The Daily Telegraph - Saturday - Money
‘I earn £80k – can I afford to retire at 60 to aid charity?’
David Hall, 55, wants to volunteer in dementia care. What are his pension options, he asks. By Madeleine Ross
David Hall would like to retire from his job in a telecommunications company soon in order to dedicate more time to helping those with dementia.
The 55-year- old took a break from his upper management role in order to look after his mother when she was diagnosed with the disease.
After she died, he went back into the industry, but took a pay cut to join the company he wanted to, and is currently earning up to £ 80,000 with bonuses.
He said: “It’s not that I am not enjoying what I am doing but I did learn an awful lot about dementia and the impact on families while caring for my mother. One thing I was thinking about is if I could maintain a reasonable income, I might step away and look at doing something in terms of support and care in the dementia space.”
Mr Hall has two grown-up children, who are both financially independent, and he is divorced, having separated from his wife a few years ago.
He has paid off the mortgage on his three-bedroom house, and has maxed out his £50,000 Premium Bond allowance. He also has some cash Isas, which give him flexibility over withdrawals, with a few thousand in each.
Alongside a personal pension, he has a defined benefit pension from a previous job that he would be able to take a £40,000 tax- free lump sum from. Mr Hall can take the defined benefit pension now, if he accepts an extra charge for taking it early, or in full from the age of 60.
As he is a higher-rate taxpayer, he wants to know whether he could claim additional tax relief by putting the lump sum straight into his personal pension. “One of the options is that I could take a tax- free lump sum of £40,000. That would reduce my pension per year payment by about £ 1,000,” he said. “Could I take that £40,000 and effectively swing it into my personal pension?”
Rosie Hooper Chartered financial planner at Quilter Cheviot
David has the commendable goal of dialling down the amount of work he does in his high-paying job and dedicating more time to charitable dementia care. But to do this, he must navigate his finances carefully to maintain both a reasonable income while transitioning to doing more charitable work.
First and foremost, David’s thoughts around transferring his tax-free lump sum (TFC) from his defined benefit (DB) pension into his personal pension need a rethink.
UK pension recycling rules are stringent to prevent the systematic reuse of tax-free pension cash for tax relief purposes. While David’s intention is to maximise his pension contributions, he must ensure this action does not appear as an attempt to exploit tax benefits, which could lead to problems with the taxman down the road.
Instead, he could consider using his TFC for everyday living expenses, which would, in turn, allow him to channel a portion of his current income into his pension without contravening recycling rules.
This strategy leverages the tax relief on pension contributions for higherrate taxpayers like himself, while also adhering to the regulations.
However, he needs to be mindful because if he takes his tax-free lump sum and contributions paid into his personal pension are larger than they would have been because of taking the TFC, then he could be liable to a charge from HMRC.
Other reasons that would prompt an HMRC assessment would be if the amount of tax- free cash you take is more than £7,500, when added to any tax-free cash taken in the previous 12 months. The case is similar if the amount of all additional contributions exceeds 30pc of the tax-free cash.
HMRC is generally only concerned if it sees an increase in excess of 30pc on expected contributions. Only then will it consider applying the extra tax charge, but it is something David needs to keep a very close eye on. Getting professional advice to ensure he stays on the right side of the rules is crucial.
Regarding his DB pension in general, David should thoroughly analyse the consequences of early withdrawal.
Early retirement factors can significantly reduce the pension’s value, often around 5-8pc per annum, which may not compare favourably against the returns he is getting from his Premium Bonds – especially considering the recent reduction in prize fund rates from 4.65pc to 4.40pc. Since these bonds are currently not offering such competitive returns as they were, retaining his pension until the age of 60 without early withdrawal could be more beneficial in the long run, preserving its value and providing a more substantial retirement income and subsidising his living costs from Premium Bonds in the meantime.
Another angle David could explore is reducing his working hours. Reducing his workdays could decrease his overall tax burden by lowering his salary.
As UK taxpayers retain a larger portion of their income when they fall into a lower tax bracket, David might find a sweet spot where he can support his charitable pursuits without significantly impacting his net income.
This approach would also allow him to remain engaged in his professional field while gradually transitioning to retirement and charitable work. Furthermore, with the recent changes in the interest rates for Premium Bonds, David should reassess the effectiveness of holding the maximum allowance in these bonds.
Lastly, considering David’s personal situation – owning a mortgage- free three-bedroom house and living alone – downsizing could be something to consider to free up additional capital. This should be a careful decision.
Neil Rayner
Head of advice at True Potential David has quite a few options available, so it is wise that he has a review with a financial adviser before making any changes.
He has no mortgage debt, which in a lot of cases is why people take their tax-free cash to pay off debt. People normally assume they must take their tax- free cash but, in my opinion, if there is no need, why take it?
Taking the sum would reduce his eventual pension income in retirement so it’s wise to review the need before David makes that decision. When he is 60, he would receive the full benefits of the pension upon retirement instead of a lower income amount offered.
David could take the tax-free cash and recycle this into his personal pension receiving a tax relief as a pension contribution, but this is limited by the pension recycling rules which can be complex. It would be wise to speak with a financial adviser first.
He could instead make Isa contributions with the tax-free cash to keep them money tax-free, maxing out his £20,000 allowance. There is also the potential to look at the British Isa announced in the Budget, where David could have an additional £5,000 to invest, dependent on funds. Filling up tax allowances such as pensions or Isas is always recommended.