Pension contributions post retirement

[Dicky99]

Can I get some practical foolish advice please.

I stopped working in March 2021 at age 57 years.

For background I went from permanent to freelance in 2005 and as a result of the perm period I have a DB pension which will pay me about £11k per annum starting May 2024 plus a £32k lump sum.

At the time I went freelance I couldn't afford to max my ISA and fund a pension. Since there wasn't the degree of pensions freedom then that we have today I decided the ISA alone would make up the rest of my pension. Having been over £500k in late 2021 the ISA is currently circa £430k of which £40k is cash.

I have no mortgage and I have enough remaining cash in the Building Society to live on until I start drawing my DB pension next year at which time I anticipate needing to draw about £15k per annum from my ISA for 7 years until I get my state pension.
I'm wondering if I'm missing a trick not thinking sooner about deploying some of the cash in the ISA and / or next years £32k lump sum into a SIPP, until age 67, using the £2880 allowance for non working people. The alternative would be to keep the £40k sheltered in the ISA and add another £20k of the lump sum in 2024.

I gather that this pension allowance can be backdated to 20/21 however for the last three years of my employment I was PAYE and paid a small amount into a workplace pension, which I extracted very shortly after quitting work. I don't recall how much I paid into that in 20/21 but well short of the £40k allowance for working people. So an added question is whether, since I was earning over £40k in 20/21 could my backdated SIPP deposit entitlement be £40k less the amount I paid into my workplace pension for that year + £2880 for each of 21/22 and 22/23. Or is 20/21 struck out for me.

So here's my thinking, if I have calculated it right and, for the purpose of the exercise, assuming that the chosen investment both in ISA or SIPP grows 5% per annum and 11 x £2880 SIPP instalments would be drawn from the ISA and installed in the SIPP, back dated to 2021 :-

1) ISA option - £31,680 left invested in the ISA would be worth £46,805 in 2031 - a gain of £15,125

2) SIPP option - drawdown 11 annual instalments of £2880, increased by Gov to £3600, grows to £51,144 equating to £43,473 after tax @20%, however because the instalments are being drawn down annually, the still growing tapering ISA balance would have a terminal value of £17,930 for a total gain of £61,403 - £31,680 = £29,723

I've bored myself to death with this and so I've probably bored you too, but is this correct working or is there a gaping error?

[JohnB]

The back-dating for earlier years is for allowances, not earnings. In the 23-4 tax year we are in you can only put in £2880 if you aren't earning. The reason to do so is the £720 government tops it up with. You can withdraw it straight away and for this tax year you can get all of it without tax because you are not using your personal allowance, so £720 gain. From 24-5 onwards your other pension will be using up your annual allowance, so you get 3600*0.25=900 tax free, and pay 20% tax on 3600*0.75 to get 2160, so your £2880 gets you £3060, a £180 gain.

[DrFfybes]

For this sort of exercise I find it easier to ignor potential growth,, helps my maths

As John says, no backdating, but it is worth turning £2880 into £3600. You get at least £900 back tax free, than taxed at your marginal rate on the other £2700, so you always come out on top. I'm in a similar boat to you but with a £4k DB income and I cycle the pension, leaving the 75% invested.

It might also be worth ISA-ing some of your cash savings anyway, depends how much of it you need and what the interest rates are. Also think about putting your ISA into divi paying ITs or VHYL or similar (not a recommendation, just an idea) and perhaps taking some income that way. If you intend to take £15kpa from the ISA then that's only 3.5% so easily done by 'natural yield', and leaves the cash savings as a backup in case of market crashes.

Paul

[DrFfybes]

One last thing - have you looked at taking the DB scheme early?

I can have £4kpa from my scheme now, or wait 10 years and get £6k. With getting about 2/3 for 10 years sooner the breakeven is about age 87. However, the DB payments plus SP put me into taxpayer territory, so the first 10 years are tax free then I only pay tax on a proportion ot it, whereas (at current rates) waiting and taking it at £6k means I'd pay tax on a most of it.

Paul

[Dicky99]

One last thing - have you looked at taking the DB scheme early?

I can have £4kpa from my scheme now, or wait 10 years and get £6k. With getting about 2/3 for 10 years sooner the breakeven is about age 87. However, the DB payments plus SP put me into taxpayer territory, so the first 10 years are tax free then I only pay tax on a proportion ot it, whereas (at current rates) waiting and taking it at £6k means I'd pay tax on a most of it.

Paul

I had almost made my mind up to take it this year, 1 year early, for quite a modest forfeit. If I recall correctly about £500 less pa. The thing that changed my mind was the lump sum. The indexing is based on September CPI so the pension amount and the lump sum increased by 10.1% this April. In the current market I decided I'd rather not have the lump sum yet and get the benefit of this September's CPI rather than bet on myself to beat that.