Early retirement next year, is it worth adding to my pension?

kempiejon

I think I could squeeze a tax benefit, as this is the last year with a job and relevant income to contribute to a pension look at maximising it. At 55 one could take income from a SIPP. Depends just how much the part time income provides but by adding all this year's relevant income would give a tax bump to your contributions, you can spend down savings and next year extract up to the full amount contributed, first £12k tax free to replenish savings before turning on DB etc.

af1963

 I have my ISA with T212, so it would be easier for me to stick with them if I opened a SIPP. Using your figures, I could put £8k out of my savings into a SIPP and this would be topped up to £10k. Is this each financial year - could I repeat this next April 7th if I retired later in the year? Could I then move my workplace pension to this SIPP when I retire, therefore giving me £36k plus growth? Or is this too good to be true?

A few points:

Yes, you can do this each financial year.

To get the tax benefit, you need to have enough employment earnings in each financial year to cover the gross payment that you're making. So you could pay in another £8k to be topped up to £10k next April 7th as long as you were sure you would earn at least £10k in 2027-28 tax year. Or you could wait till you do actually stop working so you have the actual earnings figure to work with. You need to make the pension payment during the financial year - you can't "carry back" a payment to a previous year.

(But even if you have no employment earnings or very low earnings, you're still allowed to pay in a maximum of £2880 each year, which will be topped up to £3600, and you can keep doing that each year till you hit 75)

Transferring from another pension won't get another chunk of tax relief, though - you've already had that when contributing to the original pension.

Albermarle

The other DB pension is due to mature at age 67, forecast at £11k per year but reduced to £6.7k at age 55.

A reduction of only around 3.4% for each year taken early is actually pretty low, although it depends on the terms of the pension to some extent.

Sunshine_and_Roses

https://forums.moneysavingexpert.com/discussion/comment/82107987#Comment_82107987

I have checked the paperwork from DB pension if I take it at 55. I would get an annual pension of £6837 and a lump sum of £6132, and my OH would get an annual widowers pension of £3941 if I went before him. Alternatively I could take a smaller pension of £4724 and a larger lump sum of £31494. Widowers pension would be the same. I think with both DB pensions I can change the beneficiary, as I named my parents originally then changed when I married. If anything happens to OH I can change the beneficiary again.

My thoughts would be to take the larger pension, hoping the genetics work as my parents lived to 85 and my grandparents were all in their 80's too. I would consider myself relatively healthy but who knows what tomorrow may bring.

Sunshine_and_Roses

https://forums.moneysavingexpert.com/discussion/comment/82108414#Comment_82108414

Good point, didn't consider employment earnings for the partial financial year. Planning on May/June time.

I also have a fixed rate saver maturing next year with £30000, some of the interest on this will be taxed.

So - I can ask my employer/pension provider to add to my workplace pension, maybe a couple of hundred a month (thinking this will bring down earnings so I receive more of the starter rate for savings?). Then open a SIPP with T212 and add up to 80% of my annual salary minus the extra contributions direct from my wages. In April when the new tax year starts I can add £2880 to my SIPP plus 80% of any salary into my workplace pension. When I leave the workplace I transfer the workplace pension to SIPP. That could potentially give me £30k in my SIPP, which I could then withdraw £6k tax free each year to supplement the £6k pension which I will receive.

Have I got that right?

mrklaw

I would request a formal quote from the pension provider if they’ll give you one (mine wouldn’t accept requests before 55..)

I found to hard to properly estimate forecasts as they index things forwards then apply reductions and I got befuddled. Also their online tool that said ‘these forecasts are in today’s money’ turns out were nominal values so messed things up

now I’m asking for quotes once a year on the countdown to actually taking it so I have a properly reviewed figure to work from

af1963

If you pay your work contributions by salary sacrifice, you could effectively reduce your salary in the way you suggest, and could benefit from a higher starter saver rate this year. (Salary sac contributions are considered as employer pension contributions and not part of your income. If they are not done by salary sacrifice, they won't reduce your income. )

But it sounds like the interest on the fixed rate saver will probably be taxable next year anyway - so to maximise the starter savings rate, you'd want to keep next year's total taxable other income at around the tax allowance. (Salary from the couple of months you work PLUS DB pension PLUS any taxable amount you withdraw from the SIPP)

You presumably know how much interest the fixed rate saver is going to pay. As long as you have enough in the starter rate band and the £1000 personal savings allowance to cover that, no tax will be due. The starter rate band is £5k if you earn £12570, and reduces by £1 for every £1 you earn above that. So if you expected £3k of interest, you'd need to allow £1k from the PSA and another £2k from the starter band, so you'd need to keep your total income below £15570. (If you're trying to take cash from the SIPP without tax being due, you'd need to be aiming for a total of 12570 anyway)

The total amount you can pay pay in to your pensions next year isn't "2880 plus 80% of earnings", it's the larger of
a) 2880 or
b) 80% of earnings.

Sunshine_and_Roses

Thanks all for your comments, really appreciate it.

One thing that I am not too clear on is the 25% tax free and 75% taxable income from pension. Is this if you take the whole amount out in one go? Or each time you take any money out?

Example (with approx figures) -

Take DB pension at 55: £5000 per annum.

Workplace pension/SIPP: take £5000 each year for 5 years if I have £25000 in there. Would £1250 be tax free and I would be taxed on £3750?

Also, I don't really understand about crystallisation. Would this affect me?

BikingBud

If you only have £10k of income why would any tax be due?

If you have income over the tax threshold you will pay tax?

Depending on other income sources, if you are above the threshold, then for DC drawdown it can be modelled as an effective tax rate of 15%.

Sunshine_and_Roses

https://forums.moneysavingexpert.com/discussion/comment/82119077#Comment_82119077

It was the '25% tax free' bit from the pension pot that was confusing me.

I will only be taking the DB pension and drawdown DC to total up to £12k per year, any other money needed will come from savings.