Question
I am 60 and I have accumulated some 21 years of civil service pension which will give me a pension of around £23k per year. I intend working for another 5 years and so will accumulate another 5 years of pensionable service . I would like to boost my savings towards my pension.
Am I better off paying into a superannuation fund i.e taking advantage of the fact that the sum invested will come from my pre-tax income or should I pay tax and invest what would then be a reduced amount in Sipps or something similar?Answer
If you contribute money into a pension, whether your civil service scheme or otherwise (e.g. a stakeholder pension or SIPP), then you'll normally receive tax relief on your contributions. This means a £100 gross contribution will effectively cost you £80 if a basic rate taxpayer and £60 if a higher rate taxpayer.
So I think your first decision should be whether to contribute the extra money into a pension (whether your civil service scheme or another) or use a different savings vehicle, e.g. an individual savings account (ISA).
Contributions into an ISA don't benefit from tax relief, but when you eventually take income from an ISA it's tax-free - whereas pension income is taxable.
There's no right or wrong answer here. If you're a higher rate taxpayer now and plan to take a tax-free lump sum from your pension when you retire, then a pension is likely to offer the greater tax advantage (as it looks like you'll be a basic rate taxpayer in retirement). But an ISA is more flexible (you don't have to exchange the fund for an income on a certain date) and tax-free income could be increasingly valuable if tax rates rise.
Either route is unlikely to be a bad decision, but it's worth giving some though as to which is likely to be most beneficial to your situation. You can read more about pensions versus ISAs on our ISAs page.
If you decide to top up your pension you'll have two main options. Either to buy extra annual pension within your civil service scheme or contribute into a money purchase type pension where your pension will depend on the amount contributed, investment performance and annuity rates.
You'll need to contact your pension scheme administrator to get a quote for buying extra annual pension, as the cost varies between schemes and depends on your age and time until retirement. Assuming you're in a local government pension scheme the cost is likely to be around £90 per month per extra £250 of annual pension at retirement for a male aged 60 retiring at 65 (£100 if female). The advantage of this route is that there's no investment risk on your part, you'll know exactly how much extra pension you'll receive at retirement.
Contributing the money into a stakeholder or self-invested pension means taking risk. If investment performance is good you might do better than buying extra civil service pension, but there's a fair chance you'll do worse.
Only you can decide whether you're happy to take the risk of using either a money purchase pension or ISA in pursuit of a higher pension, but given you're only five years from retirement I'd be tempted to err on the side of caution and seriously consider buying extra pension entitlement within your existing pension scheme.
I am 60 and I have accumulated some 21 years of civil service pension which will give me a pension of around £23k per year. I intend working for another 5 years and so will accumulate another 5 years of pensionable service . I would like to boost my savings towards my pension.
Am I better off paying into a superannuation fund i.e taking advantage of the fact that the sum invested will come from my pre-tax income or should I pay tax and invest what would then be a reduced amount in Sipps or something similar?Answer
If you contribute money into a pension, whether your civil service scheme or otherwise (e.g. a stakeholder pension or SIPP), then you'll normally receive tax relief on your contributions. This means a £100 gross contribution will effectively cost you £80 if a basic rate taxpayer and £60 if a higher rate taxpayer.
So I think your first decision should be whether to contribute the extra money into a pension (whether your civil service scheme or another) or use a different savings vehicle, e.g. an individual savings account (ISA).
Contributions into an ISA don't benefit from tax relief, but when you eventually take income from an ISA it's tax-free - whereas pension income is taxable.
There's no right or wrong answer here. If you're a higher rate taxpayer now and plan to take a tax-free lump sum from your pension when you retire, then a pension is likely to offer the greater tax advantage (as it looks like you'll be a basic rate taxpayer in retirement). But an ISA is more flexible (you don't have to exchange the fund for an income on a certain date) and tax-free income could be increasingly valuable if tax rates rise.
Either route is unlikely to be a bad decision, but it's worth giving some though as to which is likely to be most beneficial to your situation. You can read more about pensions versus ISAs on our ISAs page.
If you decide to top up your pension you'll have two main options. Either to buy extra annual pension within your civil service scheme or contribute into a money purchase type pension where your pension will depend on the amount contributed, investment performance and annuity rates.
You'll need to contact your pension scheme administrator to get a quote for buying extra annual pension, as the cost varies between schemes and depends on your age and time until retirement. Assuming you're in a local government pension scheme the cost is likely to be around £90 per month per extra £250 of annual pension at retirement for a male aged 60 retiring at 65 (£100 if female). The advantage of this route is that there's no investment risk on your part, you'll know exactly how much extra pension you'll receive at retirement.
Contributing the money into a stakeholder or self-invested pension means taking risk. If investment performance is good you might do better than buying extra civil service pension, but there's a fair chance you'll do worse.
Only you can decide whether you're happy to take the risk of using either a money purchase pension or ISA in pursuit of a higher pension, but given you're only five years from retirement I'd be tempted to err on the side of caution and seriously consider buying extra pension entitlement within your existing pension scheme.
Read this Q and A at http://www.candidmoney.com/questions/question285.aspx
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