Paying £2880 into pension when retired

Xbigman

Just to clarify a few points.

I have taxed income over £12500 this year but will only have a taxable income next year around £4000. If I pay in 2880 this tax year (I'll have the money on 25th Feb) I can take out 3600 next year then pay 2880 back in again, wait for the tax relief, then withdraw 3600 (or 2600 subject to minimum balance requirements). 

£4000 pension plus two times £3600 = £11200 so under the £12500  tax threshold, so no tax.

Darren

Dazed_and_C0nfused

Depending on how you access it could well be two times £2,700 as 25% will be tax free.

What does this this year's income consist of?  If it includes interest roughly how much is that? 

And how much earned income (wages/business profits etc but not pension income) will you have in the current tax year?

Xbigman

I'm currently employed but ill health is forcing me to stop working, which will be early March. I have no mortgage, a small pension (the 4k income), some investments (11k) and will have about 5k in cash by March. That all looks incredibly modest but I'm single, don't drink, smoke or drive (I have an ebike). I live very cheaply and could get by quite happily with the above money until my SP kicks in in 9 years but an extra 720 a year would make life a lot more comfortable so I'm certainly going to give this a try. It's just a case of making sure I understand the in's and out's of it all and getting organised.

Darren

Dazed_and_C0nfused

You should check your State Pension forecast to see what you have accrued to date (normally shown to 5 April 2020 at the moment).

You need to read past the likely headline of £175.20 to see your actual entitlement.

And yes, if you take two lots of £3,600 (or two X £2,700 taxable income) in the 2020:21 tax year and your only other income is £4,000 pension then you would pay no tax assuming the Personal Allowance remains £12,500.

Xbigman

Many thanks.

I qualified for the full FRSP this year (I hit the LEL in August) with this last year only being worth 90 odd pence a week as the odd amount. Total income this year should hit about 18k. 


Darren

Xbigman

As I'm a taxpayer this year could I pay in 3200 and get 800 in tax back? (for the 20/21 tax year) and then pay in 2880 in future tax years as a non taxpayer. 
There's a lot to get my head around with this.


Darren 

Dazed_and_C0nfused

No.  You cannot get a personal tax refund this year.

You could contribute £2,880 this year and get £720 tax relief added to the pension fund though.  You could contribute more (based on your earnings) if you wanted.

If you stop work in this tax year you will be limited to contributing £3,600 next year (£2,880 from you plus £720 tax relief).

Once you take at least 1p in taxable income you will forever be limited to contributing £4,000 (gross) per year even if you were earning more.
£3,600 gross if not earning.

Xbigman

OK. Thanks.


Darren

ossian

The big gotcha that I think everyone needs to be ready for is that your contributions are limited to 2880/3600 unless you have relevant UK earnings in excess of that.  I have spoken to people in the past who were taking pension income into account when working out the contributions they could receive tax relief on.

where_are_we

Xbigman said:

I'm currently employed but ill health is forcing me to stop working, which will be early March. I have no mortgage, a small pension (the 4k income), some investments (11k) and will have about 5k in cash by March. That all looks incredibly modest but I'm single, don't drink, smoke or drive (I have an ebike). I live very cheaply and could get by quite happily with the above money until my SP kicks in in 9 years but an extra 720 a year would make life a lot more comfortable so I'm certainly going to give this a try. It's just a case of making sure I understand the in's and out's of it all and getting organised.

Darren

How liquid are your 11k investments? Wouldn`t maximum gain be realised by contributing to your pension in 20-21 as much as you can afford to? Use your 5K cash plus some of your 11K investments. What will your earned income for 20-21 be? Do not include your pension income. You will receive pension tax relief on pension contributions up to 100% of your earned income. You will be able to withdraw up about £11,200 (£8400 taxable 75% + £2,800 untaxed 25%)(£12500 PA - £4000 pension = up to £8500 to get you up to your personal allowance ) untaxed from your pension in 21-22 and every year until your SP kicks in providing the £12500 personal allowance remains the same. You can contribute £2880 to your pension each tax year you are not working but this tax year only you can contribute much more - "use it or lose it". Maximise completely tax free withdrawals from your pension by contributing as much as possible before this tax year ends.