Additional Pension Contribution Balance
Discussion
First off, bare with me...
I'm looking into setting up a SIPP as an addition to my current work pension for the sole purpose really of offsetting a decent portion of the 40% tax until retirement. Ironically I stumbled across the info on here! A little further research elsewhere and from my understanding you can contribute pretax earnings to put into a pension, during that time the money can (hopefully) mature and grow then it's taxed when withdrawn at retirement?
Currently talking to an FA about it all but not completely getting all the answers I want, which I understand. What I'd like to know is how to work out how much tax I'll pay in the 40% bracket and whether realistically I need to contribute the lot to bring my earnings down to threshold or whether I just set aside a fixed amount per month and put a decent post tax chunk into an ISA aswell.
Appreciate it would be helpful if I noted earnings but would prefer not to disclose. I'm mainly looking for a calculator, formula or advice on how other people work their contributions. Would be good to hear peoples thoughts how they %split it and why they split it that way from people of similar age(s).
As a rough idea of affordability, I'm 28 and have approx £1700 left over after mortgage, bills, including Beer, but not including any post tax savings.
Cheers
I'm looking into setting up a SIPP as an addition to my current work pension for the sole purpose really of offsetting a decent portion of the 40% tax until retirement. Ironically I stumbled across the info on here! A little further research elsewhere and from my understanding you can contribute pretax earnings to put into a pension, during that time the money can (hopefully) mature and grow then it's taxed when withdrawn at retirement?
Currently talking to an FA about it all but not completely getting all the answers I want, which I understand. What I'd like to know is how to work out how much tax I'll pay in the 40% bracket and whether realistically I need to contribute the lot to bring my earnings down to threshold or whether I just set aside a fixed amount per month and put a decent post tax chunk into an ISA aswell.
Appreciate it would be helpful if I noted earnings but would prefer not to disclose. I'm mainly looking for a calculator, formula or advice on how other people work their contributions. Would be good to hear peoples thoughts how they %split it and why they split it that way from people of similar age(s).
As a rough idea of affordability, I'm 28 and have approx £1700 left over after mortgage, bills, including Beer, but not including any post tax savings.
Cheers
Essentially earnings above £43,000 p.a. are normally taxed at 40%. (That's £11,000 tax free personal allowance and £32,000 basic rate 20% tax band)
Someone earning £50,000 a year might decide to make pension contributions of £7,000. They would get full tax relief on the pension contributions and therefore pay no tax at all at the 40% rate. Their income tax liability for the year would be 20% on £32,000 so paying only £6,400 Income Tax on earnings of £50,000 looks a great result!
Your IFA will be able to explain exactly how the contribution/tax relief works.
Someone earning £50,000 a year might decide to make pension contributions of £7,000. They would get full tax relief on the pension contributions and therefore pay no tax at all at the 40% rate. Their income tax liability for the year would be 20% on £32,000 so paying only £6,400 Income Tax on earnings of £50,000 looks a great result!
Your IFA will be able to explain exactly how the contribution/tax relief works.
Classy6 said:
First off, bare with me...
I'm looking into setting up a SIPP as an addition to my current work pension for the sole purpose really of offsetting a decent portion of the 40% tax until retirement.
One thing to consider is whether your employer offers salary sacrifice for your pension contribution to reduce NI.I'm looking into setting up a SIPP as an addition to my current work pension for the sole purpose really of offsetting a decent portion of the 40% tax until retirement.
Another to keep an eye on is the lifetime allowance.
Ozzie Osmond said:
Essentially earnings above £43,000 p.a. are normally taxed at 40%. (That's £11,000 tax free personal allowance and £32,000 basic rate 20% tax band)
Someone earning £50,000 a year might decide to make pension contributions of £7,000. They would get full tax relief on the pension contributions and therefore pay no tax at all at the 40% rate. Their income tax liability for the year would be 20% on £32,000 so paying only £6,400 Income Tax on earnings of £50,000 looks a great result!
Your IFA will be able to explain exactly how the contribution/tax relief works.
The example you have used there is the exact reason I decided to look into this. My IFA has mostly gone through it with me, however seems reluctant in aiding me to work out how much of contribution I need to make. I suppose it's a personal preference based on affordability. Obviously it would be great to put the full 40% earnings directly into the SIPP but part of me thinks I'm 28 and if I get hit by a car in the next 5-10 years then I'm going to take a fair size cut out my wages and not benefit for the now as much.Someone earning £50,000 a year might decide to make pension contributions of £7,000. They would get full tax relief on the pension contributions and therefore pay no tax at all at the 40% rate. Their income tax liability for the year would be 20% on £32,000 so paying only £6,400 Income Tax on earnings of £50,000 looks a great result!
Your IFA will be able to explain exactly how the contribution/tax relief works.
LeoSayer said:
One thing to consider is whether your employer offers salary sacrifice for your pension contribution to reduce NI.
Another to keep an eye on is the lifetime allowance.
I pay into a defined benefit pension, CARE and my employer operates a salary sacrifice scheme. Can I benefit from the reduced NI on contributions into SIPP also?Another to keep an eye on is the lifetime allowance.
Just had a look at the lifetime allowance, fair to say I don't think I'll get anywhere near that amount
Classy6 said:
I pay into a defined benefit pension, CARE and my employer operates a salary sacrifice scheme. Can I benefit from the reduced NI on contributions into SIPP also?
Reduced NI is on salary sacrifice only. You could always transfer into a SIPP at a later date. Some people do this for this increase range of investments available.Some employers offer the ability to use your defined contribution pension pot (eg from AVCs) to fund the 25% tax free lump sum from your defined benefit scheme. This is usually better value than funding the tax free lump sum by reducing your defined benefit pension.
Classy6 said:
Just had a look at the lifetime allowance, fair to say I don't think I'll get anywhere near that amount
Starting in your twenties you will hit the Lifetime Allowance very easily indeed. It's not a big number these days when you factor in a few decades of cumulative tax free returns.I'm not clever enough to crunch the numbers myself but an IFA should be able to show you projections along the lines, "If you contribute £x00 per month for 35 years and invest in equity funds with an average return of y% p.a. you should just about max out on the Lifetime Allowance at age 63 (all adjusted for inflation)". If your IFA can't do that - tell him/her to do one.
What you actually want to do is be approaching the Lifetime Allowance somewhat earlier and use that opportunity to de-risk your investments. i.e. gradually reduce the proportion of equity exposure during the last 5-10 years. Reduced returns are effectively the cost of buying pension insurance.
LeoSayer said:
Reduced NI is on salary sacrifice only. You could always transfer into a SIPP at a later date. Some people do this for this increase range of investments available.
Some employers offer the ability to use your defined contribution pension pot (eg from AVCs) to fund the 25% tax free lump sum from your defined benefit scheme. This is usually better value than funding the tax free lump sum by reducing your defined benefit pension.
Started to look into the first point a little more as it's not clear from the info available online, but I need to make a phone call to my company pension provider next week. I'm assuming the salary sacrifice is only available on primary contributions and not AVC's, but my employer do offer a prudential fund, that allows AVC's to be paid into as opposed to a SIPP - just not sure what the benefits are yet, other than it being managed and assume it will run along the same lines as contributing to a SIPP.Some employers offer the ability to use your defined contribution pension pot (eg from AVCs) to fund the 25% tax free lump sum from your defined benefit scheme. This is usually better value than funding the tax free lump sum by reducing your defined benefit pension.
Ozzie Osmond said:
Starting in your twenties you will hit the Lifetime Allowance very easily indeed. It's not a big number these days when you factor in a few decades of cumulative tax free returns.
I'm not clever enough to crunch the numbers myself but an IFA should be able to show you projections along the lines, "If you contribute £x00 per month for 35 years and invest in equity funds with an average return of y% p.a. you should just about max out on the Lifetime Allowance at age 63 (all adjusted for inflation)". If your IFA can't do that - tell him/her to do one.
What you actually want to do is be approaching the Lifetime Allowance somewhat earlier and use that opportunity to de-risk your investments. i.e. gradually reduce the proportion of equity exposure during the last 5-10 years. Reduced returns are effectively the cost of buying pension insurance.
It's a nice thought and hopefully achievable. I assume it accounts for both pensions? Not sure how a defined benefit pension would factor into that overall amount or even how you worked out the amount - too clever for me to work out aswell. I'm not clever enough to crunch the numbers myself but an IFA should be able to show you projections along the lines, "If you contribute £x00 per month for 35 years and invest in equity funds with an average return of y% p.a. you should just about max out on the Lifetime Allowance at age 63 (all adjusted for inflation)". If your IFA can't do that - tell him/her to do one.
What you actually want to do is be approaching the Lifetime Allowance somewhat earlier and use that opportunity to de-risk your investments. i.e. gradually reduce the proportion of equity exposure during the last 5-10 years. Reduced returns are effectively the cost of buying pension insurance.
Ozzie Osmond said:
You will find many people on here using both pension and ISA for their longer-term savings/investment strategy. A good combination of tax advantaged wrappers that should deliver great returns with considerable flexibility.
This is the plan, I've found out contributions are flexible so I guess it's just finding that amount I'm comfortable dealing with. I was informed my by IFA that contributions are made net which I didn't realise until yesterday, which throws a bit of a spanner in the works in terms of my original calculations!Jockman said:
Or use up your wife's lifetime Allowance too.
When you get one.
IF you get one.
No IF's here, it's a NO. When you get one.
IF you get one.
Classy6 said:
Ozzie Osmond said:
Starting in your twenties you will hit the Lifetime Allowance very easily indeed. It's not a big number these days when you factor in a few decades of cumulative tax free returns.
I'm not clever enough to crunch the numbers myself but an IFA should be able to show you projections along the lines, "If you contribute £x00 per month for 35 years and invest in equity funds with an average return of y% p.a. you should just about max out on the Lifetime Allowance at age 63 (all adjusted for inflation)". If your IFA can't do that - tell him/her to do one.
It's a nice thought and hopefully achievable. I assume it accounts for both pensions? Not sure how a defined benefit pension would factor into that overall amount or even how you worked out the amount - too clever for me to work out as well.I'm not clever enough to crunch the numbers myself but an IFA should be able to show you projections along the lines, "If you contribute £x00 per month for 35 years and invest in equity funds with an average return of y% p.a. you should just about max out on the Lifetime Allowance at age 63 (all adjusted for inflation)". If your IFA can't do that - tell him/her to do one.
- DB pension is offering you a pension of, say, £20,000 p.a. You multiply that figure by 20 (which is simply the multiplier HMRC uses) and the amount counted towards you Lifetime Allowance becomes £20,000 x 20 = £400,000
- DC (money purchase) pension "pot" is valued as simply the total value of its contents on the day in question. Let's say it's grown to £500,000
When valuing a defined benefit pension, don't forget to take the tax free cash into account. Funds taken before 2006 in the form of a benefit crystallisation event were valued at twenty five times 'pot' value, though, and not twenty. Lump sums paid before 6 April 2006 do not normally use up Lifetime Allowance, but if a lump sum was paid before then, and if you elected at any point after July 2004 to defer payment of your pension, the lump sum will use up the Lifetime Allowance. I accept this won't apply to a twenty eight year old though..
Thanks again for the info chaps. My most recent exchange of email is now mentioning insurance and claiming back? I'm completely confused, thus leaving me uneasy about doing anything until I understand the process. I've attached an excerpt as it's easier than explaining... I think I need an IFA with a bit more time to explain things in laymen?
"It means you pay £100 but £125 is invested the insurance company claim the £25 off the revenue to gross up the premium. If you are a higher rate tax payer you have to claim the rest from the revenue. Quite complicated I am afraid but at least more is invested than you actually pay."
"It means you pay £100 but £125 is invested the insurance company claim the £25 off the revenue to gross up the premium. If you are a higher rate tax payer you have to claim the rest from the revenue. Quite complicated I am afraid but at least more is invested than you actually pay."
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