Planning for retirement
concernedpharmacist
Posts: 37 Forumite
Hi,
I just wanted advice on whether my plan to reduce tax burden around retirement is robust.
I am currently 58 years old, planning to retire at about 61 or 62 years old. My mortgage has already been paid off.
I currently earn £50,000. I now have a defined contribution pension, In 2 years time (at age 60) my NHS defined benefit pension will kick in adding £20,000 p.a with a lump sum of £60,000. I want maximise my benefits over the next 4 years.
If I do nothing this would take me into the 40% tax bracket - therefore the extra £20K p.a. would only be worth £12K after tax.
My plan is to increase my DC pension contributions by £20k p.a. reducing nett pay to £30k. Drawing down my DC pension only after I retire.
Thus at 61-62y after retirement each extra £20k in the DC pension could be drawn down as £5k tax free with just 20% tax on the remaining £15k - overall worth of £17k after tax.
Once I reach 60 my income will revert to about £50k as the sum of my pay and nhs pension.
Of course, if I increase my pension now, I will need to survive over the next two years with less income. I could perhaps manage this through heavy use of a 24m+ 0% credit card (credit limit £10k) plus perhaps a loan of £25k at 2.75%. I would be able to pay these off at age 60 with my nhs pension lump sum.
The cost of this ( under £1k interest on loan) would be likely to be far less that saved by avoiding tax.
Have I missed anything here? Is my plan robust?
Any advice welcomed.
thanks
Simon
I just wanted advice on whether my plan to reduce tax burden around retirement is robust.
I am currently 58 years old, planning to retire at about 61 or 62 years old. My mortgage has already been paid off.
I currently earn £50,000. I now have a defined contribution pension, In 2 years time (at age 60) my NHS defined benefit pension will kick in adding £20,000 p.a with a lump sum of £60,000. I want maximise my benefits over the next 4 years.
If I do nothing this would take me into the 40% tax bracket - therefore the extra £20K p.a. would only be worth £12K after tax.
My plan is to increase my DC pension contributions by £20k p.a. reducing nett pay to £30k. Drawing down my DC pension only after I retire.
Thus at 61-62y after retirement each extra £20k in the DC pension could be drawn down as £5k tax free with just 20% tax on the remaining £15k - overall worth of £17k after tax.
Once I reach 60 my income will revert to about £50k as the sum of my pay and nhs pension.
Of course, if I increase my pension now, I will need to survive over the next two years with less income. I could perhaps manage this through heavy use of a 24m+ 0% credit card (credit limit £10k) plus perhaps a loan of £25k at 2.75%. I would be able to pay these off at age 60 with my nhs pension lump sum.
The cost of this ( under £1k interest on loan) would be likely to be far less that saved by avoiding tax.
Have I missed anything here? Is my plan robust?
Any advice welcomed.
thanks
Simon
0
Comments
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In general looks like a good plan but a couple of points not mentioned in respect of the DC plan.
How large is it now ? If it is already quite large ( hundreds of thousands ) then you have to be careful not run into lifetime allowance problem.
On the other hand if it is currently quite small , then your additional contributions will be subject to short term investment risk ( depending on how they are invested )0 -
Why not just leave things as they are now, until you hit 60 and NHS pension, then for 2 yrs put £40k gross into your DC scheme? leaves you with more than £30k a year for 2 yrs after tax relief..even in your example £20k into your DC won't cost you £20k.........Gettin' There, Wherever There is......
I have a dodgy "i" key, so ignore spelling errors due to "i" issues, ...I blame Apple
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Thanks
My DC pot is small at present less than £100k. Even valuing my DB pot at £400K (20 x 20K) and another DB pension (not mentioned above) of £8kp.a. at age 65 (valued at £160K), I don't think lifetime allowance is an issue.
I guess it is best to choose lower risk investments given the short term0 -
thanks GunJack, that was one of my options. One small issue I have is that I am only allowed to change my pension contributions in October. So I might have to manage for at least a few months between increasing to 40K pension contribution and collecting the NHS pension. Again thinking of bridging with a zero interest credit card.0
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You could open a separate DC pension yourself and contribute to that when you want .One small issue I have is that I am only allowed to change my pension contributions in October.
It depends on how your current contributions are made. If it is by salary sacrifice then it probably would be best to stick with the employer pension.0 -
One thing...don't forget that the DB(s) have lump sums, so you're already up to £560k+£60k NHS LS(+ other DB lump sum), so £650k-iish PLUS your DC+growth+future contributions, so still worth keeping an eye on........Gettin' There, Wherever There is......
I have a dodgy "i" key, so ignore spelling errors due to "i" issues, ...I blame Apple0 -
no lump sum with other DB, and not too many years left to invest in DC but thanks I will keep an eye on regardless.0
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my current pension is salary sacrifice. thanks0
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It seems odd contemplating taking a loan in order to maximise contributions to my pension scheme (and thereby reduce tax), but if I have done the maths right there are considerable savings to be made by doing this.
The reason I can contemplate this is because I will be able to pay off any short-term borrowing with part of my lump sum from the DB pension in 2 years time.
Of course even more saving with 0% credit card use (is this considered to be a form of "stoozing"?0 -
I know what you mean , I guess ( like me ) you are not the type to normally be leveraging investments.It seems odd contemplating taking a loan in order to maximise contributions to my pension scheme (and thereby reduce tax),
However the tax advantage for a 40% tax payer in employment and 20% in retirement is very generous, and so tends to skew ones normal thinking.0
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