Hi, read some stimulating and useful money thoughts on here, so can I ask ...
Is it worth starting a pension at 60? Assume a scenario of:
- husband and wife, no other pension than state, full NICs
- each earning a low-modest (low rate tax payer) income at the moment, both self employed
- both happy to continue with work for 10 years, and along with state pension, gives a 'happy household' income
- both 60
- have a rental - thinking of selling now and along with modest savings would generate a pot of e.g. £300k (assume can manage without the rental income)
Could they invest this pot into a pension to release money to supplement/replace work earnings in 5+ years? Thinking of tax efficiencies etc.? Gather one can't dump a big pot into a pension all in one go? Haven't really understood 'carry forward' approach and what constitutes strong historical/recent earnings.
(Also exploring general investing account/fund, e.g. Vanguard type thing).
Cheers
I’m just having a review of my pensions with an IFA as I’ve got 5 different ones at 61. I’ve got 4 smaller pots that are showing little growth due to the way pension companies manage risks approaching maturity - if I was to take a ‘riskier’ investment approach, they could grow another 20% in 5 years - fortunately I’m happy to leave them for longer as I’m still working / have other income. One of my concerns is spreading my investments with Mrs DB to avoid me paying 40% tax whilst ensuring there’s enough left should I cark it. Worth discussing with an IFA to see what your options are.
I think an IFA in this case would be useful. Not so sure putting into a pension at 60 is best idea, but you are happy to continue working. I'm just weighing up whether to go at 60 or 62. No way am I doing 67, but at least you are your own bosses !
IANAFA, however my understanding is that as you are both basic rate tax payers, you could use your cash pot of 300k to pay 48k per annum each to SIPP pensions and the government gives you tax relief by adding 25% to that, meaning that they add 12k to your 48k, taking it to the maximum tax efficient annual contribution of 60k each.
You could each do that for a couple of years, basically getting 24k free money per annum between you.
With some moderate growth until you retire, the pension pots could do well, and when you come to need to access them, you pay no tax on the first 25%you take, either in a lump sum or in monthly drawdown
I was in a lowly situation (self employed and a student) at 50 but saw an IFA and its starting to get a bit healthier. The only useful thing i can say is its the most tax efficient way to save for ordinary people.
See a good IFA based on a recommendation if you can.
I'd say so, you get an immediate 20% benefit but I guess the returns after that might be modest presuming you'd want low risk investments.
The max you could put in annually before penalties was £40k but it went up to 60 I think, (might even be 80) but both you and your wife would have separate accounts so you'll soon get your 300k invested.
I also would be asking an IFA though, because my advice is worth what you paid for it.
Its probs worth speaking to an IFA but for tax reasons ALONE there's probs no downside but the upside is small.
If you look at basic rate tax only you'll get tax relief on what you put in so in rough terms a £300k pot may only cost you £240k (net £60k saving) and then you can draw that back out with a tax cost of £45k so £15k saved. If you are higher rate then it looks more worthwhile. I cant see there is much risk of adverse tax changes on a £300k pot .... but just putting it in ISAs etc may be simpler and more flexible.
The annual limit for contributions is £60k per year - plus a 3Y carry forward so my guess is if you've never made contributions in theory could make a £240k contribution in one year...but this wouldn't be worthwhile unless your taxable income was actually £240k. It would only be worth contributing upto your taxable income (but what do you live off in the meantime ?) so you'd need to feed in the contributions over time to get to £300K. If you've got a high income then you can siphon off the part subject to higher rate tax into a pension fund (if you can do without the money) but otherwise the benefits to me seem on the margins.
It soon gets quite complex for quite a small sum of money.
The true value of a pension is not really the tax it's just regularly saving small sums you won't miss over a long period of time until compounding takes over. The tax benefits are just the incentive to encourage people to save. For five years I cant see a pension actually delivers a lot.
would only be worth contributing upto your taxable income
really ? What’s to stop a basic rate tax payer, earning say 30k per annum, to put 48K per annum from savings into a SIPP and benefit from the 12k government top up ?
What’s to stop a basic rate tax payer, earning say 30k per annum, to put 48K per annum from savings into a SIPP
Nothing
and benefit from the 12k government top up ?
The law. You can't claim top-up beyond your earnings for that year.
TexWade's response covers it all beautifully imho.
IanC:
You could each do that for a couple of years, basically getting 24k free money per annum between you.
But you're not getting 24k free as you will pay tax when you take it back out of the pension. Fair enough only 15% rather than 20% but the saving isn't that great.
I'd be putting a chunk of the £300k into an ISA personally
Thanks, all does appear quite complicated!
Nothing to stop you doing it but you only save tax on the £30k - the extra £18k saves no tax (though 25% of this can be drawn back in future free of tax). If you only had £48k wouldn't you be better off doing £30k in year 1 and £18k in year 2 ?
Really helpful, thanks all ... Texwade and Thegeneralist summaries give a great perspective, esp to remember you get taxed when you take it out therefore the overall realised tax saving is less that I had imagined!
And iainc - agree, certainly more complex the more I read!
and if you count the personal allowance not even £30k saves the max amount of tax. If you had savings of £48k probably best to do £17430 per annum until the £48k ran out. As above an IFA will know the rules - I dont in detail but I do know you cant get ta relief for more tax than you've actually paid.
would only be worth contributing upto your taxable income
really ? What’s to stop a basic rate tax payer, earning say 30k per annum, to put 48K per annum from savings into a SIPP and benefit from the 12k government top up ?
Doesn't work. Maximum contribution is your "relevant earnings" in the year with no carry over. Mainly this is salary and bonus and taxable self-employed profits.
So 30k earnings means maximum 30k contributions. If you contribute into a relief-at-source SIPP, you will typically get 20% tax relief all the way down from 30k to 0k. It is a rare example of free money from the government.
Contributions over 30k will be penalised and the outcome is worse than staying within the boundaries.
Randomly noticed an IFA advert in the latest cyclingUK magazine, not sure if it was just an ad but I got the impression it might be a perk/association with CUK.
recently managed to get some advice via an employer partnership with a financial company, had about three telephone consults all for free, peculiarly useful if you have a couple of old pensions knocking about or a smattering of savings pots etc. Would recommend.
Most people are focussing on the technicalities of pensions. Can I broaden the subject...
OP - you're suggesting selling a bricks and mortar asset generating a stable rental income to invest in the stock market. I think this might be a decent plan if your investment timescale is > 10 years but you've said it is for 5 years. At 5 years from retirement a lot of people are looking to reduce their exposure to the stock market, not increase it. I don't think this is a good idea. I think you should keep it.
Also - don't forget the CGT payable on the property when you sell it.
Gilts within a stocks and shares ISA?
Something like IGL5?
it's a 'cash like' investment so maybe more suitable than stocks in terms of risk and the short horizon?
Fair points above. The OP doesn't explicitly say whether he has other savings/investments available as well if not then I'd be seriously nervous dumping all my worldly wealth into stocks at this point in time
Fair points above. The OP doesn't explicitly say whether he has other savings/investments available as well if not then I'd be seriously nervous dumping all my worldly wealth into stocks at this point in time
Yeah that's why I suggested gilts.
Or you could even park 50k into premium bonds until you can filter it into an ISA etc. If there's a tax consideration.
Absolutely, for the tax relief alone. Plus you have immediate access the funds if required. If you plan on working the next 10 years, that's a great opportunity to build up an additional fund for retirement. If you're working S/E, there's the opportunity to set up a Ltd company with the advantage that you can wring any profit out the business above salaries as employer pension contributions that aren't limited by your earnings and aren't subject to Corp tax.
Are pension withdrawals taxed at a lower rate? It says 15% not 22% above
Fyi
https://www.moneyhelper.org.uk/en/pensions-and-retirement/pension-wise
1 free hr of expert knowledge, if you and Mrs haven’t used it it’s free. Suggest doing all you own research first and getting all facts and figures ready for session.
ps check commission rates and terms with any advisor,
It's assumed 25% tax free, the rest as 20% so a notional rate. If the OP only has State Pension income, they'll still have some level of remaining P Allowance, so the notional rate likely a wee bit lower.
Is there a CGT liability on the profit from the B2L?
Is there any outstanding finance on the B2l( mortgage )?
What is the RoR on the B2l currently?
Are you both willing and able to carry on working without touching pension pots till at least 68 / 69 YO?
How risk averse are you?
Again, thank you all, incredibly helpful and stimulating ... serves a great purpose in making me think differently and also highlighting new areas/points.
Donald's perspective is interesting ... and probably ties in with my hesitation at embarking on new finance approach when most people at 60 are maybe winding it down a bit. And rental is something we (roughly) know how to do, how it works etc so there's comfort in the familiarity.
ISAs are obvs a good shout, and hadn't really considered premium bonds, but also make sense.
The RoR (or net yield excl capital growth) is about 5-6%.
And working for the next 10 years ... Mrs A will work for at least 5 years as she enjoys her work a lot whereas I'm finding lots of reasons to wanting to reduce work! So on reflection, and with the many mentions of investments or pension maybe be more of a 10 yr window than 5, it's a pertinent thought!
I used Unbiased.co.uk to find an IFA - I have used one previously but they’ve since retired plus I couldn’t get a recommendation for someone local. You enter your details and they try and match you with a suitable IFA. I had my first detailed discussion (free) this week and there’s an offer of another session to do some more detailed profiling before we get into the specifics of suitable investment vehicles and fees.
Are pension withdrawals taxed at a lower rate? It says 15% not 22% above
As testesDouglas says I was working on the basis that you pay 20% tax on the non tax free bit ie 20%x75%=15%
Absolutely, for the tax relief alone. Plus you have immediate access the funds if required. If you plan on working the next 10 years
Can we unpack this a bit more.... I assume you're replying to the OP, but not sure.
You see to be saying that on the one hand stick the money in a pension as you can access it immediately. But then you're also saying that you can pay more into it for ten years and benefit from tax reductions..... The devil's in the detail, but if you do the first bit wrong then you may not be able to do the second .....
You’ll also need to think how long you are likely to live.
ie spend the cash in your pocket while you can ie whilst your fit / healthy or save it for a rainy day (pension) where you might end up giving it all to the state for care needs
Then there’s how much growth will you get in a pension pot in 10 yrs, yes you get ‘free’ gov contribution but it’s not going to grow massively in 10 yrs. If the market crashes too you could end up with not much return while much longer investment tends to always inflate more than a crash
I’m not saying don’t, just at 60 do you want to be locking up cash ?
at 60 do you want to be locking up cash ?
If it’s in a SIPP it’s not locked up though.
If it’s in a SIPP it’s not locked up though.
Yes it’s accessible but at 60 is it worth spending your cash or saving it? At 60 you have much more mobility than you do at 70, than you do at 80
As I understand it , you continue to contribute in to a recognised scheme up to the point of draw down. Tax relief adds 25% to the amount put into the scheme.
Once money is removed the scheme is basically locked * . Then it gets real complex with uflups , annuities, draw down etc .
* There's a thing called pension recycling when you can keep adding back iirc it's a smaller percentage.
Why not keep the b2l and sell it and buy a lifetime index linked annuity with the lump ? Keep the 6% returns running if it's working ok for you
You can still stuff a load of cash into a sipp now. Low cost tracker for you probably.
Keep a load in an instant Access ISA for rainy day money
You have left it rather late to benefit from compounding so the tax relief at source is the biggest benefit, although this benefit high rate tax payers the most.
Whatever you do, do something. Strong decisive action now will be better than pontificating and doing nothing. You'll never know what is the best fund , best plan , best decision is and neither will any ifa. Just start investing as much as possible now.
Why not keep the b2l and sell it and buy a lifetime index linked annuity with the lump ?
You'd be buying a taxable product with money you'd already paid tax on.
You have left it rather late to benefit from compounding
Sure, but don't make the mistake of automatically assuming it isnt worth it. The best time to start was yesterday, second best is today and with life expectancy in the mid 80s and rising you could still have some of it compounding for 20+ years.
Although also noted a market correction / crash is due. Time in vs timing and all that, but i might be a bit more cautious about shoving into shares if you believe thats happening soon, could buy in at the bottom and ride the recovery!
You'd be buying a taxable product with money you'd already paid tax on.
Every pension is a taxable product. The gov serp takes you to the tax free amount and any income over and above that is taxed.
The advantage is the annuity costs 25%less because you have recovered the tax by buying from a sipp , but there is a cgt hit at some point.
Yes and no .
You keep getting income from the b2l . Then use as much of your taxable income or wages towards the sipp
Tennant covers MTG , costs plus some profit , keep capital asset which will probably appreciate in value. No need to knee jerk into the sale when spare cash from salaries can be diverted from holidays to sipps .
As JV states , you will get some compound interest possibly for 10 years so potentially a doubling of year 1 investment over time . Or sell it , max out sipp allowance , sipp allowance and then invest the rest maybe in terms deposits and each year move the maximum amount into sipp and ISA .
My comment was about buying an annuity out of already taxed income. That's not really a good idea.
Singletrackmind has all the hallmarks of an early 1990s AI bot
I recognise all the words most of the phrases makes sense, and even some of the sentences, but taken together.....
( Or I even more stoopid than I thought which could well be the case 🙂 )
I think the usual rabbit hole is gone down with this thread that happens with pension threads the focus is on the financials as opposed to the important thing which is having and enjoying a retirement.
You can’t assume that the average life span ages apply to you and health is not a given 🙂
You’ve got to figure out whether you planning for your own enjoyment of your lifetimes work or just passing it onto others.
If your planning an active retirement then you seriously have to think about your fitness and aging , leave it to late and all those things you dreamed may not be achievable or you can’t be assed by the time you’ve retired.
Never forget every days a gift you can’t buy 🙂
hadn't really considered premium bonds, but also make sense
Do they, when you can get 4+% on a savings account, with £1000 tax free interest. I guess it depends on how lucky you feel?
If your planning an active retirement then you seriously have to think about your fitness and aging , leave it to late and all those things you dreamed may not be achievable
this is a fair point, however the quandary I have, having just turned 60 and having stopped full time work 6 months ago, is the what if ? around planning having a full and active next 10 years and then finding that I am able to keep on being busy and active but having burned through most of the money. Better than falling into ill health and decrepitude for sure, but still a big factor in my thinking… My dad was pretty active into his 80’s and my mum even more so.
Thank you all, it's been a really helpful thread for me.
I think my takeouts are:
- think carefully at 60 about embarking on a new retirement plan/financial approach that, to some degree, ties one's money up. I'm (as is Mrs A) pretty active, healthy ... I like being able to enjoy that aspect of life now (and long may it last)
- buying into a pension or investment (stocks/shares) has, naturally, some complexities and probably best done with some expert guidance ... also, going into it with limited knowledge might be a flaw as I like to feel I have some idea of what's going on, I can see what's going on. So rentals are something I've got history with and pretty aware of how it works, relative upsides / downsides and tax implications
- a (very successful) financial friend once told me "the best way of investing is where you sleep well at night" ... think this is true. Not sure I'm seeking to max my potential £ but looking to be happy, relatively stress free, OK with the money I'm getting/got
- my nervousness over rentals is the change in EPC (ours fail purely because of the original build aspect) and Renters Rights Bill which I think shift the risk massively. I was a little disingenuous in my original post as we have several rentals ... our tenants are all 5 years +, seemingly v happy and we do our best to be excellent landlords (it's the right thing to do, we avoid voids, tenants are happy, I sleep well). However, all our eggs are in 1 basket ... and with much chopping and changing in govt policies over the last decade, things feel slightly less secure
But as I said, the input has helped me think 'stick to what I know' and roll with whatever changes come along ...
Thanks again