New to pensions, made £80k this year, can I get the tax back if I put it in a pension

Legacy_user

First things first, I have no idea how pensions work except from the state pension


But a quick google shows that there is tax relief to be gained! If I put £50k into a pension, will the government add another £30k?

Then I can take out the £80k when I turn 55? Does the money in the pension increase with interest?


Seems like an easy £30k, or is it too good to be true?

BobQ

You can reclaim income tax that you paid on the [STRIKE]£50K[/STRIKE] (Edit £40K). Your pension provider will claim back the basic tax you paid from HMRC, and you can claim the balance if you are a HRT payer. So yes the pension will be worth more than you put in if invested wisely.

The earliest age you can take it out depends on the law then. You can currently claim 25% lump sum at 55 but the amount may change b y then and the age will almost certainly go up.

System

What pension do you recommend so that is grows with the inflation rate each year and has no risk?

BobQ

berbastrike wrote: »

What pension do you recommend so that is grows with the inflation rate each year and has no risk?

Some experts will be along to answer that question but they will first of all point out that there is no such thing as a risk-free investment. You have to work out the risk you are willing to accept and choose your investments accordingly. Or go to an IFA who will be able to help you make that decision.

MoneySavingUser

berbastrike wrote: »

First things first, I have no idea how pensions work except from the state pension


But a quick google shows that there is tax relief to be gained! If I put £50k into a pension, will the government add another £30k?

Then I can take out the £80k when I turn 55? Does the money in the pension increase with interest?


Seems like an easy £30k, or is it too good to be true?

1. The Annual Allowance Limit is £40,000 for the current tax year (but if you haven't used the allowance in the last 3 (I think) years you can use that in the current tax year.) Any contributions in excess of this will not save any tax.

2. If it is a DC scheme under the new rules you can take out 25% of it "tax-free" and withdraw the rest off it at normal rates of income tax when you retire - taking it out at 55 might not be the best option

3. Interest? normally no (unless you keep it all in cash which will have a very low interest rate) - you normally invest it in the stock market so it depends on that

4. Does your employer offer a pension scheme and will they contribute? that is more free money!

5. Ask employer if you can contribute via salary sacrifice then you will save national insurance as well as income tax (they might even put in their national insurance saving too)

As BobQ says there is no such thing as a risk free investment - the normal disclaimer about investments being able to go up and down applies.

System

Much appreciated, MSE posters very helpful as always !!


Im self employed, age 24, and not too sure I like the risk element despite the big tax savings.

If I put my full limit, £50k, in a pension now. I understand the gov would add in £30k, total £80k in pension.

IDEA 1 - In 2016, I withdraw the £80k, would it be taxed I guess yes?


IDEA 2- In 2016 to 2024, I withdraw £10k each year, and have no other earnings. The tax free allowance is £10k, so would I still get taxed on the £10k withdrawn from the pension?

jem16

berbastrike wrote: »

If I put my full limit, £50k, in a pension now. I understand the gov would add in £30k, total £80k in pension.

You can only put in £40k and get tax relief. How much tax relief depends on your earnings.

Im self employed, age 24, and not too sure I like the risk element despite the big tax savings.



IDEA 1 - In 2016, I withdraw the £80k, would it be taxed I guess yes?


IDEA 2- In 2016 to 2024, I withdraw £10k each year, and have no other earnings. The tax free allowance is £10k, so would I still get taxed on the £10k withdrawn from the pension?

You cannot withdraw from a pension until you are age 55 so at age 24 now you will not be able to withdraw in 2016.

BobQ

OP, it was £50K last year that you could put in but that has reduced to £40K this year. Any more there is no tax relief when you put it in..

A pension is not a short term tax avoidance measure!. You are 24 so you need to start asking where you expect to be when you retire in 40 or so years time?

If you remain self employed all your life, it is sensible to have a pension that will pay you a reasonable income in retirement. How much do you expect that income to be in today's terms? Have a look at this link.

http://www.standardlife.co.uk/1/site/uk/pensions/getting-started?WT.mc_id=SAMPP061&WT.srch=1

What you need to do work out the income you want and then save enough each month until you retire to provide that. Is you have a spare £40K to kick it off fine that will help but there is no substitute for making it a regular payment each year/month.

Then you need to work out what to invest the money in. Nothing is risk free, but at 24 your investments should grow on average if you choose the right combination of investments. So you can afford to take some risks as you will not be drawing this money for 35 years at the earliest.

If you want the money next year put it in a savings account (not without any tax benefits).

grey_gym_sock

by this year, do you mean the current tax year (since 6 april)? because you only set pension contributions against income which is taxable in same tax year that the contributions are made.

BobQ

grey_gym_sock wrote: »

by this year, do you mean the current tax year (since 6 april)? because you only set pension contributions against income which is taxable in same tax year that the contributions are made.

Good point. By "this year" I meant the Annual Allowance for this tax year. The OP has not made clear which year he is talking about although the title talks of an income of £80K "this year".

kidmugsy

He's pulling your legs, chaps.