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Cost of buying back years but going early.

Discussion in 'Retirement' started by Prim, Oct 21, 2018.

  1. Prim

    Prim Occasional commenter

    Just had a quick look at the calculator and trying to figure out what the benefits maybe. I may well be looking at these figures through rose-tinted spectacles.

    I'm 48, if I want to buy £500 extra to my pension with an NPA 67 then it will cost me £5246 for the year or £437.00 a month. I'm guessing that this will go down to £237.00 a month as I pay 40% tax? Is that a correct assumption or will they just add 40% on top thus contributing more?

    So, if I pay this for the next 6 years I will be accruing an extra £3.5k per year to my pension? How will this be affected if I choose to take my pension at 55? Does it just go into the melting pot and take a 5% hit per year? Although if that's 5% per year from 67 it won't be worth having?

    Does that make sense?

    Thanks

    P
     
  2. Sundaytrekker

    Sundaytrekker Star commenter

    Nearly there with the rosy spectacles, I think. First the tax: the monthly £437 will be shown on your payslip as an additional pension deduction and will come off before any income tax is calculated. If you earn enough to pay higher rate tax on this amount of your income then you will not have to pay 40% (or any tax) on that £437. So it’s a good incentive to save into your pension. Be aware that some people say the chancellor might change this tax rule at some point.

    If you retire early then the actuarial reduction will apply to this part of the pension, too. Also, you will have paid the additional contributions for fewer years than might be expected.

    I’ve had a quick took at the tables on TPS because your figures look high. I think you’ve looked at the cost if you pay over one year. If you think you’re likely to pay it for six years then look at the cost of however many multiples of £250 you want with payments spread over six years. To get £3.5k a year you obviously need 14 times the cost of getting one lot of £250. This would be pretty expensive.

    If it’s any help, I felt that the money I put into the additional pension was very worthwhile especially if it means you pay less tax at 40%. When they calculated the pay out they also increased the additional amount by CPI so this added a fair bit more.
     
    emerald52 likes this.
  3. zondacat

    zondacat New commenter

    Interesting. I'm confused about this. Is it better to buy additional pension than to do AVCS?
    What does faster accrual mean? Is this something I could do. I'm 50 and desperate to get out ASAP!
     
  4. Sundaytrekker

    Sundaytrekker Star commenter

    I think it depends what you want to achieve and what you can afford. Additional pension with TPS is generally considered the best value and is index linked in the future. It will be subject to reduction if you take it early. I did some AVCs too, as they were the only option for me 20+ years ago. They built up a decent pot of money but any annuity from it is quite low. Some people use them differently, as there are different options now, and regard them as a pot of money to drawdown and bridge the gap between the age you stop working and the age you take your pension to try to avoid too big a reduction in the main pension.

    Faster accrual means agreeing to pay a higher percentage contribution to TPS in return for taking the pension a bit earlier without any reduction. I think it’s only used to get it down from the new 66,67 or 68 to 65.

    I suppose much depends on your own circumstances. As the career average element of a pension builds up I suggest it’s going to get harder to go at 55 because of the large reduction. If you’ve got a decent salary, years of service under final salary entitlement then it might be possible. I know I looked at mine and decided I didn’t have enough to go then.

    The other thing to consider is building up enough entitlement to the new state pension since the rules changed in 2015. I’m still working on that one! That might depend if you are doing any other work after 55.
     
    emerald52 likes this.
  5. Sundaytrekker

    Sundaytrekker Star commenter

    Just to add I don’t know much about faster accrual so do check all information with TPS.
     
  6. Prim

    Prim Occasional commenter

    I wonder if anyone is in the process of doing this i.e 48-50, 40% bracket. How much are you buying back and what is the real world hit on your salary.
    Thanks
     
  7. Sundaytrekker

    Sundaytrekker Star commenter

    Again it depends how much. In my case I bought £1500 over nine years between 50-59. From memory it cost £385 a month. As I didn’t pay 40% tax on that the actual reduction was about £231 a month. Over the time this cost me about £24500. As it paid out just under £2000 a year when they adjusted for inflation I expect to have got my money back in about twelve and a half years. I hope to live a lot longer than 72 so will gain. That’s the unknown of course. But it was also about putting money where I couldn’t touch it for other things.
     

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