Pension Tax relief

Malcmandy

I am receipt of a State and Occupational Pension. I pay basic rate tax of £3,500 above my £9490 allowance. Would I be able to start a new Pension plan, in order to alleviate some of the tax that I pay ? If so, how would I go about it ?
Thanx.

jem16

Do you mean you are £3500 above the allowance or that you pay £3500 worth of tax?

Will the tax saving be worthwhile? What will you do with the pension?

JOHNGT

You can pay pension contributions up to 100% of earnings but pensions don't count as earnings. However, if you are under 75 (from your allowance you are over 65 and under 75) you can pay £3600 a year gross into a pension, regardless of your income.

If you only have £3500 INCOME above your personal allowance and therefore pay £700 in tax a year (which is what I think you mean because if you paid £3500 tax, your personal allowance would be reduced because you would be over the age allowance income threshold), you can still pay £3600 and get basic rate tax relief on all of it.

You pay in £2880, pension company invests £3600 after claiming difference from HMRC. If you take it immediately, you can take £900 in tax-free cash, which means the net outlay to you is £1980. You can then use the remaining £2700 to but an annuity which will give you more income.

Doing this will eliminate the £700 tax you pay, but as jem16 says, do you need more income?

Loughton_Monkey

Despite being retired, I pay my £2,880 every year. Provided you take the 25% tax free lump sum, it does represent a good "gift" from HMRC.

You are, of course, taking an investment risk if you let it accumulate. Taking Johng's scenario, though, avoids the investment risk

maggieann155

Very interesting LM.So do you have lots of small annuities?
This sounds like something to think about for me and my husband .
I presume you do this for yourself and your wife?
What kind of annuity, level,or increasing?
Or joint maybe?
Further information on how it works for you would be appreciated please.

zygurat789

You put £2880 in a pension, the taxman makes it up to £3600. You take 25%, net outlay £1980. Costs, say 1%, £36.
So £2664 to buy an annuity at 6.45% (male aged 65) is £171.82pa. This is 8.68% pa on the outlay of £1980.
After 12 years you have got your money back and are still receiving 8.68%.
With a drawdown the fund, after 12 years woukld be worth
very little and would cease to provide any income.

kidmugsy

@maggieann: there's a relevant thread here
https://forums.moneysavingexpert.com/discussion/comment/30394029#Comment_30394029

Loughton_Monkey

maggieann155 wrote: »

Very interesting LM.So do you have lots of small annuities?
This sounds like something to think about for me and my husband .
I presume you do this for yourself and your wife?
What kind of annuity, level,or increasing?
Or joint maybe?
Further information on how it works for you would be appreciated please.

No. I am simply paying into them and watching them grow.

Since I have well over £20K in 'secured' pensions, I can use 'Flexible Drawdown'. So in my case, the strategy is very clear. It is (a) an extension of S&S ISA, where I can invest in funds without fearing CGT, with (b) a 'bonus' of the tax free cash lump sum which is effectively 6.25% 'free' money.

For my wife, it is (b) only.

Given that I am early retired, my 'game' is to manage my available cash in an optimum way. For the last 5 years, at least, the combination of equities growth, fixed term cash interest, and 'instant' cash interest has given me enough income not only to supplement my pension income, but actually to grow my asset base. It should be shrinking gradually.

But as I get older, I need to wind down the %age equities - but the pension will be the last to go - because of the tax relief.

robbieroy

This is an interesting thread and I would like to find out a bit more about this. Personal circumstances:
- recently took voluntary severance from work and took an actuatily reduced pension and lump sum
- can get by on my monthly pension
- lump sums are invested
- could afford to to put in £2880to an additional pension (is this a one-off payment or is it annual)
- I am interested in the tax relief side of this.
Basic information/explanations or links would be greatly appreciated.
Thanks in anticipation
RR

kidmugsy

"£2880 to an additional pension (is this a one-off payment or is it annual)": annual - every tax year.

What do you see as your need for income - is it to see you through until your State Pension begins?

What do you see as your need for capital - is it "rainy day" money, protection against the risk of house repairs, car replacement, private funding of medical treatment, and so on?

robbieroy

Thanks for taking the time to reply kidmugsy

kidmugsy wrote: »

"£2880 to an additional pension (is this a one-off payment or is it annual)": annual - every tax year.

But I need not pay this every year, i could do this for say 3/4 years?

What do you see as your need for income - is it to see you through until your State Pension begins?

I am 57 and so have a few years before state pension kicks in
I can get by on my monthly pesnion at present - no debts or mortgage to worry about and I will have a twice annual income for luxuries such as holidays, house redecoration etc
Most of my portfolio investments are not in an isa wrapper and I think the plan will be to use my full isa allowance each year to move them to an isa.
If this happens then it may be useful to explore other tax efficient means of deploying some of my savings (not in an isa) - hence my interest in this thread.

What do you see as your need for capital - is it "rainy day" money, protection against the risk of house repairs, car replacement, private funding of medical treatment, and so on?

I have capital in cash isa and short term savings bonds. House repairs an possibly new car might be required to be paid from this.
Anything else that you need to know to help further?
Thanks so far
RR