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Early Pension Reduction - Ooops! (Income Tax effects)

Discussion in 'Retirement' started by diddydave, Oct 2, 2020.

  1. diddydave

    diddydave Lead commenter

    Following a post today I realised that I'd not taken account of the effect of income tax on my spreadsheet that looks at whether taking your pension 'early' is worth it or not.

    I've added one further tab that looks at this for the NPA60 scheme.

    This only affects those whose pension would take them over the personal tax allowance (currently £12,500).
    Once over that allowance, taking the pension early stays ahead for longer.

    Why? If your pension taken early was £12,500 then there would be no tax. If taken later it was £12,600 then I had treated that as being £100 more, but of course it gets taxed at 20% so is only worth £80 more. So it takes longer to catch up.

    For example, a NPA60 pension of £20,000 taken at 55 on my sheet ignoring income tax would take you until you were 78.5 years old to catch up. Taking into account income tax it would take you until you were 82.5 years old.
  2. diddydave

    diddydave Lead commenter

    Now updated to account for income tax at the basic rate
  3. semolina29

    semolina29 New commenter

    Amazing and fast work too. Thanks for this .
  4. diddydave

    diddydave Lead commenter

    Golf got rained off today so I had a spare few hours this morning ;)
  5. pauljoecoe

    pauljoecoe Occasional commenter

    Can you post a link to that spreadsheet. I always spend forever searching around to find it.
  6. diddydave

    diddydave Lead commenter

  7. a_venkatesh

    a_venkatesh New commenter

    Don't suppose you'd be able to take higher tax bands into account Dave? Thanks for all your work and the help you're giving people.
  8. diddydave

    diddydave Lead commenter

    Of course I can have a look but for a teacher to be drawing a pension of £50k+ they'd need a career of 40 years and a final salary of £100k
  9. diddydave

    diddydave Lead commenter

    I went up to the next tax band but not going to bother with the highest one :)
  10. a_venkatesh

    a_venkatesh New commenter

    Thanks Dave, much appreciated.
  11. maz403

    maz403 New commenter

  12. diddydave

    diddydave Lead commenter

    You can either:
    File - Make A Copy (this creates a Google sheet that you can share with editing rights)​
    File - Download (different versions depending on what package you want)​
  13. diddydave

    diddydave Lead commenter

    or you can send them the link and they can download it ...
    frodo_magic likes this.
  14. Aghfell1

    Aghfell1 New commenter

    Hi Diddydave
    I have spoken to ASCL about the McCloud judgment and what happens as I am a HT with 28 years service, 4 years teaching abroad. I'm trying to work out my options re lump sum and annual pension, they said they could help, but the real expert was you.....Any suggestions?
  15. diddydave

    diddydave Lead commenter

    That's kind of them...I think.

    Ive started a conversation with you so we get a bit more detail as the above is just a tad too broad a topic.

    The lump sum versus pension question has been discussed here a few times and is very dependent on each person's needs. My own opinion is that unless you have a definite need for it or trust your investing skills to beat inflation by some margin then the highest pension is the safest route.

    If you are back in the UK then unless your service abroad was in a school that was part of the TPS then you have only 1 year to get back into the TPS in order to maintain your rights to be in the older schemes (a break of more than 5 years breaks those rights)
  16. MrMedia

    MrMedia Star commenter

    That's helpful. I don't need the lump sum, so taking it as pension is better? I see what you are saying - all I would do is try and invest it. Better return from the pension - should I live long enough!
  17. diddydave

    diddydave Lead commenter

    I made this post on lump sum versus higher pension:
    "Is it better to take a bigger pension and smaller lump sum... or to opt for a smaller pension and bigger lump sum?"
    A question to which there is not a 'one-size-fits-all' answer.
    There are a few threads already, it may be worth searching for those using "lump sum" as your term.
    Here are a couple I commented on:
    Much depends on your attitude to risk.
    Much depends on what you will use it for.
    Once you take the lump sum you get the benefit of it and also the responsibility for it.
    If you have debts that can be paid off then many find that more reassuring.
    Some want to put it into a major project that will enhance their lives immediately and for those early, more active, years of retirement.
    Some get excited by just having tens of thousands in the bank.
    Inflation is the enemy of the lump sum, more so because the pension you swap for it is increased every year by inflation. In order to keep its 'worth' the lump sum needs to return more than inflation, to keep up with the pension payments by another 12th (£1 pension got you £12 of lump sum), or 8%. Finding an investment that can give around 10% pa would allow the lump sum to keep it's value and 'pay' you what the pension would have. From this I would suggest that if your goal is long term investment that taking a larger lump sum is quite risky.
    Investing is not just about money though, buying a motor home, holiday home, upgrading the house etc are all life enhancing investments and being able to do so soon after retirement gives you longer to benefit from them.

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