Paying £2880 into pension when retired

Dazed_and_C0nfused

Yes but it's an effective rate of 25%, not 20%.

You pay £2,880 and 25% is added giving you a fund of £3,600.

swindiff

You can but it makes sense to take it out without paying tax on it if that is possible. So if taking it out annually meant that you were within you annual tax allowance and paying no tax on it this would be much more preferable than taking 10 years worth out all in one go and paying 20% tax on a fair chunk of it.

Rob749

The idea is to leave the SIPP open with the minimum allowed amount left in there, no need to open one every year then, just need to take the hit on the first deposit, then just leave the minimum. You can leave it there and let it accumulate, just be careful when you decide to withdraw some on UFPLS that you don't push yourself into a higher tax bracket in that tax year. Think that's correct, someone will correct me if not.

ezhiki

Many thanks for the replies.

I've got it now, for some reason at first I was thinking if you didn't take it out during the same tax year HMRC added the £720 it was lost, sorry for my misunderstanding. I'll do as suggested for me and my wife, and take out everything but the minimum needed to remain.

ezhiki

Sorry, its me again!

Just an afterthought regarding the tax liability, does the £720 gain count towards your 'income' for tax purposes? I'm very close to the next band income tax allowance. Or does it count towards your £1000 limit for 'savings' interest allowance?

Dazed_and_C0nfused

ezhiki said:

Sorry, its me again!

Just an afterthought regarding the tax liability, does the £720 gain count towards your 'income' for tax purposes? I'm very close to the next band income tax allowance. Or does it count towards your £1000 limit for 'savings' interest allowance?

The gross contribution of £3,600 increases your basic rate tax band from £37,500 to £41,100 so potentially moves you further away from paying higher rate tax if that's what you mean.

The money in the pension is only taxable when withdrawn, 25% of which is tax free, usually either as lump sum up front or part of each payment.

This has nothing directly to do with the savings nil rate band (aka Personal Savings Allowance) but taking taxable pension income could reduce the amount of savings starter rate band available.

ezhiki

Dazed_and_C0nfused said:

ezhiki said:

Sorry, its me again!

Just an afterthought regarding the tax liability, does the £720 gain count towards your 'income' for tax purposes? I'm very close to the next band income tax allowance. Or does it count towards your £1000 limit for 'savings' interest allowance?

The gross contribution of £3,600 increases your basic rate tax band from £37,500 to £41,100 so potentially moves you further away from paying higher rate tax if that's what you mean.

Yes this was my concern. Thank you for putting it better than me.

So long as you start off as a basic rate tax payer, taking £3,600 from the SIPP will not by itself take you into the higher rate band.

Dazed_and_C0nfused

You are getting pension contributions and income mixed up.

If you contribute to a relief at source pension it increases your basic rate band (potentially saving you some higher rate tax).

If you take income from a pension the taxable element uses up some of your Personal Allowance or your basic rate band (or a bit of both).

etienneg

ezhiki said:

PS I'm probably over thinking this. If I don't need the money I can just leave it running from one year to the next adding £2880 each year and let it accumulate at an effective rate of 20%?

It's been pointed out that the "effective rate" is 25%, not 20%. This is true for the first year only of any contribution. You add £2880 and get 25% of that added in tax relief. But if you leave this money into a second year you get no further "effective interest" on that money. So it's not true to say "it accumulates at an effective rate of 25%".

That's why I'm not a fan of "effective interest rates", as they are calculated under a particular set of conditions but it's all too easy to forget this, think of them as "interest rates" and compare them with genuine interest rates.

merlin321

Another query for this thread. I have a modest DB pension of £8040/yr, and intend to add the £2880 to get the upgrade. I have taken the full tax free portion of the DB pension
So when I withdraw up to my annual allowance from my Sipp, do I use the full £16660 minus the £8040 DB pension. Or is it less than this because I have received my 25% on the DB pension.  Don't think I have worded that very well but just want to use my full personal allowance before state pension kicks in.