PSE and increase in National Minimum wage

[Jaggs]

I currently pay 25% into the RMDCP. This is within what you can while still taking advantage of PSE. When the National Minimum wage rises next April my rough calculation says I could pay 23% and still stay within the limits for PSE. If I were to keep my contribution level at 25% would it only be the roughly 2% that I would be over that would once again be liable for NI or would all of my pension contributions have to stop being done by PSE?

[heapsy]

In April we will all be entering the new CDC pension. AVC payments will stop in their current form. I asked on here about the benefits of paying AVCs into the new scheme. RobertTs reply was that it wouldn't be beneficial to do so, due to the fact that we will be building up an automatic lump sum, as section B members do now. Unlike section B members at present, we will not be able to replace some of the automatic lump using AVCs. My choice will be to pay more into an existing Stocks & Shares ISA. I'm sure RobertT will disagree as he sees the benefit of tax relief from paying into a private pension as better. Each to their own. I'm single and don't want to pay more tax than I need to. I've chosen another fund which replicates, as near as possible, my current AVC arrangement. ISAs benefit from tax when you take them. Not on the way in through tax relief as you get with a pension. The advantage of an ISA would be that you could build up a much bigger lump sum, tax free than you can with a pension. Everyone has different needs with their retirement funds. Some need more than others. Think about your situation. Do you have more than one pension? Inheritance maybe? As I'm a section C member currently, I'm going to use the additional fund I've chosen to act like a further supplement. I intend to retire from RM at 60. Just short of 39 years will be enough for me.

[RobertT]

I currently pay 25% into the RMDCP. This is within what you can while still taking advantage of PSE. When the National Minimum wage rises next April my rough calculation says I could pay 23% and still stay within the limits for PSE. If I were to keep my contribution level at 25% would it only be the roughly 2% that I would be over that would once again be liable for NI or would all of my pension contributions have to stop being done by PSE?

If you go over the limit you will lose the benefit of PSE altogether, so it's best to reduce your contributions accordingly.

But as has already been mentioned by heapsy, the new CDC scheme is due to start sometime in 2022(no definite date has been mentioned yet) so you will have the choice of joining that or joining the Nest DC scheme, which has significantly lower contributions.

[RobertT]

In April we will all be entering the new CDC pension. AVC payments will stop in their current form. I asked on here about the benefits of paying AVCs into the new scheme. RobertTs reply was that it wouldn't be beneficial to do so, due to the fact that we will be building up an automatic lump sum, as section B members do now. Unlike section B members at present, we will not be able to replace some of the automatic lump using AVCs.

Depending on how the CDC scheme is valued for lump sum and Lifetime Allowance purposes, there is scope to at least pay into the Lump Sum Booster to increase the lump sum up to around 25% pot value.
But the method of valuation is not yet known, as least not to me!

I think the Lump Sum Booster is a no brainer for CDC members, just like Bonusplan is for section C'ers.

Paying AVC's aswell to gain extra lump sum via the CDC scheme may not be best from a tax point of view.
But I see no reason why it won't be possible to pay into the new AVC scheme, taking advantage of the tax breaks and then transfer out to a personal pension for drawdown, which might potentially be more tax efficient(depending on the individual) as well as more flexible to enable earlier retirement before 67.

My choice will be to pay more into an existing Stocks & Shares ISA. I'm sure RobertT will disagree as he sees the benefit of tax relief from paying into a private pension as better. Each to their own. I'm single and don't want to pay more tax than I need to. I've chosen another fund which replicates, as near as possible, my current AVC arrangement. ISAs benefit from tax when you take them. Not on the way in through tax relief as you get with a pension. The advantage of an ISA would be that you could build up a much bigger lump sum, tax free than you can with a pension. Everyone has different needs with their retirement funds. Some need more than others. Think about your situation. Do you have more than one pension? Inheritance maybe? As I'm a section C member currently, I'm going to use the additional fund I've chosen to act like a further supplement. I intend to retire from RM at 60. Just short of 39 years will be enough for me.

We've had this discussion before a few times and it always comes down to personal circumstances to one degree or another.
Personally I think it's best to at least build up enough in pensions to make the most of the Personal Tax Allowance, with ISA's being a consideration after that.

If you want to put £100 into AVC's it'll only cost you £68 due to the benefit of tax relief and PSE and with a personal pension it's a cost of £80.
But if you want to put £100 into an ISA it will cost you £100, and considering you have already paid income tax and NIC's on your money, you'll need to have earned £147 gross to be able to put that £100 net into an ISA.

So it's clear that on the way in, AVC's are far better than an ISA. But what muddies the waters is when you come to take your money out. Which is where personal circumstances are important.

All of your ISA money will be tax free on the way out(assuming the current rules don't change).
But with the pension, only the first 25% will be tax free with the remainder being classed as income and taxed under normal PAYE rules.

Whether you actually pay any tax on that money will depend on the amounts involved and how much other income you have, which will obviously vary with the individual.

As a general rule and in my humble opinion, going the pension route is probably likely to be more tax efficient overall for the average postie, but it does involve more planning. While ISA's are generally less tax efficient but are easier to manage.

For me, personal pensions are best suited to drawdown alongside a DB scheme until SPA and/or to enable early retirement before a DB scheme kicks in. That's certainly what I'm planning to do with mine and don't expect to pay much, if any income tax despite having built up a 6 figure amount(which will include my Bonusplan).

I also recognise that many people haven't ever had access to a DB scheme and therefore their DC provision may have to be managed differently.

I also have ISA's to supplement my pension income!
After a recent rethink of my plans I've decided that 35 years is enough for me and will go shortly after my 54th birthday.

It's always going to be horses for courses, so do what's best for you based on your own circumstances and needs.

[Jaggs]

I currently pay 25% into the RMDCP. This is within what you can while still taking advantage of PSE. When the National Minimum wage rises next April my rough calculation says I could pay 23% and still stay within the limits for PSE. If I were to keep my contribution level at 25% would it only be the roughly 2% that I would be over that would once again be liable for NI or would all of my pension contributions have to stop being done by PSE?

If you go over the limit you will lose the benefit of PSE altogether, so it's best to reduce your contributions accordingly.

But as has already been mentioned by heapsy, the new CDC scheme is due to start sometime in 2022(no definite date has been mentioned yet) so you will have the choice of joining that or joining the Nest DC scheme, which has significantly lower contributions.

Thank you for confirming what the PSE situation is.