Have I understood these tax rules correctly?

Daverok

I am 53 years old and have a large amount to invest. I was thinking of putting say £80,000 into a pension plan as cash. I believe that I can claim a tax rebate that would increase the figure invested to £100,000. I want to take 25% out of the fund tax free when I am 55 years old, and then take the rest out over the next few years paying 20% tax.
Are these sums correct?
25% of £100,000 equals £25000.
The remaining £75,000 less 20% tax equals £60,000.

£25,000 plus £60,000 equals £85,000 for an £80,000 investment. Too good to be true. Obviously I could also look for steady growth in the meantime.

jem16

Daverok wrote: »

I am 53 years old and have a large amount to invest. I was thinking of putting say £80,000 into a pension plan as cash.

You won't be able to contribute £80k into a pension as the annual allowance limits you to £40k.

However if you have been a member of a pension scheme for the last 3 years, you could use Carry Forward to use previous years' allowances to contribute higher than £40k.

However tax relief is limited to 100% of year earnings so if Carry Forward permitted an £80k contribution, you would need to be earning £80k this tax year to claim tax relief on all of it.

Daverok

I have been in a pension for the last 3 years. This year I have been made redundant and this makes my earnings,including redundancy payment, to be over £100,000.

jem16

Have you got enough unused allowance from the last 3 years then?

zagfles

Also the tax free element of the redundancy won't count as "relevant earnings". See http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/

Daverok

Thanks both,

Part of the £100k was the £30k tax free element, so we are now down to £70k taxable income earned this year.(some would be taxed at 40% but we will ignore that for now)
I would have capacity on the 3 year rule.

I would change the numbers to
£70000 invested plus £17500 tax rebate.
25% tax free of £87500 would be £21875
20% tax on the remaining £65625 would make £52500 still to hand.

My sums make that 21875 + 52500 = 74275.

A profit of £4275 seems too good to be true. Am I missing something?

zagfles

Daverok wrote: »

Thanks both,

Part of the £100k was the £30k tax free element, so we are now down to £70k taxable income earned this year.(some would be taxed at 40% but we will ignore that for now)
I would have capacity on the 3 year rule.

I would change the numbers to
£70000 invested plus £17500 tax rebate.
25% tax free of £87500 would be £21875
20% tax on the remaining £65625 would make £52500 still to hand.

My sums make that 21875 + 52500 = 74275.

A profit of £4275 seems too good to be true. Am I missing something?

On £70k your tax relief limit is £70k gross into the pension ie £56k net plus £14k tax relief claimed by the pension scheme (and you'd be able to claim higher rate relief via your tax return).