I am a serving police sergeant and will retire at 60 years of age. With the recent government pay increase, I am due a raise, which will mean that from September I will be earning around £53,000 a year.
I pay into the police pension scheme, which has a 13.44 per cent deduction from my salary, which means my actual earnings before tax will be more like £43,000-£45,000.
My wife and I are eligible, as it stands, for child benefit payments.
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However, overtime is quite frequent and it would not be unexpected for me to earn between £50.00 and £10,000 per year in overtime. Overtime is not pensionable.
Right now, I pay the same percentage as before of my overtime in stocks and Lifetime Isa shares, which I obviously get when I’m 60. However, this has been taxed now, rather than 22 years from now when I retire.
So earning this amount in overtime would obviously take me over the £50,000 threshold, meaning I would no longer be eligible for the child benefit or would have to pay tax at a higher rate to make up for it.
To avoid this, would it be worth contributing a portion of my overtime to a private pension that I could withdraw as cash later in life?
They told me I could start doing this at 57, three years before I received my police pension. Or, given the cost and value of my police pension, would I also lose taxable benefits this way?
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Steve Webb responds: For someone in your situation, making additional pension savings instead of saving through Lifetime Isa could have many attractions.
However, you are understandably concerned about how your current income, including overtime, or collecting pension income later if the child benefit is still an issue at that time, will increase the child benefit charge you could face.
To start with the basics, the High Income Child Benefit Charge (HICBC) applies where someone receives child benefit and where he or his partner has a ‘net income’ (see below) of £50,000 per year or further.
For every £100 your net income exceeds the £50,000 threshold, you will be charged 1% of your child benefit, up to a maximum of 100% for those with a net income of £60,000 a year or more .
For example, at current benefit rates, a family with one child would receive £24 per week or £1,248 per year.
If one of the partners had a net income of £55,000, this would result in a charge of 50 per cent of the child benefit amount, or £624.
Keep in mind that the child benefit is still paid in full, but the highest earner receives an additional tax bill.
As you have pointed out, the way HM Revenue & Customs (HMRC) calculates your net income for these purposes is to deduct pension contributions first.
Your contribution to your police pension therefore brings your basic salary below the £50,000 threshold. If you do not earn overtime, then you would not have to pay HICBC.
Unfortunately, however, Lifetime Isa payments are not deducted when figuring your net income. This seems unfair given that Lifetime Isa is in effect a type of pension.
If you were to stop contributing to your Lifetime Isa and put the same amount into a personal pension or similar, these contributions would be deducted and could well put you below the £50,000 threshold, even in a year when you earn overtime.
Better yet, because you are a higher rate taxpayer, you would get a higher rate tax break on your pension contributions.
For example, if you pay £80 of your take-home pay into a personal pension, HMRC will top it up with £20 to give you £100 in your pension fund.
The £20 represents a tax relief from the base rate on the £100 contribution. But someone of her income level who pays £100 in pension should get £40 in tax relief, not £20. Therefore, he can complete a tax return and get an extra £20 as a tax refund.
Generally speaking, you get a higher rate relief on the bit above the higher rate threshold.
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This is Money columnist Steve Webb calls elderly widows who might have missed a late payment when their husbands passed away to get in touch.
She wants to help people get the money that is rightfully theirs, and to find out if there is a systemic problem that went undetected in the government’s massive fix exercise for underpaid older women.
Find out if you might be affected and how to contact Steve here.
> Did you lose your state pension if you were widowed when you retired?
So, in effect, if your contribution takes you well above to well below the threshold, you get a base rate reduction on the first slice and a higher rate reduction on the second slice.
Another advantage of saving for a pension is that you can access the money earlier than in Lifetime Isa, at least for now.
Since you’re still paying in Lifetime Isa, I’m assuming you must be under 50.
For someone your age, the ‘normal minimum pension age’ (at which you can access your pension) is currently expected to be 57, although this could increase as the state pension age rises. By contrast, Lifetime Isa cannot be accessed until age 60.
But it’s worth bearing in mind that if you still have a child young enough to qualify for child benefit at this point and you decide to start drawing your (new) personal pension at age 57, this would be added to your net income and you could then find yourself with a large HICBC to pay.
One key point I would make is that just because you can access a personal pension at age 57 doesn’t mean you should or should.
If you’re still working at that point, you’ll presumably still have a good income and therefore may not need to withdraw your pension fund.
And if you add your pension withdrawals to a good salary, then you’d be paying 40 percent in tax on the money you withdraw (beyond any tax-free lump sum), whereas if you can wait until you retire, it’s You may be able to take the money out gradually and only pay 20 percent in tax.
Ask Steve Webb a pension question
Former Pensions Minister Steve Webb is Uncle Agony from This Is Money.
He’s ready to answer your questions, whether you’re still saving, in the process of leaving work, or juggling your finances in retirement.
Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner at the actuary and consultancy firm Lane Clark & Peacock.
If you would like to ask Steve a question about pensions, please email him at email@example.com.
Steve will do his best to respond to your message in a future column, but he won’t be able to reply to everyone or correspond privately with readers. Nothing in his responses constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.
Include a daytime contact number with your message; it will be kept confidential and will not be used for marketing purposes.
If Steve can’t answer your question, you can also contact MoneyHelper, a government-backed organization that provides free pension assistance to the public. can be found here and his number is 0800 011 3797.
SteveWe get a lot of questions about state pension provisions and COPE, the outsourced pension equivalent. If you write to Steve about this topic, here he answers a typical reader’s question about COPE and state pension.
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