Pension Carry Forward Decision

pwootty

Folks,
In a dilemma whether to top up my DC pension with the maximum amount with the pension “Carry Forward” ability or invest elsewhere. With the pitiful saving rates available I have a large amount of spare cash that needs to be put somewhere and with my age at 51 and the pension freedom I will have at aged 55 I’m looking at the pro’s & con’s of investing this cash into my pension.
The gross amount will be 6 figure sum but the net amount will be 5 figures payment so with basic rate tax relief my amount will be increased by 25%, and I will be able to claim higher rate tax relief on part of the rest, so I’m looking at an approximate 30% advantage, which I can access in 4 years times if I need it. This is way better than any saving rate available today.
Advantages
25% Uplift through basic rate tax
20% HRT rebate (est. to be around £8k)
25% tax free withdrawal
Full amount is invested in mixed fund low cost pension so potential for higher growth.
Accessible in 4 year time

Risks
Market fluctuations / correction
Withdrawals are taxed at basic rate (25% tax free)
Pension fund company goes under (although is a big name)
Money tied up for a minimum of 4 years

Alternatives
Property, use cash as a deposit for BTL
Premium bonds
Stock & shares

I have an IO tracker mortgage at 1% Apr so could pay a lump sum off my mortgage
I have provisioned for max ISA for 14/15 & 15/16
I have other cash available for emergencies
Thanks

jem16

Can you confirm the gross amount you are intending on contributing and what are your gross earnings for this tax year?

kidmugsy

pwootty wrote: »

...whether to top up my DC pension with the maximum amount with the pension “Carry Forward” ability or invest elsewhere. ... 51 and the pension freedom I will have at aged 55 I’m looking at the pro’s & con’s of investing this cash into my pension.
... which I can access in 4 years times if I need it.

Risks
...
Pension fund company goes under (although is a big name)
Money tied up for a minimum of 4 years

...
I have other cash available for emergencies

Spread the risk of "company goes under" by using more than one company. Diversify your investments so that you face less concentrated risk than a BTL would give you.

The big question is when you expect to withdraw the money, because money you want out in four years' time should be invested in different assets than stuff you might expect to withdraw in 10-15 years' time.

The even bigger question is jem's: you do understand that the most you can contribute tax-efficiently each year is your earnings (less any other contributions you make elsewhere)?

pwootty

I'm planning to pay in a £100k gross, which will cost me £80k net. I earn around £70k.

Looking to have the option of taking it at 55 if I want to, that's the date I looking to be FI and potentially retire early.

jamesd

The company going under would not affect your pension. Client money is held separately from pension company money, with daily reconcilliations and huge fines for any companies which get this wrong, even if nobody ended up losing money as a result.

You can put pension money into cash. Pick the right places and you can also put it into P2P lending/investing, though the places that allow this so far have annual fees in the £800-1200 range so it's only viable for at least moderately large pension pots.

You also have the option of using venture capital trusts that offer 30% initial tax relief, capped at income tax actually paid in the tax year of purchase, repayable if sold within five years.

kidmugsy

pwootty wrote: »

I'm planning to pay in a £100k gross, which will cost me £80k net. I earn around £70k.

You can't. £70k tops, unless you spread the contributions over more than one year.

jamesd

As kidmugsy wrote, you can't pay in gross more than your earned income each tax year and be entitled to tax relief on the amount over that. If the pension company pays you the relief you'd have to tell HMRC and they would collect the extra tax relief from you.

jem16

kidmugsy wrote: »

You can't. £70k tops, unless you spread the contributions over more than one year.

And that £70k also includes contributions you are already making.

The carry forward rules allow you to make contributions higher than the annual limit of £40k but they don't allow for tax relief any higher than your earned income for the tax year in which you make the contribution.

atush

As a side not to the above, I do think upping your contribs is worth doing (esp to get HRT relief) and want to point out some of the risks and alternatives you have mentioned aren't really risks of pensions.

As market fluctuations will affect all equities incl S&S isas and unwrapped investments. and even affect property. So aren't really a risk of pensions, just a risk of investing overall.

And I would only invest in property that money (over and above a cash safety fund) that wont fit into your pension allowance. you can always do that later with your cash free lump sum.

As for premium bonds, they have some appeal to those who pay HRT, but I wouldn't put a lot in them, i'd be looking for better interest rates

pwootty

Interest point that I didn't know the "Carry Forward" tax relief is only on the earned income for the tax year of the contribution. I was planing to max out this year's allowance (£40k) and back fill the previous 3 years (£50k each). So can I make a one off payment equivalent to my Gross earning for this year (approx £70k), and get the full HRT tax relief on it? Also if I wish to fill the remaining carry forward amount, that will be eligible to be topped up by basic rate tax.

So outstanding carry forward gross amount =£100k
Top up with this year gross salary = £70k
Basic rate tax 20% contribution = £17.5k
So total pension contribution = £87.5k?
HRT Relief claimable on the £70k? (£70k-£40k x 20% = £6k)

Remaining £12.5k gross carry forward amount, I can make a £10k payment but will get no HRT relief on it.

How does that sound? is that correct?
Thks

jem16

pwootty wrote: »

So can I make a one off payment equivalent to my Gross earning for this year (approx £70k), and get the full HRT tax relief on it?

You can make a gross pension contribution which includes your regular contribution, of £70k. Of that £70k, approximately £30k will attract 40% tax relief and the remaining £40k will attract 20% tax relief.

Higher rate tax relief is only available on the amount you actually pay higher rate tax on.

Also if I wish to fill the remaining carry forward amount, that will be eligible to be topped up by basic rate tax.

No - only £70k will attract tax relief. Anything above £70k will attract no tax relief.