Close to LSA and likely higher rate in retirement -- am I overlooking anything?

kermchem

Apologies for hijacking the thread, but OP and I seem to have seen the same light.

OH and I found ourselves in the situation where over the last 6 years having paid off the mortgage and seen the kids go to and finish university, I was able to put enough into SIPP and then USS IB/DC to reduce my effective salary to just below the 20%/40% threshold, and OH was also feeding a SIPP much more modestly. When a VS scheme made me look more carefully at the numbers it became clear I was getting 40% relief on the way in, but in danger of paying 40% tax on the way back out.

If I was still working this tax year I would possibly feed the USS IB/DC with about £20K, salary sacrificed, so a cost to my take-home of 58% of that. I would not repeat next tax-year due to the 40% on the way out.

Using round numbers, because this is not me, OH has a salary of about £30K, pays about £1500 into employer pension (not sal sac), leaving taxable pay of £28.5K. Tax is £3K, NI is £1300, so take home about £23.2K. Can feed 80% of £28.5K to SIPP, so £22.8K, and tax relief adds £5.7K. Hence pension fund gets back all the tax paid, all the NI paid and a bit more. OK, not sustainable long term, and not sustainable to feed both mine and OH pots, but I took VS and gave most of the VS tax-free sum to OH. Actually, she emptied her savings into pension last year and I have refilled them. Pension Annual Allowance not a problem, plenty of carry-forward.

No different from anyone under age 75 can pay £2880, a gift from spouse if necessary, into a pension every year to get £720 tax relief even if they don't pay tax. There is a decade-long thread on this.

ali_bear

Just to point out that if you are in the fortunate position of facing 40% income tax on money earned now, or putting it in a pension and paying 40% tax on it later. It is simply a matter of when you want to have that money.

guymo

https://forums.moneysavingexpert.com/discussion/comment/81998180#Comment_81998180

If that were the only choice then I think it is clearly better to take the money now so that you have it available should a need arise.

In some sense the thrust of my question was precisely to figure out whether there was anything I had missed besides the two options you've summarised here. Of course there are little things here and there but I wondered if I had missed something bigger. It seems not, which is fine.

guymo

https://forums.moneysavingexpert.com/discussion/comment/81998009#Comment_81998009

Thanks for this good point — it may be worth investigating. The basic rule is that early retirement factors apply if you retire before normal pension age, which will be 67 for me by the time I get there. But historical contracts allowed staff to retire from 60 without penalty if they do so "with the consent" of the employer, and that applies to a good chunk of my pension though not the more recently accrued parts. So it's not entirely clear. I might make some enquiries in a few years' time. I don't suppose USS would be too interested in answering complex questions like that 7 years out.

SarahB16

@guymo Did you never consider opening a SIPP?

A SIPP could have been your bridge from 55 to 60 so need to suffer any actuarial reduction on your DB pension scheme as you would still take it as planned at its normal retirement age.

guymo

Sadly I haven't had sufficient spare money to save the amount that this suggestion would require. And as I believe this thread has confirmed, there's not much point saving into a SIPP if I plan to retire at 60 given the likely tax thresholds. I will of course keep open the option of moving money into a SIPP a couple of years before my planned retirement if the tax regime looks different enough by then that there's a reason to do so.

Micrographia

Very late to this. OP, I'm almost in an identical position to you, down to the predicted numbers in the USS modeller and the intention to retire at 60, but I'm a few years older - about 4 years to go. Sounds to me like you are well on top of things.

It's a minor detail in this thread, but it's still possible to reach a 37k p/a pension without earning above the salary threshold. I don't, but I'm in a position to be making substantial AVCs each month. I intend to take all my benefits at the same time and maximise the TFLS - if I choose to take all of my DC pot as part of the TFLS, the money from the DB lump sum that is no longer used in this calculation is reverse commuted into extra pension. Whether thats a good deal is up to you. I'm fine with it, paying a little higher rate tax in retirement from a safe DB pension plus eventually the state pension is a first world problem really. My wife is in the TPS so that's more guaranteed income once she retires.

But then I already have the prospect of substantial tax free income from dividends from my ISA to supplement my retirement income as well. So to answer one of your original questions, I'm a fan of the flexibility an ISA gives you. I haven't contributed more than a nominal sum to mine since I became a higher rate taxpayer though, since the pension and salary sacrifice uplift (and until recently avoiding child benefit clawback) has been a better deal for me. I have taken the odd bit out to cover unexpected expenses, which is a major benefit of having an ISA . I still intend to boost the income using cash from the TFLS though. As I'm sure you already know, retiring late in the tax year means I can fill 2 years of ISA allowance for my wife and I over a few months and that takes care of 80k. Another 100k into premium bonds until we decide what to do with it and that's a big chunk of the TFLS that won't bother the taxman. Plenty of ways to spend the rest!

michaels

https://forums.moneysavingexpert.com/discussion/comment/81998980#Comment_81998980

If the reduction is actuarially fair then unless you know more about your life expecancy than they do then it is not something to be scared of.

guymo

https://forums.moneysavingexpert.com/discussion/comment/82024631#Comment_82024631

I don't disagree with this in principle but for the USS scheme specifically the rules are quite complicated, and there are cliff-edge effects because of historical rights to retire with no actuarial reduction. So for example I would receive a significantly larger pension if I retire at 60 than I would if I retired at 59 years and 364 days, even if I defer for a day :) There are definitely things to think about in this kind of case.