Need Enlightenment

Mr_Proctalgia

Looking forward to next year. If I drawdown £10k from my vested pension pot I would receive £8K net? (I am a basic rate taxpayer) Is this correct?

If I pay in this £8k into my current employers pension plan, which I can do by means of increased contributions from my wages, and stay within the rules, they will increase this to £9600. Is this correct?

So is the £400 lost or are my maths hopelessly wrong?

Thank you in Advance

mania112

not hopelessly wrong, but not right...


Pension tax relief is 'grossed-up' not by adding 20% of the net but by adding 20% of the gross.

in simple terms, this means dividing by 4 and multiply by 5. Back to £10k

dunstonh

This transaction also risks breaching the recycling rules in addition to yet unknown rules that will be published prior to next April to prevent tax evasion.

greenglide

And if your employer runs a salary sacrifice scheme you make over 10% genuine profit because of the NI saving! I am doing this into AVCs which I will get back as a TFLS provided the government doesn't change the rules in the next two years.

Mr_Proctalgia

@ Dunstonh - This is not PCLS but income, does this still apply in your opinion?
Also £10k is below the 1% allowance rule for recycling PCLS - Have I missed anything germain here?

Thanks in advance.

dunstonh

If its not PCLS (which a re-read of your post says its not) then its not a current recycling issue. However, be on the watch for an expansion of that tax rules before next April to stop abuse. What you propose has already been flagged up as a tax evasion loophole and is expected to be closed.

jamesd

The recycling rule currently applies only to the PCLS so current recycling rules have no effect at all on your plan. Recycling of income is allowed with no restrictions other than the annual £40,000 limit.

That annual contribution limit is itself so much lower than past limits that it's my personal opinion that the recycling rules should be abolished, since the limit already does what they were intended to do. That would be some welcome simplification of a trap that will mostly catch out only those who don't know about the rule, because it's easy enough to avoid breaching it if you plan ahead.

When you pay into a pension as a personal contribution, 25% is added to what you pay in to give you basic rate tax relief. So you don't lose £400, you were just using the wrong number, 20% instead of 25%. Adding 25% produces the number that will equal the amount paid in if 20% is deducted from it.

The current flexible drawdown rules prohibit all pension contributions after commencing flexible drawdown. Capped drawdown doesn't. Too soon to tell what the new rules will be.

If I'm still working after 55 I'll probably be recycling pension income myself, unless I think that VCTs offer a better deal.

Mr_Proctalgia

Thanks for all the replies, it is astounding what you do not know what you do not know.

@jamesd
I have been recycling income over the last four years and it has worked very well for me so far, in fact my little pot is up over 10% compared to if the investment returns had simply matched my drawdown amounts (@3.5% GAD - age 55 - 5 Year reviews, so 120% all the time too) Very pleasing indeed!

The reason for my question was that next year I receive a F.S pension and there is no benefit in delaying the receipt of it (AFPS75 Scheme) so I shall increase my payments into the company AVC by the same amount. I will by then have "run out" of tax code so need to have a think about that too. The company cannot do RaS and Gross on the same employee apparently.

The reason I asked the original question was because the company sponsors their scheme and apart from the "spread" I only have to pay 0.05% AMC which, as I don't really need the income from next year is a much cheaper place to keep my money than the Skandia CRA. I hadn't really thought about getting a second bite at the PCLS, but I will now!!

Thanks to everyone for your replies

jem16

Mr_Proctalgia wrote: »

I will by then have "run out" of tax code so need to have a think about that too. The company cannot do RaS and Gross on the same employee apparently.

Can you explain that "run out" of tax code?

Mr_Proctalgia

@jem16

My AVC's will be at such a high level that I will not pay tax. (My code will be 1056L next year) and paying 29% AVC and 4% mandatory for the company's contribution takes me out of paying any tax.

jem16

Mr_Proctalgia wrote: »

@jem16

My AVC's will be at such a high level that I will not pay tax. (My code will be 1056L next year) and paying 29% AVC and 4% mandatory for the company's contribution takes me out of paying any tax.

So I'm assuming your AVCs are paid from gross salary?

Will you be a higher rate taxpayer if you include both salary and pension income?