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State pension Gap Funding

mearnsfool
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State pension Gap Funding

#169517

Postby mearnsfool » September 27th, 2018, 3:21 pm

We were out on Sunday with a friend who is just 60 and wants to retire 29 months before her 66th birthday when she gets her state pension.

She hopes to stop working at 31 March 2022 and her first 4 week payment of her state pension will be the end of the September 2024. Therefore 30 months to fund a gap.

Her status.

£400k in two different defined contribution pensions with her state pension she is happy with that.

At today’s rate her state pension is £10,000 a year, therefore she has some previous SSP to bulk it out.

She has £60k or so in ISA's and Premium Bonds.

Earns £44k a year and pays £13k a year into her DC pension scheme made up of employers and her own contributions.

She is in good health and if possible, she wants to leave her house and any unused drawdown to her daughter, the family are long lived. House worth say £200k. Possible inheritance tax in the future but not an issue being considered.

Over the next three and a half years she wants to save around £30k from wages, probable overtime and a small inheritance. Looks possible in order to help fund her gap to her state pension starting.

I thought what about a SIPP to fund that Gap.

She wants £18k a year inflated during the GAP years.

SIPP taxable amount should fund the Personal Allowance in those years say £13k pa therefore, pay no tax on that, the 25% tax free from the SIPP should pay say £4k a year and she should fund the remainder from savings say £3k a year as any taxable money left in the SIPP will be taxed on the way out as her proper pension is well funded. Therefore, she should not overfund this SIPP.

She is happy that here existing pensions will fund her from 66 on.

She has a Gross Gap of £26k per year between the maximum £40k pension contribution and her £13k contribution. The Net Gap being circa £21k PA.

Therefore she can pay £800k a month net into a SIPP for 42 months or pay a larger amount later on and do £2,800 a year in the times she is filling the Gap. Two and a half years.

In that case she gets tax relief of circa £9k and tax free out of £13k.

Apart from hitting the drop to £4k maximum into a pension in future years (when she intends not to work) as she has taken taxable income out the SIPP from April 2022, can anyone see any problems.

I have assumed no capital growth or interest paid into the SIPS for simplicity.

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