Take it or not?

2»

Comments

  • jonsdad
    jonsdad Posts: 24
    First Post First Anniversary Combo Breaker
    Forumite
    A side note two points the amount left on mortgage is approx 29 k I have
    Left to pay,I currently pay£225 a month which is slightly more than the minimum payment but still leaves me 15 years to pay...so you see why my original question....over that time it would cost me over 40k...so taking the lump sum and paying it off straight away benefits me £2700 per annum,etc etc...I would get the pension off rm monthly and wages and carers sbut probably lose tax credits..but still be around 13500 in total ....by my calcs I would be over 5k up but would pay a small amount of tax...phew....
  • jonsdad
    jonsdad Posts: 24
    First Post First Anniversary Combo Breaker
    Forumite
    The other thing which annoyed me was several years ago I was told by hmrc,if I retired then I wouldn!!!8217;t have to pay any more ni contribs....now years later they suddenly tell me I have to pay for another 3 yrs to get full contrib....I questioned them and they said oh the qualifying system was changed but don!!!8217;t worry you will get a sort of in between deal!....don!!!8217;t you just love them!?
  • p00hsticks
    p00hsticks Posts: 12,671
    First Post Name Dropper Photogenic First Anniversary
    Forumite
    jonsdad wrote: »
    The other thing which annoyed me was several years ago I was told by hmrc,if I retired then I wouldn!!!8217;t have to pay any more ni contribs....now years later they suddenly tell me I have to pay for another 3 yrs to get full contrib....I questioned them and they said oh the qualifying system was changed but don!!!8217;t worry you will get a sort of in between deal!....don!!!8217;t you just love them!?

    The 'old' (pre-2016) pension system paid a basic pension of £119.35 (as at 6/4/16) in return for 30 years NI contributions (for those reaching state retirment age after 6/4/2010 - before that you needed 44 years if you were a man or 39 years for a woman).

    You could also get some additional (SERPS/S2P) pension if you had paid full NI (rather than being 'contracted out' and paying a lower rate of NI but paying into a personal / company pension instead).

    In 2016 the 'basic' pension amount was increased to around £159 (since increased to £164.35) , contracting in/out was done away with and the number of NI years required raised to 35.

    At the point of change over, everyone's pension entitlement under both the old and new rules was calculated and the higher figure was taken as your 'starting amount' so that no-one was worse off because of the change. After that date, each additional year earned /credited adds 1/35th of the full amount to your state pension until either the maximum amount is reached or you reach state pension age.

    If you were in a Royal Mail pension scheme, you would have been contracted out, so it is likely that your starting amount would have been that of the basic pension under the old rules - £119.35.

    However, it sounds like you are one of the lucky ones who now gets a second bite of the cherry - not only do you get the basic state pension amount you would always have been expecting plus the private pension you contributed too, you also potentially a chance to increase your state pension amount to the new higher amount.

    Each NI year for 5/4/16 onwards that is earned/bought/creditted adds around £4.70 a week to your state pension up to the maximum of £164.35 - you can buy additonal class 3 years for around £770 and this represents really good value for most people with average life expectancy.

    This guide takes you through it all
    https://www.royallondon.com/global/documents/goodwithyourmoney/topping-up-your-state-pension-guide.pdf
  • DairyQueen
    DairyQueen Posts: 1,822
    First Anniversary Name Dropper First Post
    Forumite
    I expect others will be along soon. I am still asking questions that I think are relevant to your case before I give you my two pennies worth.

    Do you know how much annual pension and tax free cash you will be giving up if you take your RM benefits 2 years early?

    I ask as, if all your RM pension is payable at age 60, then it suggests that you left RM before they changed the benefits of the DB scheme to be less generous. If all your benefits were accrued under the more generous, original scheme then they are extremely valuable as all of your pension is based on your final salary (it changed to a career-average), and are fully inflation-protected by the government rather than RM.

    The Royal Mail pension is a nightmare to understand as the scheme benefits have changed so much since it was privatised. My brother now has benefits under three different Royal Mail schemes (and he still works for them).

    The devil is in the detail (and there is a lot of complexity in the RM schemes) so it simplifies your case a little if all your RM pension was accrued under the original DB scheme (i.e. before April 2008). However, it also means that you should think very carefully before taking the pension early as you will be giving up very valuable lifelong benefits. Both your pension and lump sum will be reduced. Not sure by how much but the RM pension folk will be able to tell you.

    So, when doing your sums you need to include that retirement reduction in tax free cash, plus the amount of reduced pension, against the savings on the mortgage. The value of the amount of reduced pension should be compounded by a notional inflation figure over the years you expect to live to give an approximate value. Most people use a notional figure of 3% per year and your life expectancy from age 60 is likely to be around 25/30 years (depending on your gender) and whether you are in good health. There are compound calculators available free on the web to do this job for you. It's the same kind of thing as calculating interest on savings invested over a period of years.

    An example using just one of these sites (link here):
    Principal Amount( i.e 'Reduced pension amount') = £800p.a.
    Annual Interest Rate (i.e. 'Inflation') = 3%
    Calculation Period (i.e. 'life expectancy')= 30 years
    Compound Interval = Yearly

    You would need to total all of the annual figures to work out how much retiring early is losing you over your lifetime, and then add the lifetime value of the tax free cash you are giving up (plus interest over the same period). Then deduct the amount of pension you would have received for the two years from age 58 to 60 (£4433 + £4433 *3% inflation increase in year 2). The total will be the amount you are giving up from your pension over your lifetime by retiring two years early. Of course you may expect to, say, live only 20 years if you have health problems. This would reduce the value of the benefits you are giving up.

    I have assumed that RM is your only pension (other than the SP) and, given that your benefits are so valuable, and the other info you have given, you would need a very compelling reason not to take the max possible from the scheme at your NRD (normal retirement date) - i.e. at age 60.

    Do you intend continuing to work until SP age? (i,e age 67).

    You will pay NI if you have earned income above a set amount each year until you reach retirement age. This is called the 'lower earnings limit' for NI and it's £5876 for this tax year. Your earnings this year (£5824) will be below that limit so you will not pay NI. However, those in receipt of carers allowance receive an 'NI credit' that counts toward the state pension. You will therefore receive a qualifying year toward SP without paying NI, and for every future tax year that your circumstances remain the same.

    If you exceed your personal allowance (currently 11910) then you will pay tax on any taxable income (total of earnings plus pension and carers allowance) above that but it looks to me like, if you do your sums carefully, any extra tax you pay by increasing your taxable income will be more than offset against the tax relief you will receive on pension contributions.

    At the moment you can invest up to your total gross income (i,e, £5824) into a pension each year. However, this amount includes any pension contributions you/your employer are currently contributing. If you are not in any pension scheme via work then you could pop £4659 (£5824 net of 20% tax) into a SIPP and the government will add £1164 (the tax relief). So that £5824 will only cost £4659. Because you are over 55 you are able to take 25% out at any time tax free (i.e. £1456) without incurring any tax penalty. The remainder will be liable to income tax at the point you take the cash.

    You can take also take chunks of 25% tax free plus 75% taxable whenever you want so you can time withdrawals to coincide with times when you receive less income. The trick is to max-out the amount you receive in tax relief on pension contributions and withdraw it when the 75% taxable part is most advantageous for you tax-wise.

    A couple of things that are general but may affect your sums when you reach SP age:

    - You will lose the carers allowance at state pension age regardless.
    - Giving-up DB benefits to take early retirement is usually ill-advised.
    - 50% of any pension contributions you make will be 'added' to the amount you can earn annually before you breach the maximum income you can earn whilst receiving carers allowance.
    - Check the impact of paying off the mortgage not just now but also if you delay paying it off, and taking your RM pension, until you are 60. My bro would have received zero pension increase (i.e. deferred it passed NRD) if he hadn't taken the pension at age 60 so it's likely the same rule applies to you.
    - Investing any taxable income above your personal allowance into a pension effectively ensures that you claw the tax back.
    - It looks like you can arrange things such that you will receive more tax relief on money invested in a pension now than you will pay in tax on it if you withdraw it later.
    - Don't get too hung-up about breaching the tax allowance and becoming a taxpayer in later life. If you have to pay 20% on (say) income of £1000 at age 67 that will cost you £200. However, it's likely that you will have received much more tax relief on pension contributions than you will have to pay in tax later on.

    This is a long post and high time I shut up but it seems, superficially at least, that you may be better off by taking your RM pension at age 60 and paying the mortgage off then, and also putting as much cash as possible (up to your gross income) into a pension of some description. Check-out your current employer's pension scheme first. It's possible that you are unable to join it because of the bizarre technicalities that bar low earners from some schemes. A SIPP may be better anyway as it's so flexible and gives you so much control over withdrawals.

    At your age, and given that you may have never invested in stocks and shares, it may be best to leave most/all of it in cash. The effects of inflation will take several years to erase the benefit of tax relief and you can remove 25% of each year's contribution as soon as the tax relief is (automatically) added. This part can then be invested in interest-paying accounts.

    Caveat: I have no idea how tax credits will effect anything but I'm sure that you, or someone else will.

    Hope this isn't too confusing but I think you could easily lose out unless you evaluate the pros/cons very carefully.
  • DairyQueen
    DairyQueen Posts: 1,822
    First Anniversary Name Dropper First Post
    Forumite
    edited 22 July 2018 at 11:01AM
    p00hsticks wrote: »
    If you were in a Royal Mail pension scheme, you would have been contracted out, so it is likely that your starting amount would have been that of the basic pension under the old rules - £119.35.
    It seems that the OP worked for RM BEFORE it was privatised. It was then a public sector scheme and may have been contracted-out. However, the RM scheme is highly complex and bears no relationship to anything else in the public/private sector. Pre-privatisation deferred benefits work like a public sector scheme and are similarly underwritten by the government.

    He has been receiving carers allowance for some years and therefore some of his qualifying years will be NI credits. It's also likely that the three qualifying years he requires will be earned based on NI credits (he receives carers allowance) rather than NI contributions and he will NOT have to make any Class 3 voluntary contributions at all.

    SERPS isn't an issue for him now. He hasn't declared any other pension arrangements historic or current. Even if he had been contracted-out it's incidental to the advice he seeks.

    Sorry to sound a bit waspish but an explanation of SERPS is unlikely to help the OP. It's irrelevant to his current circumstances and future financial plans.
  • p00hsticks
    p00hsticks Posts: 12,671
    First Post Name Dropper Photogenic First Anniversary
    Forumite
    DairyQueen wrote: »
    SERPS isn't an issue for him now. He hasn't declared any other pension arrangements historic or current. Even if he had been contracted-out it's incidental to the advice he seeks.

    Sorry to sound a bit waspish but an explanation of SERPS is unlikely to help the OP. It's irrelevant to his current circumstances and future financial plans.

    Point taken. I was responding to the OP's comments about how he had been told that the pension rules had changed and he therefore had found that he needed further NI years to reach the maximum.

    I was trying to describe how the change worked as succinctly as possible in general terms for anyone readingg, not just the OP - hence the reference in passing to SERPS/S2P and my use of the term 'earned/bought/creditted' when talking about additional NI years .
  • DairyQueen
    DairyQueen Posts: 1,822
    First Anniversary Name Dropper First Post
    Forumite
    Understand the reasoning for your response and you did a very good job Thing is that I think the OP is drowning in confusion over his options and I knew that the carers allowance would address any NI needed to qualify for the max SP . His issues are not related to the SP. Hope my post didn't offend (not my intention) :)
This discussion has been closed.
Meet your Ambassadors

Categories

  • All Categories
  • 342.5K Banking & Borrowing
  • 249.9K Reduce Debt & Boost Income
  • 449.4K Spending & Discounts
  • 234.6K Work, Benefits & Business
  • 607.1K Mortgages, Homes & Bills
  • 172.8K Life & Family
  • 247.4K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 15.8K Discuss & Feedback
  • 15.1K Coronavirus Support Boards