Drawing down pension next year. Move from cash to pension now?

Ballard

I’m normally careful about putting my details online but I don’t think that I have any choice if I’m going to get useful answers.

I’m 57 and have £535k in my DC pension.
My mortgage is fixed until next June and will be in the region of £50k at that point. I plan to repay it then.
I have around £38k cash, some of which is in regular savers and £10k is on a fixed deposit until January. The rest is in ISAs (cash & s&s)
I currently sacrifice 15% of my salary into my workplace pension which takes me below the 40% band. If I get a bonus this year it will all go into my pension.

I’m thinking of sacrificing more even if it leads to a reduction in my cash balance as this would save me tax and NI. My employer doesn’t match any sacrifice, but they do at least pass on their NI savings, which gets credited to my pension.

In addition to repaying the mortgage I am considering some work on my house (probably totalling around £20-25k.)

The only downside that I can think of is that I’d be losing some of my tax free drawdown if I take, say £65k out.

I hope to retire in 3 or 4 years, but that’s largely governed by the performance of my pensions.

I’d be grateful for advice as to whether it’s worth me sacrificing more.

Thanks.

MallyGirl

there is a cap coming in on NI savings from Sal sacrifice. I haven't seen anything about whether employer NI contributions will be impacted. Now is the time to bump it up if you are going to.

This might fall under recycling rules though - I am sure someone who knows more about those will be along soon.

Ballard

Thanks @MallyGirl.

I think that the NI rules come into effect in a couple of years so I’ll barely be affected by that, but it was a good point to make.

WRT your point on recycling, my understanding is that I would still be able to sacrifice after I’ve withdrawn as long as I only take tax free cash. Restrictions on future contributions are limited as soon as tax is paid on withdrawals.

mrklaw

for you, practically two things to consider

1. leave it as long as practical. every £100 your pension grows you gain £25 tax free cash. with a 500k pot if you earn 8% nominal thats £10k a year in tax free cash alone. 1-2 years can make a big difference. I would potentially cut back on spending to avoid pulling TFC for life costs, and hold off on drawing down until the last moment for settling a mortgage etc.
2. Be careful of recycling. There is a good royal london checklist to help but eg drawing more than £7500 tfc and increasing pension contributions within 2 years of each other could trigger that. Its also a bit of a grey area on intepretation so be wary.

edited for brevity

mrklaw

Royal London recycling page with checklist

Ballard

Your post is rambling and I’m afraid that it lost my interest part way through, @mrklaw, but the link you provided was useful, so thanks for that.

My intention is to increase my sacrifice for the next year and withdraw some tax free cash from it, which will be spent rather than recycled into the pension.

Once I’ve gone through this process (next June) I could well reduce my sacrifice to enable me to rebuild my cash reserves.

I have taken professional advice on withdrawing from my pension next year and so I am very confident that it wouldn’t be seen as recycling. Prior to seeing the advisor, my thinking was to build up cash to repay it but the advisor suggested the pension route. My specific question is whether it would be worth my while contributing even more now in order that I reduce my tax for the next 10 or so months

I have no absolute necessity to repay the mortgage next year but coming off a 5 year fix of 1.6% would be a bit of a shock so I’m sorely tempted to pay it off. I have given serious consideration to keeping it going another couple of years but am coming down on the side of just getting rid of it.

mrklaw

I’ll take a look and see if I can tidy it up.

Good that you’ve looked into recycling - would have been useful context in the OP as others are and did call that out too. I’m always nervous as the indirect aspect can catch you out - could HMRC argue you are only able to sacrifice more into the pension becasue you’re taking TFC? but if you have professional advice thats likely enough. I hate grey areas in things like this as you can’t ever be 100% sure

If you understand that paying the mortgage is more psychological than financial thats obviously fine.

Its always worth sacrificing more if you can afford to, and you’ve covered the two main elements - recycling and mortgage.

NormalNorman

@Ballard

Hello, reading your post and wondering if this is similar to my thoughts?

I also salary sacrifice large amounts of the main role to stay within BRT. To further complicate this I have a second job which I see nothing of as swept up by those pension contributions and has it's own pension. What I'm getting at is a long history of high pension contributions.

So… come 60 two DB schemes will come into payment and I plan on keeping the main job on for while and dropping the second job but to stay within BRT I will have to increase sal sac even more.

Does this complicate taking tax free cash or should I delay taking that until I finally quit work? Even though I'm not recycling as such, just avoiding HRT?

Cheers!

PS as an aside wife put 100% of salary into pension [sal sac & SIPP] part funded from savings if this is what you were also suggesting?

QrizB

My personal situation is that I'm expecting to retire (cease regular paid employment) next year. I'm therefore salary sacrificing down to NMW, paying into my pension and supplementing my day-to-day living expenses from savings.

In principle this leaves me ~18% better off (£1000 of salary becomes £850 of net pension after salsac, 25% TFC and 20% BR tax rather than becoming £720 of income after 20% BR tax and 8% NI).

Your situation is slightly different in that you're hoping to take TFC to clear your mortgage while continuing to work for a few more years, and you also get the benefit of the employer NI savings. The logic still holds, IMO.

Ballard

@NormalNorman I didn't think that you could sacrifice your entire pension. I'm basing this on the fact that my last two employers insist that you have to take the minimum wage in cash.

@QrizB This does seem very similar to my position.

Unless I hear evidence to the contrary, I believe that I'll be fine to up my sacrifice to 20/25% for a few months at least. It's very easy to change this figure online, and can do so as often as I need.

Just to add some context to the building work… The house needs rendering. I've been here 5 1/2 years and there have always been clumps of it that could fall off. I'm also thinking of getting solar panels with a battery and aircon installed. The most basic of Google searches gives me a very very rough figure of £25k for all of this. I shall look into it properly in the new year. I'm 6 weeks into a new job and don't want to spend cash until I've passed my 6 months probation. I'm getting excellent feedback from management but I'm not counting my chickens.

QrizB

I'm also thinking of getting solar panels with a battery and aircon installed.

When you're ready, you can get opinions on solar & battery over on the Green & Ethical forum, and on aiircon from the Heat Pumps forum.

In the meantime, browsing those forums will give you a good idea of options, availability and costs.