement date and a 10 year fix could take you up to state pension age offering more flexibility before then.  Yes it costs a bit of interest, but you could quite easily make it back (and more) in tax savings and investment return from extra pension contributions. But you may value the feeling of being mortgage free more.

Thanks, just so i'm correct in understanding your point regarding extra pension contributions. I'm presuming your suggesting that I would use the cash i would have used to pay of the mortgage to pay extra into my pension?

The only reason why i think that may not be the best is that I know i'm going to go to an interest rate that is going to be at least 3% more than what i have been paying for the last 5 years if i remortgage. Plus by paying off the mortgage, it enables me to increase my salary sacrifice contributions (as no mortgage payment).

It depends on your rate, but the reason for the suggestions are that pension tax relief will add at least 25% (or 66% of the higher rate contributions) as an immediate uplift into your scheme. Salary sacrifice would make this even higher (maybe 2-17% higher)

So even if your mortgage interest jumped from 7% to 10% it would take 6 years+ to exceed the 40% relief saving (plus any growth in your investments.. but lets disregard these for now as they are not guaranteed), compared with using taxed income to pay down your mortgage.

So the big question is: would you give up a 25% or 66% immediate uplift in order to save 3% per year? There is no wrong answer as for many the risk and the feeling of being mortgage free is worth it, but for some it won't be. 

ok thanks, but sorry im still not sure on this (probably because i haven't provided all the numbers).

If i salary sacrificed down to minimum wage, i would only be around 9K shy of 60K, which means only 9K of my spare cash would be eligible for tax efficiently by adding into my pension, hence my thoughts is that after paying in the 9k,  I should use the cash i have to pay off my mortgage, rather than paying 4%+ in interest. 

(obviously based on monthly affordability) but I'm presuming the best bet is to always salary sacrifice first, then see what pension allowance is left to then complete with available cash?

Thanks Mark. 



 

vacheron

Kinclad said:

vacheron said:

Kinclad said:

Kernowshep said:

Similar to someone mentioned above it's worth considering remortgaging at the end of your current term, for example a 5 year fix would take you a couple of years past your target retirement date and a 10 year fix could take you up to state pension age offering more flexibility before then.  Yes it costs a bit of interest, but you could quite easily make it back (and more) in tax savings and investment return from extra pension contributions. But you may value the feeling of being mortgage free more.

Thanks, just so i'm correct in understanding your point regarding extra pension contributions. I'm presuming your suggesting that I would use the cash i would have used to pay of the mortgage to pay extra into my pension?

The only reason why i think that may not be the best is that I know i'm going to go to an interest rate that is going to be at least 3% more than what i have been paying for the last 5 years if i remortgage. Plus by paying off the mortgage, it enables me to increase my salary sacrifice contributions (as no mortgage payment).

It depends on your rate, but the reason for the suggestions are that pension tax relief will add at least 25% (or 66% of the higher rate contributions) as an immediate uplift into your scheme. Salary sacrifice would make this even higher (maybe 2-17% higher)

So even if your mortgage interest jumped from 7% to 10% it would take 6 years+ to exceed the 40% relief saving (plus any growth in your investments.. but lets disregard these for now as they are not guaranteed), compared with using taxed income to pay down your mortgage.

So the big question is: would you give up a 25% or 66% immediate uplift in order to save 3% per year? There is no wrong answer as for many the risk and the feeling of being mortgage free is worth it, but for some it won't be. 

ok thanks, but sorry im still not sure on this (probably because i haven't provided all the numbers).

If i salary sacrificed down to minimum wage, i would only be around 9K shy of 60K, which means only 9K of my spare cash would be eligible for tax efficiently by adding into my pension, hence my thoughts is that after paying in the 9k,  I should use the cash i have to pay off my mortgage, rather than paying 4%+ in interest. 

(obviously based on monthly affordability) but I'm presuming the best bet is to always salary sacrifice first, then see what pension allowance is left to then complete with available cash?

Thanks Mark. 

It really depends on the size of the inheritance you may be looking at (not that I am asking you to tell us). If it was  £60K and you are going to sacrifice right down to minimum wage, you want/need to use some of that spare £9K subsidise your day to day living expenses?

If it was closer to £120K, and you are also planning to continue working all of next year too with a similar salary you could disappear another c. £51K (including tax relief) in the 25-26 tax year. Yes, you would have to pay an extra 4% on that money still being owed on your mortgage for another year, but that 25-66%+ tax relief uplift could still make it more than worthwhile.

If however you you might recieve enough to still be trying to find ways to stash money in pensions in 4-5 years time, then things start to become a little less clear cut.

Also if you have a partner, remember you can potentially utilise their unused ISA allowances, savings nil rate band, and workplace pensions too.

Kinclad

vacheron said:

Kinclad said:

vacheron said:

Kinclad said:

Kernowshep said:

Similar to someone mentioned above it's worth considering remortgaging at the end of your current term, for example a 5 year fix would take you a couple of years past your target retirement date and a 10 year fix could take you up to state pension age offering more flexibility before then.  Yes it costs a bit of interest, but you could quite easily make it back (and more) in tax savings and investment return from extra pension contributions. But you may value the feeling of being mortgage free more.

Thanks, just so i'm correct in understanding your point regarding extra pension contributions. I'm presuming your suggesting that I would use the cash i would have used to pay of the mortgage to pay extra into my pension?

The only reason why i think that may not be the best is that I know i'm going to go to an interest rate that is going to be at least 3% more than what i have been paying for the last 5 years if i remortgage. Plus by paying off the mortgage, it enables me to increase my salary sacrifice contributions (as no mortgage payment).

It depends on your rate, but the reason for the suggestions are that pension tax relief will add at least 25% (or 66% of the higher rate contributions) as an immediate uplift into your scheme. Salary sacrifice would make this even higher (maybe 2-17% higher)

So even if your mortgage interest jumped from 7% to 10% it would take 6 years+ to exceed the 40% relief saving (plus any growth in your investments.. but lets disregard these for now as they are not guaranteed), compared with using taxed income to pay down your mortgage.

So the big question is: would you give up a 25% or 66% immediate uplift in order to save 3% per year? There is no wrong answer as for many the risk and the feeling of being mortgage free is worth it, but for some it won't be. 

ok thanks, but sorry im still not sure on this (probably because i haven't provided all the numbers).

If i salary sacrificed down to minimum wage, i would only be around 9K shy of 60K, which means only 9K of my spare cash would be eligible for tax efficiently by adding into my pension, hence my thoughts is that after paying in the 9k,  I should use the cash i have to pay off my mortgage, rather than paying 4%+ in interest. 

(obviously based on monthly affordability) but I'm presuming the best bet is to always salary sacrifice first, then see what pension allowance is left to then complete with available cash?

Thanks Mark. 

It really depends on the size of the inheritance you may be looking at (not that I am asking you to tell us). If it was  £60K and you are going to sacrifice right down to minimum wage, you want/need to use some of that spare £9K subsidise your day to day living expenses?

If it was closer to £120K, and you are also planning to continue working all of next year too with a similar salary you could disappear another c. £51K (including tax relief) in the 25-26 tax year. Yes, you would have to pay an extra 4% on that money still being owed on your mortgage for another year, but that 25-66%+ tax relief uplift could still make it more than worthwhile.

If however you you might recieve enough to still be trying to find ways to stash money in pensions in 4-5 years time, then things start to become a little less clear cut.

Also if you have a partner, remember you can potentially utilise their unused ISA allowances, savings nil rate band, and workplace pensions too.

Thanks Vacheron, so based upon a reasonable house price sale, it will be in the region of 220K.

Apologies, you will have to bear with me, as im still having problems trying to understand how the scenario (where...if i dont pay off my mortgage) i can use that cash to add into my pension and get the tax benefits.

let me show an example how i see it and can then be corrected...

Salary 60K

2024/2025 - 25K into works pension through salary sacrifice. 

2025/2026 - intend to dramatically increases SS%, ultimately resulting in around 50K going into pension.

Just before the end of the tax year - My understanding is that you can use previous years unused allowance (ie in 2024/2025 - 35K not used).

So for 2025/2026
50K - already paid into pension
35K - still left over

But im still only earning 60K Salary, so does that not mean that i can only use 10K of the 35K left over as i thought you cant contribute into a private pension more than what you earn?

Thanks Mark. 

 ...edit...just doing some more research on this, do i need to split out/separate my employers contributions (10.5%) in order to compare just my pension contributions compared to my annual salary for a given year?

vacheron

It's probably best at this point (as we have a little more information) to first eliminate what you can't do to help keep things simple. 

• If you earn 60K PA you can't carry forward any previous year's contributions as your would need more than £60K of earned income in this tax year to be allowed to do so. So this leaves you with the standard £60,000 annual allowance limit for 2025-26.

• Also, using your salary sacrifice scheme, you can't sacrifice your salary below the current minimum wage.

• There is also no point in making pension contributions below your personal allowance (£12,570 assuming basic rate), as there is no tax relief to be gained below this, so that gives you £47,430 you can contribute to your pension that would receive tax relief each year.