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  • FIRST POST
    • nxdmsandkaskdjaqd
    • By nxdmsandkaskdjaqd 3rd Jan 17, 8:39 AM
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    nxdmsandkaskdjaqd
    Paying £2880 into pension when retired
    • #1
    • 3rd Jan 17, 8:39 AM
    Paying £2880 into pension when retired 3rd Jan 17 at 8:39 AM
    Jamesd wrote in another thread the following:
    "She can make £720 a year tax free by paying 2880 net into a pension, having it grossed up to 3600 then withdrawing it. Can only do the withdrawing part from age 55. Can only pay in for this until age 75."

    I have just retired at 60 and have transferred my DC pension to a new SIPP. I plan to live off savings till state pension kicks in.

    I am correct that the above approach should be part of my strategy of being tax efficient?
    Last edited by nxdmsandkaskdjaqd; 03-01-2017 at 10:14 AM.
Page 3
    • roxy28
    • By roxy28 5th Jan 17, 5:05 PM
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    roxy28
    So dad is just 61 and drawing his work pension of £10,000 per year and around £1,200 in savings interest estimate.

    No other income so would he pay tax on the £2.880 + £720 if he withdrew it each year?
    • Nationwide8
    • By Nationwide8 5th Jan 17, 5:10 PM
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    Nationwide8
    As xlyophone says, your savings are covered for £1000 tax free. So, if the savings were not in any isa then at most only £900 would be taxable. So in total you would still be under the £11,000 threshold.

    .
    Originally posted by saver861
    Yep so Pension of £7000 + £2700 from SIPP ( if I took that much out in a year ) plus interest earned above £1000 = £1000 year ( double checked it and I might get about £2000 interest at the most this year ) Total = £10700 year ,which means non taxable as below PA.

    Edit..just reading about 0% tax band on the previous page ( Thank you xylophone for the link )...as my income would be £9700 ( before interest income ) and is below £11000 PA + £5000 ( ie £16000 )...my interest income shouldn't come into it anyhow.

    I think !!!
    Last edited by Nationwide8; 05-01-2017 at 6:02 PM.
    • Nationwide8
    • By Nationwide8 5th Jan 17, 5:24 PM
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    Nationwide8



    The 75% part is normal taxable income and the pension firm's PAYE system will deduct income tax using the tax code sent to them by HMRC.
    Originally posted by jamesd
    Would the pension firm ie HL just automatically deduct income tax if I say took out £2700 even though as above I wouldn't' exceed my PA ?

    Do you have to claim the tax back later from HMRC or would they automatically refund at some point ?

    Also wondering how long it takes HMRC to add the £720 ( if I put £2880 in before April 6th 2017 ? For 16 -17 tax year )
    If I do this again after April 6 th 2017 for 17-18 tax year don't want to take out two lots of £2700 in that one tax year as that would put me into paying tax on some of it.
    Hope that makes sense !!
    Last edited by Nationwide8; 05-01-2017 at 5:40 PM.
    • bowlhead99
    • By bowlhead99 5th Jan 17, 5:36 PM
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    bowlhead99
    So dad is just 61 and drawing his work pension of £10,000 per year and around £1,200 in savings interest estimate.

    No other income so would he pay tax on the £2.880 + £720 if he withdrew it each year?
    Originally posted by roxy28
    In your Dad's situation he should try to create and draw enough pension income to keep using up the full £11,000 personal allowance (which increases to 11,500 in April, which might give him a bit more space on top of the work pension, if the other pension doesn't increase as much by as much as £500).

    Beyond that, there is scope to make some more free money, but some tax is inevitable - 25% of the money which you end up with in a pension can come out tax free but the rest will be taxable to the extent it can't fit into his annual personal allowance.

    So how it works is:

    When he gets the £3600 in his pension (from paying in the maximum £2880 and getting the £720 free gross-up) he will be able to take out 25% entirely tax free, which is £900.

    Then the remaining £2700 out of the £3600 is classed as new pension income and would be potentially taxable, depending on whether it fits inside his annual allowance.

    His annual allowance is £11,000 so after getting his work pension he has £1000 of space to take some of the £2700 new taxable pension money. It would leave him with £1700 that couldn't fit into the annual allowance.

    As a little aside at this point, the £1200 interest income - which always sits 'on top' of the earned income and pension income - will no longer fall into the annual allowance because now the new pension income is using that space. But that's fine, because on top of his £11k personal allowance there is a nice fat band of special tax rate for interest income for low earners: the starting rate of tax on interest income is 0%. So no tax to pay on the interest (even ignoring the fact that everyone gets a £1000 tax free interest allowance if they're below the 40% tax threshold...)

    So, getting back on track, we said he would have £1000 of the new £2700 taxable pension fit into the annual £11k personal allowance, and another £1700 that doesn't fit. The £1700 is taxed just like employment income or other pension income, i.e. it doesn't qualify for the special 0% rate for interest income on low earners. He would pay 20% on this £1700.

    20% tax on the £1700 is £340. Effectively he gets given £720 free by the government inside his pension pot, but when he withdraws it later that year he only pays £340 of tax when he takes it out. Nice work if you can get it.

    Of course, getting out ALL of the money this tax year to access the full (£720-£340) of profit would require closing the account he just opened. As that will incur fees, and he doesn't need more than £1000 of taxable income on top of his work pension to utilise the rest of his annual allowance, if he doesn't need the money for something else he could just leave most of it invested in the pension for now, and just draw out say £1300 in March (25% tax free, remaining £975 fitting neatly inside his 2016/17 personal allowance).

    He could draw another £1300 out after April to use up the capacity in his 2017/18 allowance. Then with the two lots of £1300 received tax-free back into his bank account, and £1000 still in the pension, he'd almost be able to afford another full £2880 contribution for the 2017/18 tax year, which would get turned into a fresh £3600 and sit alongside the remaining £1000 undrawn from earlier. So, £4600 at that point.

    Invested sensibly that £4600 would allow £1200 to be drawn out tax free in each of the next three tax years (i.e. 2018/19, 19/20, 20/21) by using up the 'spare' space in his personal allowance. Alternatively he could take out the whole balance (taxable) at any point (less account closure fees), or just take out enough of it to help with ongoing new contributions of £2880 going back in again. Lots of options and few restrictions other than some simple rules and some tax rates and allowances to keep an eye on.
    Last edited by bowlhead99; 05-01-2017 at 6:25 PM.
    • bowlhead99
    • By bowlhead99 5th Jan 17, 6:04 PM
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    bowlhead99
    Would the pension firm ie HL just automatically deduct income tax if I say took out £2700 even though as above I wouldn't' exceed my PA ?

    Do you have to claim the tax back later from HMRC or would they automatically refund at some point ?
    Originally posted by Nationwide8
    As a one off payment when HL don't have a tax code for you they would just charge you basic rate tax or some 'emergency tax' rate, like if you had started a new job without bringing the P45 and tax code from your last place.

    The tax that you paid when it didn't need to be paid, can just be recovered from HMRC, you will get it quicker if you ask for it.

    Also wondering how long it takes HMRC to add the £720 ( if I put £2880 in before April 6th 2017 ? )
    This would vary by provider.
    HL's timetable would be, if you pay in by the 5th of a month they will claim it and get it added to your account by the 21st of the following month. So, if you made a contribution on 5 Feb (ok, that's a weekend, try Friday 3rd Feb), the tax relief would arrive by 21 March and would be available to draw down as pension income or lumpsum in time for the end of the tax year. If instead you made a contribution on 5 April, the extra money would arrive in late May, so couldn't be drawn until then.

    In other words if your goal is to create as much extra income as possible during the 2016/17 tax year to use up your personal allowance for that tax year, don't wait until after 5 February to get your SIPP open and your £2880 contribution made, because your free money won't have arrived, and you'll only have £2880 in your account as you approach the end of the tax year, and the remaining £720 would have to be drawn in some future tax year instead.

    If I do this again after April 6 th 2017-18 tax year don't want to take out two lots of £2880 in that one tax year as that would put me into paying tax on some of it.
    Hope that makes sense !!
    Yes, so if you want to make the most of your current year allowance, you should make the contribution in good time to get the tax relief to top you up to £3600 BEFORE April this year, and then you can draw out a good chunk of that total and make use of your 16/17 annual allowance and still leave more than a token amount in the account so HL don't close it and charge you a whopping admin fee.

    Example, put in £2880 now, it turns into £3600, then in late march/early april you leave £300 in the account to keep it alive and draw out £3300, of which 25% is taxfree and 75% emergency-taxed at 20% leaving you with £495 to claim back from HMRC and £2805 in your hand.

    Then in mid April you can put in £2880 (using the £2805 you just got back from HL and £75 quid of some other cash you have knocking about) and by June, HL will have turned this into £3600, which together with the £300 left in there from earlier is £3900 inside the pension. And you will probably have completed your £495 claim from HMRC by that point too, so by this summer you will have basically got £495 in your hand fresh back from HMRC, and £3900 in your pension pot, for an outlay of £2880 today and £75 in April.

    If you need the money back this summer you can draw down on the £3900 pension as 2017/18 income, or you could actually put it in an investment and draw some of it in late March / early April 2018 and repeat the process.
    Last edited by bowlhead99; 05-01-2017 at 6:25 PM.
    • Nationwide8
    • By Nationwide8 5th Jan 17, 6:14 PM
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    Nationwide8
    bowlhead99 just wanted to say Thank you for so much advice,am reading it and digesting
    • Nationwide8
    • By Nationwide8 5th Jan 17, 6:23 PM
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    Nationwide8
    As a one off payment when HL don't have a tax code for you they would just charge you basic rate tax or some 'emergency tax' rate, like if you had started a new job without bringing the P45 and tax code from your last place.

    The tax that you paid when it didn't need to be paid, can just be recovered from HMRC, you will get it quicker if you ask for it.


    l
    Originally posted by bowlhead99
    Once they have my tax code,given my income is just £7000 before SIPP income they should not tax me on anything I draw out .....Yes ?

    Also just checking,not sure if its best to leave £1000 in the SIPP ?
    Last edited by Nationwide8; 05-01-2017 at 6:38 PM.
    • bowlhead99
    • By bowlhead99 5th Jan 17, 6:37 PM
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    bowlhead99
    Once they have my tax code,given my income is just £7000 before SIPP income they should not tax me on anything I draw out .....Yes ?
    Originally posted by Nationwide8
    Yes that's probably correct, for example if you get a state pension and a 'normal' monthly pension you don't have to always pay too much tax and chase HMRC for it.

    However, my Mum is in a similar situation to you and doing this for the first time (not the first time I've suggested it of course...). We did her budget on the assumption that she set up the account and drew a lot of it out very quickly, and had to wait around to recover tax. As could perhaps be the case when someone only realises late in a tax year that they like the idea of doing this

    If you opened an account on a Friday and then demanded a big drawdown the following Monday, this may not be sufficient time for them to get tax coding paperwork in place to support a zero rate of withholding. So my example numbers above just assume you'll pay a bit of tax and then tell HMRC you paid a bit of tax and they can send it you back. "Prepare for the worst" is not a bad philosophy. I don't have any direct experience with HL as a provider as mentioned, Mum only doing it for the first time this year. She has ISA with them so they are an easy choice though not the only one in the industry with similar charges of course.
    • Nationwide8
    • By Nationwide8 5th Jan 17, 6:59 PM
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    Nationwide8
    I keep thinking there must be a "catch" with it somehow,£720 a year is a lot of money to me and when did HMRC ever give you anything for ( what it seems ) not much work ?...am just getting my mind around the whole set up !!
    Even just doing it for a few years or whatever or until SPA in 12 ys ( if I get there) must be a good idea.

    Am assuming you went with a Cash SIPP for your mum ?

    ...and if taxed claiming it back is by filling in a R85 form or ring HMRC ? ( But hear horror stories about ringing them unless its got better ).
    Last edited by Nationwide8; 05-01-2017 at 7:19 PM.
    • enthusiasticsaver
    • By enthusiasticsaver 5th Jan 17, 7:45 PM
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    enthusiasticsaver
    Actually (in case people were just assuming this gets you access to the £720 of relief instead of just £200, it's better than that) - if you only earn £12000 you can put £9600 net into a 'normal' personal pension scheme and the provider is allowed to do the standard gross-up to the £12000, for a full £2400 of tax relief. Yes, even if you wouldn't have paid as much as £2400 tax on the income.

    Your gross contributions are allowed to be as high as your gross pay, subject to the £40k a year cap (ignoring carry-forward allowances which can increase the £40k cap).

    That government policy, designed to encourage people to invest in pensions for their retirement, only works if you are making a personal contribution to a pension which claims the automatic gross-up direct from HMRC. If you were having deductions taken and paid over out of your gross salary by your employer, it's right that you could only save £200 of tax because after that your gross pay would not be attracting any tax so there's no tax to save via PAYE.
    Originally posted by bowlhead99
    I have just done that having learned of this in last day or so. I earn £12k as a part timer and make £1200 contributions to my LGPS (including AVCs). Have just opened a SIPP with £8k which will be grossed up to £10k in spite of paying less than £200 tax per annum. Most strange but very welcome. I will do the same in 2017/2018 tax year but retire next January so only 2 years benefitted from it.
    5 weeks to go until early retirement in December . Debt free and mortgage free.

    I'm a Board Guide on the Debt-Free Wannabe, Mortgages, Banking and Budgeting boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Pease remember, board guides don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com
    • Theta101
    • By Theta101 6th Jan 17, 3:55 AM
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    Theta101
    What would happen if you put more than £3600 gross into the SIPP one year?

    Say you put in £10,000, but were limited to £3600.

    I guess it would be possible to NOT be aware of the limit.

    Would the SIPP provider just add the £720 and the remainder is untouched?

    I'm sure some people make a monthly contribution into a SIPP. This could easily go over £3600 gross if you don't know about the limit.
    Last edited by Theta101; 06-01-2017 at 3:59 AM. Reason: edit
  • jamesd
    If you pay in too much HMRC will notice and in a few years send you a bill for the tax relief you got on the extra. If you do it by mistake tell the pension firm as soon as you can because they may be able to sort it out more easily than that.
  • jamesd
    if taxed claiming it back is by filling in a R85 form or ring HMRC ? ( But hear horror stories about ringing them unless its got better ).
    Originally posted by Nationwide8
    Easiest way is via your online Personal Tax Account that we all have now. The forms for the various cases are there and HMRC expects to pay in a month or less if done that way.

    Pension tax relief is given in part to keep retirees away from needing means tested benefits. One of the complaints is that a lot of the usual relief goes to higher rate tax payers. Such people are relatively well off and probably won't have a need to do it year by year like this. One of the joys of this is that most of the tax relief is going to the less well off people who society collectively is likely to think need the relief most. It's a nice bit of equalising of a bit of the tax relief potential between the two, particularly for those who don't pay income tax on the way out.
    • RADDERS
    • By RADDERS 6th Jan 17, 9:08 AM
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    RADDERS
    Trying to get my head around al of this. Hubby took early retirement in August at age of 56 and I finished work at the same time aged 53.
    Both worked full time so am I correct in thinking that we can both pay in £10,000 to a sipp this year and receive the tax relief or is it £8,000 and the tax relief makes it up to £10,000 and then going forward the £2,880 each tax year?
    I know that I won't be able to draw on mine for a couple of years but still seems a worthwhile exercise.

    Thanks for any advice as even though I worked in finance, pensions are a bit of a mystery to me. Radders
    • Linton
    • By Linton 6th Jan 17, 10:02 AM
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    Linton
    Trying to get my head around al of this. Hubby took early retirement in August at age of 56 and I finished work at the same time aged 53.
    Both worked full time so am I correct in thinking that we can both pay in £10,000 to a sipp this year and receive the tax relief or is it £8,000 and the tax relief makes it up to £10,000 and then going forward the £2,880 each tax year?
    I know that I won't be able to draw on mine for a couple of years but still seems a worthwhile exercise.

    Thanks for any advice as even though I worked in finance, pensions are a bit of a mystery to me. Radders
    Originally posted by RADDERS
    Provided it is covered by earned income and you wont be exceeding the fixed limits you can put £10K into your pension this year. You do it by actually paying £8K and HMRC will add the extra £2K later. Of course it is only a large benefit if you can later withdraw the money tax free. If you cant the net benefit is the tax on the £2500 tax free lump sum - £500. But dont forget there will be the SIPP charges as well to pay.
    • Hal17
    • By Hal17 6th Jan 17, 12:14 PM
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    Hal17
    Can someone help on the following please. My wife and I took early retirement after both being made redundant. I am 62 and my wife is 61 and both will receive a full state pension when we are both 66.

    We currently both take a pension income on flexible drawdown, that match our personal allowances in order to minimise our tax liability.

    We have been contributing £2,880 into our respective pensions taken from savings and getting the £720 tax allowance. However, going forward, I am not sure if we are correct in doing this, if we pay tax on these additional contributions outside of the 25% tax free when the money is drawn are we making the most of this £2880.

    Not sure if I have explained that very well, and the maths might be simple but I cannot get my head around the numbers. Appreciate any thoughts.
    • Linton
    • By Linton 6th Jan 17, 1:16 PM
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    Linton
    ......
    We currently both take a pension income on flexible drawdown, that match our personal allowances in order to minimise our tax liability.

    We have been contributing £2,880 into our respective pensions taken from savings and getting the £720 tax allowance. However, going forward, I am not sure if we are correct in doing this, if we pay tax on these additional contributions outside of the 25% tax free when the money is drawn are we making the most of this £2880.

    Not sure if I have explained that very well, and the maths might be simple but I cannot get my head around the numbers. Appreciate any thoughts.
    Originally posted by Hal17
    If you have used all your allowance for the drawdown payments then the only benefit of the £2880 game is the basic rate tax on the tax free 25% of £3600 =£180. But you also need to deduct the SIPP charges. You may feel that it's not worth the effort.

    You could reduce your main drawdown amount by £2880 and so get the full tax benefit taking £720 tax free and £2880 from your "recycled" pension.. However when you take your State Pension it becimes rather more difficult to stay within the zero tax band.
    • Hal17
    • By Hal17 6th Jan 17, 3:36 PM
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    Hal17
    Thanks Linton, that was really helpful and helped clarify my thoughts. I was going around in circles.

    Going forward I will adjust my numbers so to maximise the tax free numbers between my wife and myself. Seems little point in putting more cash into my plan if I am not able to draw tax free. Thanks again.
    • Linton
    • By Linton 6th Jan 17, 3:44 PM
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    Linton
    Sorry its £900 tax free and £2700 from the "recycled" pension, so you just need to reduce your main pension drawdown by £2700.
    • saver861
    • By saver861 6th Jan 17, 4:58 PM
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    saver861
    Thanks Linton, that was really helpful and helped clarify my thoughts. I was going around in circles.

    Going forward I will adjust my numbers so to maximise the tax free numbers between my wife and myself. Seems little point in putting more cash into my plan if I am not able to draw tax free. Thanks again.
    Originally posted by Hal17
    Sorry its £900 tax free and £2700 from the "recycled" pension, so you just need to reduce your main pension drawdown by £2700.
    Originally posted by Linton
    Reducing drawdown on your main DC by £2700 will allow you take benefit of the £720 give away. However, it is effectively switching one for the other.

    Once you reach SPA then you will pay the 25% on your main DC drawdown - if you have full SPA there will only be around £3-4k of PA to play with.
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