It’s not clear what to do.
Maybe pay enough into AVCs to clear not only higher rate income tax, but also basic rate?
Are there accountants who specialise in helping individuals with tax efficient retirement planning (instead of using an IFA)?
Presumably max out your ISA and investigate gilt ladders.
Hi Jim, I have no personal knowledge of professional accountants tax advice services but just scanning the web there seem plenty of chartered accountancy firms offering their personal tax advice services. Also the banks offer similar services. My brother in law uses Coutts for his retirement planning and he was a partner with PWC. Obviously, there are charges for these services so it makes sense to shop around and talk to potential investment advisors.
Any competent accountant who works with individuals should be able to advise on tax efficiency of pension investments, along with any others. Obviously you would expect to pay them for such a service, although in my experience their charges are likely to be a lot less than those of an IFA, who may or may not be as clued up on tax affairs as an accountant.
Be careful not to confuse Income Tax management with Capital Gains (CGT), as they are very different, although both aspects should inform your investment choices.
Of course, CGT is only applicable for non-tax-sheltered investments (i.e. >pensions/ISAs…and perhaps other asset classes which attract favourable CGT rates).
The issue with CGT is that the level of gain on (say) a market investment isn’t ‘indexed’, and it’s an absolute annual level of £3k now (non-cumulative), worked from the ‘base cost’, which could have been incurred many years previously. CGT workings can be complex, as there are techniques to manage and work out exposures if losses have occurred and additions made.
IME, a decent IFA should work this aspect through with you e.g. what your potential exposure is, how to manage this, and how it should inform where non-sheltered funds should be invested, and managed on at least an annual basis, to protect against material CGT obligations arising.
I just saw this:
“MoneyHelper brings three legacy consumer brands into one (Money Advice Service, The Pensions Advisory Service and Pension Wise). MoneyHelper is there to make your money and pension choices clearer. They offer impartial guidance that’s backed by the government and free to use.”
Yes - but for the part you don’t need to touch for say a decade or longer, it’s probably best to put it in a developed markets global stocks index fund with low fees and forget about it as the volatility should revert towards the mean over that period of time and give a better return than an annuity or drawdown.
Ouch!
That’s the dreaded ‘sequencing risk’ - the crash with slow recovery period just after retirement.
In the 70’s, there was one of those that lasted for the 70’s.
By all means try them.
I’ve spoken to a few people who work/worked for them over the years, we even hired one, which didn’t work out well.
I’ve yet to find anyone competent or confident enough to step outside the small, windowless box they’re given to work in.
Essentially, it’s Catch-22 writ large, if anyone working there knew a great deal about what they were talking about, they wouldn’t be working there.
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It is clearly a great investment to pay‘s into a UK pension to avoid paying 40% Income Tax.
Is it also sensible, if one can afford to do it, to pay in even more in AVCs to reduce a person’s 20% income tax bill to zero as well as their 40% income tax bill?
Be mindful:
1- pensions at their heart via the tax relief benefits are ‘tax deferral mechanisms’ i.e. while the money grows tax-free in the pension wrapper, you will pay tax on drawdown (>personal allowance level and allowable tax-free withdrawal element) – so you have to project and understand likely tax exposure for drawdown e.g. no point avoiding 20% on way in if you would be exposed to 40% on way out.
2- AVCs and overall pension contributions are limited by ‘Annual Allowance’ – this can be complicated by occupational pension workings et al. Suggest look this up for yourself.
Sure, if you can afford to. In other words, if you can live on a gross salary of less than £50,270 then the basic rate 20% is automatically reclaimed by your pension provider so that every £1000 you pay in adds 1250 to your pension pot, but without the option to reclaim the additional 20% you get in the higher rate band.
Of course, you still have to pay tax on this money when you draw it as pension, but with many private pensions allowing you to take 25% tax free in addition to your normal tax free allowance, this may well be a cost effective way build your retirement funds. Making AVCs into a DB pension may not offer this option, so the added flexibility of holding a separate personal pension could also be beneficial.
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Chris, this got me thinking. When I was working, tax was deducted after pension contributions, thereby giving the tax relief. Under your scenario the tax relief is added to the pot. If both happened then you’d get double tax relief. So I looked it up on the Gov website and you get either/or, which makes sense. I think!
Yes, if you have a workplace pension there should be no need to reclaim anything, either at standard or higher rate. I made regular and one-off lump sum payments into various pots over the years which were not operated by my current employer. In this case you get the 20% refunded automatically by the pension provider, and that is added to your pension. Any higher rate tax has to be reclaimed by you, usually by completing a tax return, otherwise HMRC will happily keep it for themselves.
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Thanks, I had a little moment there. I never bothered with a personal pension; with an employer contribution to the workplace pension that was around three times the employee contribution, there seemed little point.
The other benefit of a pension is that it is outside of inheritance tax. If one has a large pot then this could be quite a significant saving
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I’m guessing that was a DB pension where the size of your pot has no direct bearing on what you get from it, like many civil service, teachers and other such schemes. I can’t help thinking that the large employers contributions are just what’s needed to help fill the (sometimes enormous) defecits that some of these schemes have built up over the years, rather than actually increasing the payments to the individual employee.
Contrast that to the auto-enrolment schemes that many employees are now offered, which pay a paltry 3% of ‘qualifying earnings’, which usually means 3% of most, but not all of your gross earnings.
Yes, it’s the LGPS. Years ago the government of the time stupidly decided that the schemes only needed to be 75% funded, like durrrrr. Anyway, common sense returned and schemes were required to be fully funded; by 2022 the fund recovered to 125% funding after healthy growth, enabling employer contributions to be reduced. Like you, I think that all employers should be making bigger contributions. Yes it would impact on inflation indirectly but ultimately it would reduce pressure on the state pension, which is going to become unaffordable with an ageing population.
Why did you not just make AVCs into your workplace pension?
I think this would have saved you national insurance, which the external pensions would not - as I understand it.