Pensions Question

[whiskers123]

Hi, I'm currently on AFPS 05 and am thinking of taking out a private pension (SIPP) on top of this, for about £150 per month.

Does anyone know where to find any guidance if this is allowed or not and if there is any limits on contributions etc?

Thanks, Whiskers

[The Old Fat One]

I think AL R is ppruner you're looking for.

[Al R]

Whiskers,

You might not need a SSIP (they can be pricey, so why pay needlessly for functionality you'll never use - especially if you're starting with a balance of zero?). Having said that, if you want the bells and whistles, they can be worth it. I have a Higher Rate tax-payer ex-military client who religiously buys physical gold each month via his, and is currently paying just $800 an ounce (with 40% tax relief) which is being stored for him in Delaware. One or two of these credible, boutique providers are currently engaged in a price war, so management prices are tumbling.

You can have as many private pensions (SSIP or otherwise) as you like, and get tax relief on your contributions up to your annual salary. So, if you have an annual salary of (for example) £42k; then you contribute 30k and George Osborne gives you a further 12k as a 'thank you'. For a Higher Rate tax payer in his/her 50s who doesn't need all of the cash immediately and would prefer it as regular income instead, its a spectacular instant uplift on money and doesn't take into any further account investment uplift (or decline). You can take benefits from the age of 55 so for a mature saver/investor, it could be considered as an short/medium term investment tool in its own right, especially if you (rightly so, at that age) consider 'safe' or safer funds to invest in.

If your other half doesn't work or have their own pension, why not open one for them instead? They can get tax relief of 20% on contributions of up to £3600 pa and it helps with using their tax free annual allowance each year in retirement. As ever - take proper advice and if you need any help, or want any further info, feel free to drop me a line.

[zedder]

whiskers,
I certainly did the sort of option Al R recommended, and have been paying into a Stakeholders Pension for Mrs Z. The intent is to keep our overall tax liability down once we have both retired. Assuming I stay to 55, I'll likely be close to the 40% threshold once the Old Age Pension trips in as well.

The Stakeholders Pension has been invested in a FTSE All-Share Fund and what with the Tax Relief as well, has done very nicely. The only problem is the ever-decreasing annuity rates which mean that even a healthy 'fund' is not going to pay a fantastic income.

The client of Al R's that has been doing the Gold thing must have seen a very nice return given that Gold has shot up through $1300/oz!

[Al R]

Zedder,

If you have had that Stakeholder for quite a while, it might be worth shopping around. Market forces kicked in when the Stakeholder arrived, and the chances are that you are paying an older rate management charge - prices have come down over the years and most people don't know what they're paying.

Don't forget - since 2006, you don't need to have an annuity these days when you retire; you can stay invested within a pension and draw funds as you see fit up to the age of 75 (and that age was suspended in the emergency budget recently).

Make sure that investing in the FTSE is in keeping with your attitude, inclination and capacity for risk - as you get closer to 55 (or whenever you want to call it a day), you probably won't want your retirement funds to be linked to something as volatile so completely as the FTSE. You might want to consider slipping into good Corporate Bonds, Gilt, Fixed Income etc.

Yup, gold is doing well..

[zedder]

Al R,
0.8% with Scottish Widows. How does that compare?

[Al R]

Thats not too bad - it depends on the amount you have invested as to what rebate you can expect. If your pot is doing well too, you probably wouldn't mind paying a little extra; you'd be quite happy paying 2% and making 15%, compared to paying 1% and just making 4 or 5% I guess. Some pension products allow that higher sense of sophistication, choice and involvement.

[Al R]

The contribution you might refer to was formerly known as the Accruing Superannuation Liability Charge (ASLC). This charge changed and was calculated (variously) in the past on the basis of 33% of the total pensionable pay for officers and 18% for ORs, equating to an average of 22% or so of total pensionable pay. It is now known the Superannuation Contribution Adjusted for Past Experience (SCAPE), again - calculated as a percentage of military pay based on rank. The SCAPE contribution made by the MOD partially funds the payments made by AFPS in that year. This does not mean that 33% or so comes out of your pay, mainly because AFPS is unfunded and is derived on the basis of being a Prerogative Instrument.

When you refer to the 25%, are you refering to the reduction by abatement factor maybe?

[Lima Juliet]

Al

Can you explain to all the theory of 'oversubscribing' to a pension where your AVCs will effectively be taxed twice? An IFA tried to explain it when I was a Plt Off, but I never really understood it!

LJ

[Al R]

Leon,

When were you a Pilot Officer?! Perhaps the IFA was referring to days of yore, and HMRC Regs surrounding AVCs have changed over time.

Whatever the pros and cons of AVCs, the rules are simple really (no more than 15% extra benefit etc). As long as you stick to the AVC tables which relate to your income, age etc, you shouldn't inadvertantly step over the (oversubscription?) limit which might cause you to lose tax relief on your payments. Free Standing AVCs might be a different matter though, and might require more care.

The taxation double bubble he may have been referring to might involve the taxation on the benefit when your pension is in payment (another reason to load a lower paid/non wage earning partner's private pension provision?). But when it comes to paying at source, AVCs are tax friendly in their own right anyway, as your payments are taken, 'gross'. You don't get tax relief of course, which you might (if you are HMRC compliant) get with a privately sourced arrangement.

[Lima Juliet]

Al

P/O over 20 years ago. Thanks for the explanation, that pretty much as I remember it. I very nearly took a private policy for £75 per month until a wise IFA warned I would "oversubscribe".

Regds

LJ

[Topofclimb]

I'm no pensions expert, but I retired in 2005 on AFPS 05 and now receive approx 1/2 my pay as pension. I also took out a AVC pension which, I think, was the precurser of the SIPP and received an extra 40% on all payments and now receive a generous monthly sum from the "annuity" I bought with part of the pension pot. The cap on how much you can save like this was far in excess of any amount I was likely to save and I didn't pay any tax on the "lump sum" i took out of the pension pot when I retired and the monthly payments are taxed according to your tax code which in my case is at a very low rate. Its certainly a good way to save as I can't think of any other way to get 40% interest!

[VinRouge]

TOC, to get this right, you paid into a pensions pot tax free, then, on retirement at 38, took out your annuity as a lump sum, including all tax?!

How much do your monthly payments add up to from your AVC, and how much did you pay into the AVC during the term?

Would make more sense to contribute to an AVC rather than overpay the mortgage if what you say is true.

[Al R]

Generally speaking, and as information, if you're on the cusp of retiring, think long and hard before taking an annuity, especially if you're in your mid 50s right now. Annuity rates are dire at the moment, you lose flexibility of income (why draw it and be taxed, if you don't need it?) and remaining invested via a SIPP or PP can allow you to capitalise on market growth and your fund to grow free of tax.

You can also identify a suitable retirement 'vehicle' (SIPP etc) and legitimately put your gratuity into it, gaining a further 40 or 20% tax relief on the tax free lump sum - if you can justify it as coming out of income and if your taxable earnings in that year allow it and if you are within your lifetime allowance. Of course, you can't access it all in one go, but you can then take 25% of it as a taxfree lump sum and effectively and annually 'rape' the fund balance or (given your assumed age) invest more safely over longer time, and slowly drip feed income from it.

As ever, take proper advice. However 'authorised and regulated' I am, don't take any post on tinternet at face value because a suggested piece of information leading to a particular course of action might not be best for you at any given moment.

[Topofclimb]

I prefer not to comment on the above post and questions as I can only really tell you what I did. I have no idea what SIPPS are, but, when I was at my 38 point (roughly) I started putting a couple of hundred pounds into an AVC each month. The tax man then gives you back £40 per 100 if, as I was, you are on the higher rate of tax. This amount was invested and made up a healthy nest egg for when I retired in 2005. When I took out the AVC you were capped in how much you could save ( I think you could basically use your flying pay element as "pensionless" pay) although I believe this has now changed, and if my memeory serves me correctly, you are allowed to save millions before you have to pay any tax-but as I said earlier its a while since I did this and can only really tell you what I did. Clearly, if you are on AFPS 05 (I was at the end) then you don't get flying pay. My nest egg was available to me when I retired although I was not 55 years old and I had the option of taking part of the cash as a lump sum, I seem to think this was 25% of the total. I invested this and the remainder I used to buy an annuity with Canada Life. This was before the "crash" and I shopped around and found that this was a good time to buy an annuity-interest rates were up at about 7%, so that is what I did. I now receive a monthly income from this annuity which works out at about 5% of the total, which is taxed at the standard rate depending on your tax code and other income. I'm sorry that this is a bit complicated and may not be entirely clear but as a bottom line I find my monthly payment a nice addition to my RAF pension and If I hadn't saved this money each month I probably would have just spent it anyway!

[Al R]

Antelope,

Simply put, an AVC/Free Standing AVC (an AVC bought externally) offers certainty. As you know, they are simply the means to buy extra years to add to your final salary AFPS. 'Certainty' of course, is not the same as 'better' when it comes to fund performance or wealth growth (neither does it mean ‘worse‘). Certainty just means that you know what you're getting in advance (it might not mean that its what you're after or what you need). A SIPP is a more sophisticated form of Personal Pension (PP). Going down that route instead of buying AVCs means that your money remains invested and exposed to market sentiment and therefore, technically, exposed to risk (the extent and nature of which depends on your fund choice/s).

A SIPP/PP offers much - 20/40% tax relief, flexibility, diversity and the chance to capitalise on improving markets (and unless you are fleet of foot and like to keep your eye on your investmentss, the chance to lose on declining markets). You may make far more with a SIPP/PP - but you may (technically) lose a lot. If you do go down the SIPP/PP route, remember to always keep on top of your fund choices. Have your IFA review them regularly and make sure that they are still performing well and in keeping with your wishes and aims. I am in the final stages of negotiating a tailored, low cost SIPP purely for military clients with the oldest SIPP provider in the UK, and so I am acutely aware that a SIPP has usually been too expensive for many of my clients, however much they would like the functionality, sophistication, flexibility and all round greater ability of them.

Remember too, that the biggest threat to your retirement fund is George Osborne. Tax can decimate funds in payment so again (I can’t emphasise the need enough to take advice about this) - if you have a partner who is raising the family or doesn’t earn as much as you, make sure that you invest in their pension funds first. They are allowed £6475 in income each year, without being pinged for income tax. There is little point in the main bread earner having a huge pension fund and drawing on it for both of you, and being subsequently taxed to the heavens, if one’s partner has no pension fund and if you aren’t making collective use of their tax exempt £6475 allowance. I have a civilian client who has reached a maximum LTA. Her ‘problem’ is not so much one of accumalation; rather she now has to deccumalate efficiently. Best not to get into that situation in the first place - however nice it might be.

Your reference to the Lifetime Allowance is nearly right - however, the numbers are a bit arse about face. A LTA is calculated by a factor of 20 if the fund is not yet in payment, and by a factor of 25 if it is. You could have applied for ‘Primary’ or ‘Enhanced’ protection, but you only had until 6 April 2009 to apply for it. You can contribute gross up to your taxable salary. So, when you refer to the 6k available for the year, remember that the 6k is gross, and therefore, you only pay 6k - 20% or 40%. If you’re a Higher Rate taxpayer, your pension fund contribution would therefore be £3600 pa and the State makes it up to £6000 for you. That 6k is then exposed to further gains or losses.

However, as ever these days.. ‘wait out’. It is being strongly, strongly suggested that the government will reduce the current £255,000 annual allowance to between £30,000 and £45,000 for all final salary scheme holders in order to deliver savings. As an AFPS member, your annual contribution is deemed to be the increase in your annual pension benefits multiplied by 10. Because the annual allowance is set at £255,000, this formula has practically no impact on the majority of AFPS members! But the multiple might (probably will be!) in future be set at between 15 and 20 instead (lets say x 17). So, if your annual limit was reduced to around £40,000 and the formula toughened up, many more people would fall into the net.

Lets take your example, and assuming that you were a 50 year old serviceman earning your 50k pa. We‘ll assume that you have 25 years' service, and in AFPS of course, where the benefit is one-sixtieth of final salary for each year's service. If (under the strongly rumoured/ ‘proposed’/ leaked new Regs), you received a promotion and pay increase to £60,000, you could find yourself hit with a £19,000 tax bill at the end of the year, assuming the multiple was set at 17 and the annual limit at £40,000. This is because under the new formula, your pension rights would be equivalent to someone paying almost £88,000 into their pension, but anything above the new £40,000 annual allowance would be taxed at 40%.

Sorry if I haven’t explained that well or clearly - I am clockwatching and have to be at Cranwell this afternoon (well, I had to make it there one way or another ). Wait to see how the dust settles with the CSR.. and always take proper advice.

[Topofclimb]

Al, my AVC was nothing to do with my service pension. I didn't buy any extra pension years with it, I got a lump sum, roughly 130K, took about 30K as a lump sum, tax free, and now get a monthly sum of £500 ish. I'm not sure your service pension calcs are correct either, my pension is based on 35/70 so every year is worth 1/70th. If you were on the top rate of the PA spine, worth 1st year group captain, 70K+, your pension would be 35K ish. I may have read your post incorrectly but that how my pension works out.

PS you sound as if you know what you are talking about, I'm not sure I fall into that category

[Al R]

Hi Top of,

Your AVC would have to have been contributions added to some pension (maybe not mil?). Was it 'free standing'? My post was more about annual and lifetime allowances, and not so much, working out a pension in payment.

However much you do or don't know, it seems like you knew enough to get yourself a pretty good deal.

[Al R]

Funnily enough, announced this morning:

Financial Secretary to the Treasury announces changes to restricting pensions tax relief - HM Treasury

Financial Secretary to the Treasury, Mark Hoban MP, announced today that the annual allowance for tax-privileged pension saving will be reduced from £255,000 to £50,000, and the lifetime allowance will be reduced from £1.8 million to £1.5 million. This will replace the complex proposal legislated for by the last Government in the Finance Act 2010.

This measure will raise £4 billion per annum in steady state and will help reduce the record Budget deficit that this Government inherited. It will be targeted at those who make the most significant pension savings. An annual allowance of £50,000 will affect 100,000 pension savers – 80% of those will have incomes over £100,000.

My initial thinking is that if you are retiring in the next 6 months or so and/or are going to be in receipt of a large lump sum, if you are staying in work and don't possibly need that lump sum all in one go immediately, and if you want to make an immediate gain of up to 40% (tax relief) by way of a one off contribution into a private pension scheme, then you have until April to consider doing so. Also, if you already chuck money hand over fist into a private scheme, then you might well be about to be face more limited options. There does seem to be provision for offsetting a previous allowance though.

[LFFC]

Al,

The announcement today has really put the cat amongst the pigeons. I know it’s a bit early to give a definite answer, but given your last post, do you think that anyone about to retire within the next 12 months, who will receive a full immediate pension and gratuity, will be adversely affected?