Mid 20s, want to put 100k in private pension. Best option?

Legacy_user

I fortunately earned 100k this year and 100k last year and just became aware of the tax relief on pension contributions - huge savings, seems like free money!

I want to put 100k worth in a pension, so I can withdraw it at 55.


1. How much will I need to put into the pension, so it is topped up to £100k by the government? £70k ish?

2. What is my best option? A cash SIPP? I like security!

Linton

berbastrike wrote: »

I fortunately earned 100k this year and 100k last year and just became aware of the tax relief on pension contributions - huge savings, seems like free money!

I want to put 100k worth in a pension, so I can withdraw it at 55.


1. How much will I need to put into the pension, so it is topped up to £100k by the government? £70k ish?

2. What is my best option? A cash SIPP? I like security!

You are limited to £40K/year including any employer contribution. So assuming you have no work pension the maximum you can put in is £32K net in a year which is grossed up to £40K by HMRC as repayment of basic rate tax. You then claim the further 20% HRT in your tax return. You can carry over unused allowance from 3 previous years - see here.

Cash in a SIPP will earn very little interest so will lose out to inflation. Its only really useful for immediate needs and whilst deciding where to invest. You need to set up a sensibly balanced set of investments a significant part of which should be in equity (shares) funds. For £100K it would probably be worthwhile for you to get advice from an IFA.

pjread

#1 - 80k, goes to 100k with BR relief. I'd go for adding as much as pushes you down to BR tax, probably less than 80k and the rest the next year (then you can claw back another 20k or so on your tax return, probably over a couple of years)

#2 - cash is probably the single worst thing to hold any significant value in long term. with 30 years to run, equities seem an obvious choice to me.

I'm assuming you have a few years of unused allowance to carry forward as you were unaware of the benefits, so the 40k limit shouldn't be an immediate problem

mlv-1967

berbastrike wrote: »

I fortunately earned 100k this year and 100k last year and just became aware of the tax relief on pension contributions - huge savings, seems like free money!

I want to put 100k worth in a pension, so I can withdraw it at 55.


1. How much will I need to put into the pension, so it is topped up to £100k by the government? £70k ish?

2. What is my best option? A cash SIPP? I like security!

WOW! That's an awful lot for someone your age - or any age infact. :eek:

There is no such thing as 'free money', trust me. And you should also bear in mind that there is a limit on the amount of money that you can have in a pension fund before you get taxed on it. I believe the tax relief limit is £40k a year - anything more will no longer attract relief.

Are you a self-employed contractor or an employee?

xylophone

See http://www.hmrc.gov.uk/tools/pension-allowance/

https://www.unbiased.co.uk/ An IFA might assist?

jem16

mlv-1967 wrote: »

I believe the tax relief limit is £40k a year - anything more will no longer attract relief.

You can use carry forward allowances to provide more tax relief provided your income in the tax year that the contribution is made allows it.

However carry forward will only apply if the OP was a member of a pension scheme in the previous years.

kidmugsy

berbastrike wrote: »

I fortunately earned 100k this year and 100k last year

No you didn't.

berbastrike wrote: »

I want to put 100k worth in a pension, so I can withdraw it at 55.

No you don't.

berbastrike wrote: »

What is my best option? A cash SIPP? I like security!

A leg-pull too far.

System

jem16 wrote: »

However carry forward will only apply if the OP was a member of a pension scheme in the previous years.

I wasn't, so can I only put in 40k this year? Nothing from last year?


How safe are pensions? Am I right in saying the tax relief is "free money", as whatever I put in, will still be there when I'm 55 at the equivalent rate then. Or could there be nothing left?

Linton

berbastrike wrote: »

I wasn't, so can I only put in 40k this year? Nothing from last year?


How safe are pensions? Am I right in saying the tax relief is "free money", as whatever I put in, will still be there when I'm 55 at the equivalent rate then. Or could there be nothing left?

Looks like you just get £40K

When you put money into a pension in your case you avoid HRT. When you take money out 25% is tax free and the rest is taxed as income at that time. In your case you are getting 40% tax relief now and will only be subject to 20% tax on 75% of the pot assuming your income in retirement is within the basic rate tax band.

jem16

berbastrike wrote: »

I wasn't, so can I only put in 40k this year? Nothing from last year?

You can go back 3 years but if you have not been a member of a pension scheme then you are limited to the annual allowance of £40k.

How safe are pensions? Am I right in saying the tax relief is "free money", as whatever I put in, will still be there when I'm 55 at the equivalent rate then. Or could there be nothing left?

Tax relief is more correctly tax-deferment as it will depend on your tax rate at point of retirement. Some will be paid tax-free and some will be taxed.

Pension investments will go up and down over the years.

mlv-1967

There is also the lifetime allowance of £1.25M, over which you will be taxed.

It would therefore be more tax effective to claim this fund once it hits this threshold.