Pension need to knows Official MSE Guide Discussion

littlereddevil

If you have a private pension and defer taking the 25%, if the money makes money before you take it out do you still get 25% of the higher sum or the 25% as it would have been before you deferred?

Linton

littlereddevil wrote: »

If you have a private pension and defer taking the 25%, if the money makes money before you take it out do you still get 25% of the higher sum or the 25% as it would have been before you deferred?

You get 25% of whatever the value is when you take the lump sum. So yes you do get a larger lump sum if your pension pot improves.

kidmugsy

snapzz wrote: »

I've just had a small pension mature of just over £25k and had a couple of contrasting pieces of advice. Ideally I'd like to take £5,000 in cash but unsure what to do with the rest. I dont want to pay any tax on it but also not sure about leaving it until I'm 75. I'd be grateful of any advice or options for the best return.

I'm now aged 60 and currently still working as self employed.

Further to dunstonh's comment, you might find it to your advantage to withdraw the tax-free 25% and leave the rest alone until you need it. For instance, if there is a gap between you stopping earning and starting drawing State Retirement Pension, it might be handy to draw it then. It might also be that you pay less/no tax on it then.

daleos

MSE_Guy wrote: »

This discussion's specifically to discuss the new MSE Pension Need to Knows Guide.

Click Reply below to discuss it

Hi, Forgive my ignorance, I am a higher rate tax earner and was wondering if I could use salary sacrifice to pay into a personal pension for my wife to get the tax benefit as she does not work. I currently pay into a company pension. Failing that, can I pay into a personal pension for her and claim the tax back ?

thanks

jem16

daleos wrote: »

Hi, Forgive my ignorance, I am a higher rate tax earner and was wondering if I could use salary sacrifice to pay into a personal pension for my wife to get the tax benefit as she does not work.

Salary sacrifice if it's available would be your company paying into a pension for you so no you couldn't do that.

I currently pay into a company pension. Failing that, can I pay into a personal pension for her and claim the tax back ?

thanks

You can pay into a pension for your wife but you cannot claim your own tax back. Your wife would gain the tax relief but as she doesn't work she is limited to paying in £3660 gross. You would pay in the net payment and the pension provider adds the tax relief to your wife's pension.

It's certainly a good idea if your wife doesn't have much pension provision but it won't save you any tax. As a higher rate taxpayer you should be paying more into your own pension and getting the 40% tax relief.

jamesd

Even though you can pay into a pension for your wife it is probably not a good idea to do that while you are in a salary sacrifice pension scheme and she is not. You will get at least 40% income tax relief plus 2% employee NI saving in the higher rate range or 12% in the basic rate range. Possibly plus some employer NI contribution. Contributions for her would only get the 20% income tax relief.

When it comes to drawing the money out, assuming that you are not a higher rate income tax payer then, you'd both be better off by the 20% income tax difference between paying in and taking out (40% to 20% for you, 20% to nil for her up to her personal allowance). But in addition you have those NI gains.

The situation changes if you think that your pension pot will go over the £1.25 million lifetime allowance or if you are already using the maximum £40,000 annual pension contribution limit for yourself. Then it would be a good idea to pay £2880 net into a pension for her to use her £3,600 a year gross allowance.

While paying in to pension contributions for her now looks like a less than optimal solution, this doesn't mean no provision for her. For example, once you're 55 you can take 25% as a tax free lump sum from pension pots. You could take that and then transfer that to her to generate income from other investments and/or use it to fund pension contributions for either of you, having already benefited from the higher income tax and NI relief that you got originally on the money.

daleos

Thankyou all for the responses, found them really helpfull.
One other question, I have just stumbled on the HMRC website and it suggests that only the first 20% tax is given as relief at source, the additional 20% you have to claim through a self assessment or contacting HMRC by phone or letter. Is this correct or am I misreading it ?
I do not complete a self assessment form and have never contacted HMRC regarding this.

thanks again

jamesd

In a salary sacrifice scheme the money is taken before any of it goes to payroll for you so neither income tax nor NI is ever deducted from it. So you get the full relief automatically.

The HMRC page you've looked at is explaining the situation for those not using salary sacrifice. In that case it is necessary to tell HMRC to get the full tax relief.

One other related thing to mention is savings interest. Only 20% is normally deducted from that. Since you're a higher rate tax payer you need to be telling HMRC about this interest so they can take the other 20% of your 40% income tax rate off you. You can avoid this if you choose to sacrifice enough at work to take you into the basic rate income tax band far enough so that the interest doesn't move you back into higher rate income tax. For the savings interest portion of this you not only get the 40% income tax saving but also the basic rate range 12% NI, not the higher rate 2%, because the workplace sacrifice is in the basic rate range.

daleos

I should have known this and pretty much thought that was the case after posting my question.
As for interest on savings, I do not get any as I have an offset mortgage and any interest is offset against this which as far as I know you do not have to declare.

thanks again

jamesd

You're right about the offset mortgage reduction. You may well be able to get a higher interest rate elsewhere, though. Depends on how high the mortgage rate is and in part on whether you're willing to use investments.