Paying savings into pension

RheaSilva

I will be auto-enrolled into my workplace pension next January. I will be 34 by then, and ideally I probably should have started a pension a few years back, but I have discovered I will be able to pay extra cash into my pension as and when I like. My plan is to put some of my savings in, but I'm wondering what is the best way to do this?

My gross salary is roughly £15,000 so presumably that is about £4000 of taxable income. I plan to contribute about £2500 per year from my pre-tax pay. If I also pay in £1500 from my savings, this is money I will already have paid tax on through PAYE - so would I be better off contributing my full £4000 of taxable income and then living off the £1500 savings instead? ...and then doing this for 2 or 3 years until I have paid in all the savings I want put in my pension.

Am I right in thinking that doing it this way gets me more tax relief?

JoeCrystal

Well, just to clarify on your taxable income, the general rule is you can contribute to all your pensions as much as you earn so you can pay in £15,000 gross if you really want to.

pathtofreedom

JoeCrystal wrote: »

Well, just to clarify on your taxable income, the general rule is you can contribute to all your pensions as much as you earn so you can pay in £15,000 gross if you really want to.

This might not be the case for an employer type pension, for mine I couldn't pay in more if it took me below minimum wage rates within that month.

To the OP what is the pension like they are offering? What are the funds, what are the fee's etc? There is nothing to stop you having more than one pension, it might work out better to do the minimum to get the free matching money for your work one, then look for better deals in private / sipp pensions to also pay into with a better mix of funds and or lower fees.

RheaSilva

JoeCrystal wrote: »

Well, just to clarify on your taxable income, the general rule is you can contribute to all your pensions as much as you earn so you can pay in £15,000 gross if you really want to.

Thanks, my idea of limiting it to £4000 per year over a few years was to hopefully avoid paying tax altogether over a period of time, rather than contributing money that would be tax free anyway.

RheaSilva

pathtofreedom wrote: »

To the OP what is the pension like they are offering? What are the funds, what are the fee's etc?

The only thing I know at the moment is that it's with 'True Potential'.

BobQ

pathtofreedom wrote: »

This might not be the case for an employer type pension, for mine I couldn't pay in more if it took me below minimum wage rates within that month.
.

The OP was suggesting the scheme allows him to put savings into his pension which means that restriction would not apply since he would still draw his income.

zagfles

There are 3 methods of getting tax relief on workplace pensions, the answer to your question is different depending on which method they use:

Salary sacrifice: Your salary is reduced by an amount and instead your employer contributes that amount to your pension. You save tax and NI, your employer saves employer NI. But this can't take you below national minimum wage. Watch out for how salary related benefits are calculated (overtime etc) - some employers use a "reference" salary which is salary before the sacrifice.

Net pay: Your pension contributions are taken off before tax is applied. You (and your employer) still get charged NI on your full salary. These are your contributions so there is no NMW issue, but if your contributions takes you below the personal allowance you don't get tax relief.

RAS: relief at source, works like a personal pension. Your contributions are taken after tax is applied, so you get no tax relief in your payslip. Instead the pension provider reclaims basic rate tax on your contributions. If you pay higher rate tax you need to claim further relief from HMRC. But you get tax relief on the lot even if it takes your income below the personal allowance, as long as gross conts aren't more than earnings (eg earnings £15k, you can put in £12k net and get £3k tax relief).

kidmugsy

Once you've harvested the maximum employer's contribution, then unless you can use salary sacrifice I suggest you hesitate before contributing more to a pension. The money will be locked up inflexibly for a quarter of a century, and may well be subject to income tax on withdrawal, at who-knows-what rate.

It would be worth your while keeping an eye on the development of the rules for the Lifetime Isa (LISA), to be introduced for tax year 2017/18. It gives your after-tax money a boost on the way in, and offers far more flexibility about withdrawals, albeit with a penalty. Withdrawals are tax-free.

I'd think that the rules will be announced either in the Chancellor's Autumn Statement (usually in December) or his Budget (usually in March). That will give you time to decide on the total that you'd like to contribute to a pension in 2016/17 before the tax year ends on the 5th of April.

RheaSilva

kidmugsy wrote: »

It would be worth your while keeping an eye on the development of the rules for the Lifetime Isa (LISA), to be introduced for tax year 2017/18. It gives your after-tax money a boost on the way in, and offers far more flexibility about withdrawals, albeit with a penalty. Withdrawals are tax-free.

Thanks, I did wonder about this as an alternative, I'll listen out for any new info.