I'm approaching retirement - should I contribute large amounts now?
17 June 2020
Question by Peter
I am approaching 60 and about to retire.
I am considering spending around £48,000 on additional pension for my classic civil service pension which would buy me £2,000 a year pension and a lump sum of £6,000.
I am a 40% rate tax payer so would get that amount of tax relief on that investment although my pension will be taxable at 20%.
Just wanting to know the pros and cons of investing that money elsewhere because I estimate it will take 14 or 15 years for my pension to start recouping that investment by which point I will benefit from a state pension and income will be less of a problem.
Answered by Carla Brown
Hi Peter, thank you for getting in touch and congratulations on your impending retirement - You are about to begin a new chapter in your life!
As you’re aware, in the Classic Civil Service Pension Scheme you can increase your monthly pension by adding additional lump sum payments. This lump sum contribution into your pension will buy you an additional lump-sum along with an extra monthly income. You can only buy added pension by lump-sum payment if you’ve been the Civil Service Pension Scheme for 12 months or more, and you can make the lump-sum payment only once during the scheme year which runs from the 1st April to the 31st March.
At any time before that deadline the lump-sum payments can be made via salary or via cheque but there is a limit to the amount of pension that you can buy. That limit is reviewed each year and adjusted in line for the cost of living. The overall limit for the Classic Pension Scheme for purchase before the 1st April 2021 is £5800 plus a lump sum of £17,400. This rises after the 1st April 2021 to £5900 plus a lump sum of £17,700. To buy the added pension, you need to complete an Added Pension Application form which can be found on the Civil Service Pension Scheme website.
With regards to tax, you will receive tax relief on the contribution as long as it doesn’t exceed the annual allowance limits set by HMRC. If you make a lump-sum contribution by personal cheque then you have to claim the tax relief from HMRC directly yourself.
You also need to be aware that buying added pension, particularly by lump-sum, will increase the value of your pension from one year to the next, and you could potentially become liable to an annual allowance tax charge. It sounds to me Peter, that you really could benefit from some sound financial advice to take into account your specific circumstances and so I would urge you to make contact with a financial planner who specializes in pensions as it may be that adding the money to the Classic Civil Service Pension is not the right thing for you, and you may be restricted as to how much you can contribute. An alternative option could be contributing to a personal pension elsewhere which could potentially give you greater flexibility over how you drawdown the funds going forwards and allow you to draw a higher level of income before your state pension starts, but I strongly recommend you take tailored advice before making a decision.
Wishing you all the best for the next exciting stage of your life!