Additional pension purchase - yay or nay?
Discussion
I'm likely to retire within the next 4 years.
I could purchase an additional £4250 pension per year for £75,000 lump sum payment.
What's attractive about this is that it's payable after 2 years before age 60 (with minor penalty) as I'm over 55, and fully index linked.
So it would take 20 years to 'get my money back', but it would keep paying until I die.
Obviously, as with all pension planning, a lot of the figures depend on exactly when you die, which is an unknown variable.
So the question for the PH financial gurus is - could I put that £75,000 to better use over the next 20 plus years?
Maybe it would be more productive in a separate SIPP?
Buy a bond?
Buy a Tuscan II convertible, coke and hookers?
Etc.
I could purchase an additional £4250 pension per year for £75,000 lump sum payment.
What's attractive about this is that it's payable after 2 years before age 60 (with minor penalty) as I'm over 55, and fully index linked.
So it would take 20 years to 'get my money back', but it would keep paying until I die.
Obviously, as with all pension planning, a lot of the figures depend on exactly when you die, which is an unknown variable.
So the question for the PH financial gurus is - could I put that £75,000 to better use over the next 20 plus years?
Maybe it would be more productive in a separate SIPP?
Buy a bond?
Buy a Tuscan II convertible, coke and hookers?
Etc.
I'm not sure I'd bother unless low risk and definite returns are needed.
You're talking a net of fees, but gross of tax, return of a little over 5.5% pa.
When you consider ISA allowance of £20k pa from April, with total access to capital as well as having every possible chance of hitting that target return with a reasonable degree of risk and tax free? Seems to me that it's not that an attractive option.
You're talking a net of fees, but gross of tax, return of a little over 5.5% pa.
When you consider ISA allowance of £20k pa from April, with total access to capital as well as having every possible chance of hitting that target return with a reasonable degree of risk and tax free? Seems to me that it's not that an attractive option.
That's a very attractive off.
It should take 18 years to "get your money back" allowing for a bit of inflation.
Here are some current annuity best buy rates:
https://www.hl.co.uk/pensions/annuities/annuity-be...
You don't mention much about your current financial situation, which is what your decision should depend on - i.e. how much income you would like to retire on vs how much you're expecting to retire on, other saving and any dependents.
It should take 18 years to "get your money back" allowing for a bit of inflation.
Here are some current annuity best buy rates:
https://www.hl.co.uk/pensions/annuities/annuity-be...
You don't mention much about your current financial situation, which is what your decision should depend on - i.e. how much income you would like to retire on vs how much you're expecting to retire on, other saving and any dependents.
rfisher said:
Not a lot of interest in this (see what I did there) so I'll widen it out a bit.
What's the consensus on the best way to invest the 25% lump sum that you get when you take your pension?
I'm thinking the 2018 release TVR and more c&h.
Or red at the casino.
No black.
No red.
I assumed thats the bit I get to blow on cars, holidays for the next few years whilst im still fit enough to enjoy them....I dont want to die rich....What's the consensus on the best way to invest the 25% lump sum that you get when you take your pension?
I'm thinking the 2018 release TVR and more c&h.
Or red at the casino.
No black.
No red.
Unless you're spending the cash the wise choice is to leave the money in the pension. There it's free of Income Tax, CGT and IHT and you can pretty much invest it in exactly the same things as you can outside the pension wrapper.
The only main stream thing you can't access as an asset would be buy to let resi property. Why would you take money out of a tax free holding and invest it in tpretty much the self same things with an added tax bill?
The only main stream thing you can't access as an asset would be buy to let resi property. Why would you take money out of a tax free holding and invest it in tpretty much the self same things with an added tax bill?
If you're not needing it to spend why bother?
You could take a little bit of the 25% as part of each months income payment for example and that way leave more invested as the net income you're taking would be the same, but you're taking less of the gross amount, if you follow? May not be right for you, but can be worthy of consideration.
As I have said on many of the threads around these kind of questions take professional advice for your personal circumstances.
I've been in the industry for over 20 years and some of the well intended, but poor advice I see beggars belief at times.
You could take a little bit of the 25% as part of each months income payment for example and that way leave more invested as the net income you're taking would be the same, but you're taking less of the gross amount, if you follow? May not be right for you, but can be worthy of consideration.
As I have said on many of the threads around these kind of questions take professional advice for your personal circumstances.
I've been in the industry for over 20 years and some of the well intended, but poor advice I see beggars belief at times.
rfisher said:
Hadn't thought about not taking the lump sum.
Most people I've spoken to seem to be planning to take more than 25% lump sum and have less in pension per month.
I'll have to get the abacus out.
Compare the cost of taking this lump sum in reduction in annual pension to the offer that you mention in your first post...Most people I've spoken to seem to be planning to take more than 25% lump sum and have less in pension per month.
I'll have to get the abacus out.
Taking a lump sum is useful if you want to make a large one off purchase, but you have mentioned very little regarding your financial position or future requirements, so no one is able to offer any useful advice.
rfisher said:
I'm still thinking about an additional pension purchase.
Would I be able to claim any tax relief on a £75,000 AP lump sum purchase?
You can only claim tax relief if you have the equivalent net relevant earning in the tax year you wish to make the contribution.Would I be able to claim any tax relief on a £75,000 AP lump sum purchase?
The return on the contribution is 5.67% and if this is indexed this is a very good no risk investment.
You could potentially get higher than this some years - but suffer a loss in others - if you go down the route of running the £75k yourself.
If you are in your mid-fifties and in decent health you have another 30 years left kicking around (no doubt many more at the current mortality rates). So whilst not wanting to be morbid, this is a sensible option if you consider you will live and enjoy life..!
Edited for minor a typo (is/if). I nave missed the big ones!
Edited by JulianPH on Wednesday 19th April 18:22
rfisher said:
Can you claim tax relief on a proportion up to the equivalent net earnings, if net earnings are less than the £75,000?
If my understanding of your question is correct, yes, you can claim tax relief on contributions *up to 100% of your relevant earnings*. However, Julian was (rightly) quite specific in his previous answer, he referred to 'relevant earnings' - not all earnings are relevant. If you receive rental income from a second home that isn't owned by your company, or investment and/or dividend income for instance, HMRC decrees it is not 'relevant' in respect of attracting pension tax relief. Here's chapter and verse.https://www.gov.uk/hmrc-internal-manuals/pensions-...
This situation contrasts with, for instance, VCT which offer 30% tax relief and permits annual investment of up to £200,000 set against a far more broadly defined 'income tax liability'. You should never invest in a VCT or a pension (or any financial product for that matter), *just* for the tax benefits at outset. The field is broad, consider taking a little financial advice. I say that because the differences and benefits of these two products (and others) are subtle yet distinct, just as importantly (e.g.), when extracting income and if estate planning is important.
Pension - Prudent planning for later life with good tax relief from what might be considered "genuine earnings". Overall risk ought to be well contained. Everybody should be doing it.
VCT - High Risk! That's why they get generous tax relief against pretty much all income, to encourage entrepreneurial risk taking by those who can afford it. Not for the faint hearted!
These things are chalk and cheese, really. I wouldn't expect Joe average to go anywhere near a VCT unless and until he (and spouse) were maxed out on pension, maxed out on ISAs, free from mortgage etc.
VCT - High Risk! That's why they get generous tax relief against pretty much all income, to encourage entrepreneurial risk taking by those who can afford it. Not for the faint hearted!
These things are chalk and cheese, really. I wouldn't expect Joe average to go anywhere near a VCT unless and until he (and spouse) were maxed out on pension, maxed out on ISAs, free from mortgage etc.
I don't think it's as simplistic as that anymore, and we shouldn't rely on the tax wrapper treatment alone for indication of risk. Generally though, yes, VCT investments are higher risk, although there are now increasingly evidenced generalist sectors, and I agree that you should consider applying investments in a default order of preference. As I said though, tax treatment should never be the driver and advice is vital. But, *for the right client*, someone who wishes to maximise tax efficiency and who has more income than he can invest into a pension, the VCT is worth considering, at least before discounting.
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