Struggling with additional pension contribution options

Mr_Crabbs

Hi all, I'm looking at additional pension contribution options for my partner, and I'm struggling with it. Some thoughts would be really helpful, particularly from those that have been here.

I posted last year about standard or higher lump sum options when my partner, an NHS nurse now age 62, was thinking about partial retirement (https://forums.moneysavingexpert.com/discussion/6581106/nhs-pension-not-sure-whether-to-take-standard-or-maximum-lump-sum/p1).

She took the standard lump sum, but that's left her with more income than she needs and well into the higher rate tax bracket by about £7k, so we wanted to consider additional pension contributions effectively to defer the income a few years until it'll be more useful. She's planning full retirement in about 2 - 3 years (65).

We're really struggling with it, partly decision paralysis and partly as we both have a lot of other stresses so getting the focus on it is difficult, and I'm concious the end of the tax year is approaching and we haven't made a decision.

If we're doing anything this year it'll have to be a lump sum payment. Paying into her current NHS DB scheme (2015) is an option, but that doesn't start paying until she's 67, by my calculations the payback might not be there until she's into her 80s, and given the glacial pace NHSBS works at it might not be before the end of the year.

There's also an NHS run AVC scheme, but it's very difficult to pin the detail to judge how good it is, and again I think it might have to wait until 67.

The other option seems to be paying into a 'safe' if low paying SIPP, and I understand we can just open a SIPP, pay cash in and sort out the investments, mix and tax later, but I think we're both a bit afraid of SIPPs, and our time horizon might only be 2 - 3 years which I think is fairly short, so this is where the decision paralysis comes in again.

Longer term we would look at monthly payments from income, though again the SIPP or NHS DB / AVC question would arise.

There's also recycling to consider, though from what I've read at the moment I don't think what we're thinking of is recycling, and I don't want to make this a recycling thread.

I'm trying to get this moving again so every little helps, and I'd appreciate any information or thoughts.

Thanks

QrizB

If you want to make pension contributions this tax year, I'd suggest opening a personal pension / SIPP is the simplest solution and one where you'll be best able to manage your contributions. When I was in a similar situation a few years ago I opened a Vanguard pension and made my first contribution all within a day.

Vanguard aren't the absolutely cheapest option for small fund values but they're quick and convenient.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6654324/struggling-with-additional-pension-contribution-options

Once the tax year has ended she has completely missed the opportunity to mitigate the higher rate tax as you can never backdate pension contributions.

So given what you say about the NHS scheme, opening a SIPP and making the (net) contribution in the current tax year is key here.

She has several years to sort out the higher rate relief with HMRC (assuming she doesn't have to file a tax return) and can leave it as cash within the pension until she is comfortable with an investment option.

Albermarle

The other option seems to be paying into a 'safe' if low paying SIPP, and I understand we can just open a SIPP, pay cash in and sort out the investments, mix and tax later, but I think we're both a bit afraid of SIPPs, and our time horizon might only be 2 - 3 years which I think is fairly short, so this is where the decision paralysis comes in again

A SIPP is not safe or risky in itself, it all depends on what investments you choose. For a short time horizon you may be better off just holding the funds in the pension as cash. Most SIPPs pay some interest on cash, but less than you would get in a normal savings account. One way around this is to invest in a Short Term Money Market Fund. These pay interest in line with the Bank of England base rate, with minimal risk.

When you contribute to a SIPP, the provider will claim basic rate tax relief from HMRC on your behalf and add it to the pension ( after a delay). If you think you are entitled to some higher rate relief you have to apply to HMRC. Any rebate will be paid direct to you rather than the pension.

I think if she paid into the NHS AVC, the contributions would come out pre tax, so all tax relief is paid into the pension.

Mr_Crabbs

@QrizB

"If you want to make pension contributions this tax year, I'd suggest opening a personal pension / SIPP is the simplest solution and one where you'll be best able to manage your contributions"

Thankyou. I'm leaning toward SIPP because of that. I'm leaning away from SIPP because I don't feel confident about investment choice. I had thought of going for low cost option (seems to be II at the moment) on the assumption that everyine does similar, or at least usable, options.

I have been told I can move funds into the (generic?) SIPP then take time to make my investment choices, and @Dazed_and_C0nfused mentions that as well, which might help

@Dazed_and_C0nfused

Once the tax year has ended she has completely missed the opportunity to mitigate the higher rate tax as you can never backdate pension contributions

Thanks. Yes, understood. That's why I'm flapping now!

She has several years to sort out the higher rate relief with HMRC (assuming she doesn't have to file a tax return) and can leave it as cash within the pension until she is comfortable with an investment option.

Thanks, I had been told that and the confirmation is useful. It sounds as though depending on provider we might have up to 6 - 9 months to decide investment.

So given what you say about the NHS scheme, opening a SIPP and making the (net) contribution in the current tax year is key here

If I'm right about the NHS scheme. In the previous thread it was suggested the payback was quicker, but I couldn;t confirm that.

@Albermarle

A SIPP is not safe or risky in itself, it all depends on what investments you choose.

Thanks. Yes, understood; that's what I meant, really.

For a short time horizon you may be better off just holding the funds in the pension as cash … One way around this is to invest in a Short Term Money Market Fund …

Thankyou. That's useful to know; we'll look at that

When you contribute to a SIPP, the provider will claim basic rate tax relief from HMRC on your behalf … If you think you are entitled to some higher rate relief you have to apply to HMRC … I think if she paid into the NHS AVC, the contributions would come out pre tax, so all tax relief is paid into the pension.

Thanks. I think you are right about the AVC; I think it behaves as an employer's DC scheme would. I'm not sure if you can put a lump sum into it.

I suppose the other question is whether we are digging ourselves any holes by going the SIPP route. I can't see we are, other than that the NHS DB scheme is nominally more attractive, but if I've worked the number right that's offset by the later start and payback, and the gap between retirement date and being able to take it.

I'm not confident about any of this and finding it really stressful, particularly with everything else going on. I had thought about an IFA but haven't found anyone who will do paid advice and seems like someone we can work with.

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/comment/81875567#Comment_81875567

Why do you think she has 6-9 months to decide on investment. She can leave the funds in the pension as cash for ever if she wants. That isn't a recommendation it's just you appear to have invented a non-existent timeframe.

My comment about the NHS was nothing to do with payback (of tax relief). It was simply that, based on your earlier comments, but you may fail to actually make a contribution in the current tax year if you opt for that route.

To be perfectly honest you seem happier prevaricating than just getting some money into the pension. That is really what matters if you want to mitigate the higher rate tax being paid in the current tax year. Once you miss the providers deadline for contributions you have completely missed the boat for this tax year. Some may allow payment right up to 5 April but I don't know if they all do.

LHW99

Presumably you / your partner have maxed out your ISAs?

S&S ISAs can have the same investments as SIPPs, and can be used tax-free, whereas after the 25% TFLS, any form of pension provides additional income that will be taxed at personal tax band you are in at the time.

You don't get the initial tax relief going in with ISAs, which may be an issue.

claire111

Don't confuse purchase of NHS Additional Pension with contributions into SIPPS or NHS AVCs. Purchase of NHS Adittional Pension is similar to purchase of an Annuity - it is fixed, guaranteed and index linked. When I did it some years ago, as a salary sacrifice purchase, it was unbelievable value but it may be different now. There is an online calculator you can play around with. Be sure to factor in Tax Relief. Do it in plenty of time for the tax year as NHSBS can be slow.

Edited to add ; when I did it, I calculated that 9 years post age 65 was the break even point. My family seem live til their 90's so for me it was a good gamble.

af1963

I had thought of going for low cost option (seems to be II at the moment) on the assumption that everyine does similar, or at least usable, options.

ii have a fixed fee structure, which is good for larger portfolios but could work out relatively high for a new SIPP that gets a couple of years with a few thousand pounds contributed.

Grumpy_chap

I found the OP's post difficult to follow.

Is pension recycling a concern here?

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81875680#Comment_81875680

Yes, for a smaller fund, II is not a good option. They would be better with one that charges a % , like HL, Fidelity, AJ Bell etc