Pension contribution argument - opinions please

tubbee2

Ok, before I set this out, let me just point out that I am considered an intelligent person with excessive academic qualifications, a successful career (and 4 grown up children) However, I cannot get my head around this and wondered if someone (other than my husband) can explain it in simple language....

Because of my age (52) if I make a payment of £X into my pension from my taxed income then I can make a claim for repayment of the tax on that payment (not sure how perhaps you could add this to the explanation) and then (presumably after the repaid tax has arrived into my pension) I can arrange to move £Y from the pension (is this £X plus tax contributed or just £X) into anywhere I please?

I haven't given much attention to pensions so far, as you can probably tell!

Many thanks if you've made it this far

TB2

Lokolo

I have never done this but I believe the tax relief stays in your pension.

So if you put £80 net into a pension you then get £20 tax relief on top into the pension.

I believe this is done automatically by the pension provider.

Linton

You cant withdraw a tax free lump sum until you are 55 and it is limited to 25% of the pot. Also you can only exercise this option once - you cant then add more to your pension and take another 25%.

So say you had 75K in your pension and you were aged 54. During that year you could put 20K from your net pay into the pension, have it grossed up to £25K by HMRC and then withdraw 25% of the total (£25K) tax free leaving you with the £75K you started off with.

Apart from the limitations stated above, you cant put more annually into your pension than your earned income.

Whether this wheeze is a good idea or not would depend on the details of your circumstances.

somethingcorporate

From my experience the basic rate adjustment is done automatically from your pension provider.

If you are a higher rate tax payer you need to tell HMRC via a letter or self-assessment of your contributions and they will either adjust your tax code or give you a cheque for the additional relief. If it is either of these then it need not go into your pension.

For the basic rate relief this is automatically added to your pension and you cannot remove it.

Chris_P_2

Linton wrote: »

. Also you can only exercise this option once - you cant then add more to your pension and take another 25%.

.

yes you can. You can take your 25%, take an income, pay this income back into your pension to reclaim the tax paid, and then take another 25% tax free lump sum.

Chris_P_2

tubbee2 wrote: »

Ok, before I set this out, let me just point out that I am considered an intelligent person with excessive academic qualifications, a successful career (and 4 grown up children) However, I cannot get my head around this and wondered if someone (other than my husband) can explain it in simple language....

Because of my age (52) if I make a payment of £X into my pension from my taxed income then I can make a claim for repayment of the tax on that payment (not sure how perhaps you could add this to the explanation) and then (presumably after the repaid tax has arrived into my pension) I can arrange to move £Y from the pension (is this £X plus tax contributed or just £X) into anywhere I please?

I haven't given much attention to pensions so far, as you can probably tell!

Many thanks if you've made it this far

TB2

NO.

if you pay X into your pension you will get X/0.8 credited to your pension by the pension company (via HMRC).

If you pay higher rate tax you reclima this via self assesment which adjusts your tax bands, and so the additional 20% will not go into your pension.

so your X payment plus 25% can be moved to another pension, but only 25% generally) can be taken out as a lump sum.

tubbee2

Thank you to everyone who replied. So, if I pay say £1000 into my pension from my taxed income then I will be credited with say £200 (for round figures) This then means I have £1200 in my pension.
Do I have to leave this in the pension until I am 55 or can I remove 25% of the £1200 (£300) and pay this into say an ISA? And can I only do it annually, monthly, or whenever I make a payment in? Is there a cap on the number of times I can make payments in (and then bounce them out) - I understand there is a limit to the amount of money I can pay in but I'm a good way off that!

All replies much appreciated, it cuts down on the arguments in the TB household as I seem to need to digest pension information in very, very small chunks.

TB2

jem16

tubbee2 wrote: »

Thank you to everyone who replied. So, if I pay say £1000 into my pension from my taxed income then I will be credited with say £200 (for round figures) This then means I have £1200 in my pension.

No it would mean you gain £250 tax relief and have £1250 in your pension. Tax relief is always worked on gross figures not net.

Do I have to leave this in the pension until I am 55 or can I remove 25% of the £1200 (£300) and pay this into say an ISA?

Money paid into a pension must remain there until you are at least 55. Nothing can be removed.

The whole idea of the pension is to save for your retirement which is why you are given tax relief as an incentive. It's not a savings account.

Linton

tubbee2 wrote: »

Thank you to everyone who replied. So, if I pay say £1000 into my pension from my taxed income then I will be credited with say £200 (for round figures) This then means I have £1200 in my pension.
Do I have to leave this in the pension until I am 55 or can I remove 25% of the £1200 (£300) and pay this into say an ISA? And can I only do it annually, monthly, or whenever I make a payment in? Is there a cap on the number of times I can make payments in (and then bounce them out) - I understand there is a limit to the amount of money I can pay in but I'm a good way off that!

All replies much appreciated, it cuts down on the arguments in the TB household as I seem to need to digest pension information in very, very small chunks.

TB2

If you are a standard rate tax payer (or a non tax payer), paying in £1000 in a year will get you £1250, not £1200, in your pension. That's because tax is 20% of the gross, ie £1250. You can put as much as you like into pensions up to a maximum limit of your earned income or £50K, whichever is the lower.

You can only take out 25% tax free out of any individual pension once, and only when you reach 55. It may or may not be a good idea to do this as you are forgoing the 25% of any increase in value up to the point you actually retire.

Of course if you set up separate pensions of £1250, then you can separately access 25% of each once, at different times.

Where is the advantage in taking 25% out of one tax-free environment just to put it in an ISA, another tax-free environment? Seems a bit pointless, why not leave it where it is and take a larger 25% later?

soperman

You do not need to effect a series of separate pension plans of £1250 each to access the cash lump sum at different times. One alternative would include transferring a single pension pot to an Income Drawdown Plan at the time you need the first cash payment. Under a Drawdown Plan you can withdraw your cash lump sums gradually. A second alternative would be to effect a SIPP now as in most SIPPs, Income Drawdown is an automatic option. Whatever you do, the minimum age for withdrawing any part of your pension plan is 55.

Loughton_Monkey

tubbee2 wrote: »

.....I haven't given much attention to pensions so far, as you can probably tell!

It's difficult to understand what your 'motive' here is. Perhaps you are trying to reconcile why you get 20% tax relief, and to get your hands on it. It doesn't work like that.

At its very simplest, it works like this for a basic rate tax payer:

1. Every £80 you pay into a pension appears in your pension statement as £100 automatically. This is a slick way of doing it, but all it has done is given you the 20% relief on your £100 'gross' contribution.

2. At any time after age 55, you can 'take' [correct term crystalise] your pension. If you take it all as pension, then every month's pension will be taxable and as a general rule, this means that the tax man is simply taking all his tax relief away from you.

3. It therefore follows, that taking 100% of your pension pot as an annuity is not always a good idea. [this assumes you are a 20% tax payer before you take it, and remain a 20% tax payer after you take it]. Basically, it's as if the tax monkey has jumped on your back and put in £20 every time you put in £80, and then when you take it, he gets £2 for every £8 you get.

4. This is where the 25% tax free lump sum comes in. By taking this, you are effectively stealing 25% of the tax monkey's fund, and he gets only 75% of what he would have got if you took 100% as pension.

5. So mathematically speaking, you throw everything you want into a pension. I'll mirror exactly the same fund, exactly the same amount, except I'll put it in my ISA. At the date you decide to 'take' your pension, provided you take the 25% lump sum, then you will have precisely 6.25% more assets than I. The difference will be that my pot of money is totally mine, not taxed at all, and its all there to spend whenever I like. Apart from your 25%, you, however, are required to take your other 75% 'on the drip'.

For most of us, we decide to invest in these things for our retirement. Hence our objective is to provide income rather than cash - since we use our cash simply to draw down slowly as needed. Hence, the 6.25% 'extra' money is a reasonable motivation to follow the pension route.

Those who can get tax relief at 40% (or more) but suffer only 20% when they take it are clearly almost 'forced' to use pensions if they have any sense. Similarly, any person who can get 20% relief on payments, but avoid any tax on the pension would be equally advised to do that - although since State Pension entitlement usually gets pretty close to the tax allowance, those cases are rare.

Finally, I would point out that there are lots of 'wrinkles' I haven't mentioned. You can take a lump sum and keep the 75% invested for later. You can take 'drawdown' instead of buying an annuity, but all of these have advantages/disadvantages and are generally for those with significant pension pots.