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Just a quick "yes" "no" sense check would be really helpful.
1. I'm paying higher rate tax for the first time in my life.
2. My pension scheme is light. I've no final salary schemes.
3. I don't really need the extra income now, and have enough savings.
4. I should/could pay everything over £46,350 into the pension scheme as an AVC to benefit from the 40% tax relief
Does this feel sensible. Obviously the coke/N+1 response is the correct response but this is the sensible one?
Yes, sensible idea.
Quick edit - although there's rumours that the tax relief may be capped at 20% in the upcoming budget. But still, sensible idea.
Many thanks IHN. That 20% cap is a fair idea if we're honest. Thanks for the feedback, have a good weekend
an expert in these matters I know said yes, with the caveat that they don't know your age or retirement plans. Also remember there is a cap at 40k and that includes your employers contribution
Thanks that's helpful. No chance of hitting £40k! Thanks for advices
Yes it's a fairly good idea to add to your pension, however
"That 20% cap is a fair idea if we’re honest. "
This is something that I'm afraid I disagree quite strongly with.
although there’s rumours that the tax relief may be capped at 20% in the upcoming budget.
There have been rumours about this every budget for the last lots of years. Hasn't happened, quite possibly because it is far from straightforward to come up with a sensible implementation (how do you deal with salary sacrifice, employer contributions and DB schemes?). Tories also aren't likely to want to hit their voters that hard.
I should/could pay everything over £46,350 into the pension scheme as an AVC
You say you don't have a final salary scheme, but the term AVC is almost exclusively used to mean money purchase contributions that run alongside a DB scheme. Either way, paying the excess into a pension is a pretty good idea. 40% tax relief on the way in, only 20% tax paid on the way out (plus the 25% tax free cash) means an instant return that is hard to beat as long as you are prepared to wait.
Cycle to work benefits also increase as a higher rate taxpayer. 🙂
Cycle to work benefits also increase as a higher rate taxpayer
Yes - my employer's scheme was only really worth using if you were. So I went for it. About 6 months later I decided it was time to start putting into the AVC so that I wouldn't be on the higher rate. Doh!
Good idea, I used to do this. Power of compound interest too when the dividends are reinvested. I have just reviewed an investment and the capital growth over 5 years was next to nothing, the dividends however tick over at c5%. Just be aware of the charges.
Are there reliable calculators to determine if it would be better to put extra cash in a pension or overpay on the mortgage?
Overpaying your mortgage is hardly ever going to be a better plan unless you are struggling with debt. Investment returns should be greater than the mortgage interest, and the incentives of a pension (especially if a higher rate payer) just make that more so.
Tories also aren’t likely to want to hit their voters that hard.
Unsurprisingly they've been incredibly generous to higher earners eg upped ISA to £20k per annum, so that's £40k pension allowance and £20k ISA allowance per year, basically allowing you to reduce tax on up to £60k a year, which is over twice the national full time male wage.
Overpaying your mortgage is hardly ever going to be a better plan unless you are struggling with debt. Investment returns should be greater than the mortgage interest, and the incentives of a pension (especially if a higher rate payer) just make that more so.
Mmm... gut feel that makes sense (barring any Brexit interest rate disaster). But I think my company’s pension guy was suggesting if I paid off the mortgage a couple of years early and then was paying the equivalent of mortgage payments into pension it could be better. I like the idea of getting the mortgage cleared quick but I don’t trust this guy isn’t just trying to get some mortgage (advice) fees somewhere too!
Unsurprisingly they’ve been incredibly generous to higher earners eg upped ISA to £20k per annum, so that’s £40k pension allowance and £20k ISA allowance per year, basically allowing you to reduce tax on up to £60k a year, which is over twice the national full time male wage.
Its actually quite the opposite. If you look at pension policy over the last 30 years or so it has been conservative governments that have restricted people’s ability to save into a pension and Labour who have increased it. Pension holidays and taxes on pension fund surpluses were done in the 80s & early 90s both of which had a long term negative impact on the state of pensions. It was also the case that until the early 2000s the limit on what you could save into a pension was 19.5% of your salary. It was Labour who increased this to 100% and also increased the lifetime allowance to over £2,000,000. The conservatives have reduced both these allowances to £40,000 and £1,000,000 with further limits if you are a very high earner.
ISAs are different to pensions as the initial investment is tax paid its just the growth that is tax free.
It was Labour who increased this to 100% and also increased the lifetime allowance to over £2,000,000.
They introduced the concept in 2006 at £2m, prior to that there was no upper limit, so it was a restriction on pensions.
ISAs are different to pensions as the initial investment is tax paid its just the growth that is tax free.
You say 'just' but the growth can quite easily exceed the principle many times over, so being tax free is a big deal. NB there are 100s of ISA millionaires already.