Paying £2880 into pension when retired

MallyGirl

you can pay in up to £40k gross contributions if you earn that much. £40k is the max but you also can't pay in more than you earn.
This thread relates to people who earn nothing but can still contribute £3600 gross

nigelbb

MallyGirl wrote: »

you can pay in up to £40k gross contributions if you earn that much. £40k is the max but you also can't pay in more than you earn.
This thread relates to people who earn nothing but can still contribute £3600 gross

Sorry, I couldn't find another thread but the principle is the same.

Unless I have missed something the government gives you free money in terms of tax relief for paying into a pension scheme then after the age of 55 allows you to withdraw 25% tax free so you only pay tax on 75% of the sum you put in.

If you are a 40% tax payer & pay £24K into a pension scheme the tax refund brings this up to £40K. If subsequently £10K is drawn tax free & 40% tax is paid on the remaining £30K then your total net income will be £28K meaning a tax saving of £4K. The question is when can the money be drawn out? Next tax year? Only after retirement?

Asghar

nigelbb wrote: »

The question is when can the money be drawn out? Next tax year? Only after retirement?

Currently, as soon as you are 55 years of age.

nigelbb

Asghar wrote: »

Currently, as soon as you are 55 years of age.

Assuming you carry on working & earning enough to pay 40% income tax does that mean tha you can carry on paying in £24K to the pension & taking out £28K every year after the age of 55?

Dazed_and_confused

If you are a 40% tax payer & pay £24K into a pension scheme the tax refund brings this up to £40K. If subsequently £10K is drawn tax free & 40% tax is paid on the remaining £30K then your total net income will be £28K meaning a tax saving of £4K. The question is when can the money be drawn out? Next tax year? Only after retirement?

You seem to be getting confused with your figures.

If you pay £24k into a pension fund you will have either a fund of £24k (unusual but not impossible) or £30k (a relief at source scheme).

You will not have a fund of £40k. Where are you getting that figure from?

You can currently withdraw the money once you are 55. But as soon as you take £0.01p of taxable income from this defined contribution pension I think you will be limited to paying in £4k gross per year thereafter.

xylophone

Could someone please explain the relevant numbers for someone past state pension age in full time employment paying 40% tax? How much income per year can be funnelled through the pension scheme to reclaim the tax paid & then drawn out again with 25% tax free?

You are over state pension age? Did you reach it under the old or new arrangement?


You are under 75?

Are you drawing an occupational pension (if so, DB or DC) and state pension and a salary?

Is the pension you mention the one offered by your current employer?

If so, is tax relief given on a net pay or relief at source basis?

Do you need to have regard to the Lifetime Allowance?

https://retirement.fidelity.co.uk/planning/pension-allowances-tax-benefits/

nigelbb

xylophone wrote: »

You are over state pension age? Did you reach it under the old or new arrangement?

New.

xylophone wrote: »

You are under 75?

Yes.

xylophone wrote: »

Are you drawing an occupational pension (if so, DB or DC) and state pension and a salary?

All three. DB pension, state pension & salary.

xylophone wrote: »

Is the pension you mention the one offered by your current employer?

Paying in to DB pension with main employer. Enrolled in NEST by secondary employer.

xylophone wrote: »

If so, is tax relief given on a net pay or relief at source basis?

Net pay on DB pension. Relief at source on NEST contributions.

xylophone wrote: »

Do you need to have regard to the Lifetime Allowance?

No.

nigelbb

Dazed_and_confused wrote: »

You seem to be getting confused with your figures.

If you pay £24k into a pension fund you will have either a fund of £24k (unusual but not impossible) or £30k (a relief at source scheme).

You will not have a fund of £40k. Where are you getting that figure from?

Paying 40% income tax. £40K gross £24K net Relief at source £6K plus £10K reclaimed from HMRC.

Dazed_and_confused wrote: »

You can currently withdraw the money once you are 55. But as soon as you take £0.01p of taxable income from this defined contribution pension I think you will be limited to paying in £4k gross per year thereafter.

It looks like a £4K limit would mean being able to funnel £40K through for a tax saving of £8K only once thereafter £4K/year for an £800 tax saving per year.

bowlhead99

nigelbb wrote: »

Paying 40% income tax. £40K gross £24K net Relief at source £6K plus £10K reclaimed from HMRC.

If you want to put £40k into a relief-at-source pension, you would pay £32k into the pension. The provider would claim the basic rate relief from HMRC, which may take a month or two to arrive. Then there would be £40k in the pension. The £32k comes from the fact that basic rate relief is 20%, and 20% tax on £40k is £8k; so £32k is the net-of-basic-rate-tax amount from £40k gross; put in £32k to the pension and it is grossed-up to £40k.

Later when you do your year end tax return with HMRC and tell them that you did this, they will recognise that you have made extra pension contributions and will have only received basic rate relief on those contributions even though some of your earnings during the year were taxed at higher rate. To compensate you for that, they will extend your basic rate band.

So effectively although your PAYE will have been working on the basis that you get a personal allowance of £11850 and basic rate band of £34500 (total higher rate threshold £46350), the extra £40k pension contribution will push the higher rate threshold up to £86350. As you've paid some tax at 40% on the income over £46350 and below £86350, and now it is known that you only needed to pay tax at 20% on the income over £46350 and below £86350, you will get back 20% on that income.

So, if you earned at least £86350, you will get 20% tax back from HMRC on the whole £40k, which is £8k. If you paid out £32k to fund the £40k gross pension, and got £8k back eventually through the tax return process: the gross £40k pension contribution has cost you £24k.

Logically that makes sense, because if you had enough earnings that the whole £40k of salary was going to be taxed at 40%, the net pay from that £40k salary would be £24k. So you can instead decide to have £40k into your pension pot instead, and it will cost you £24k of net cash. Albeit, it's a two-stage process of provider claiming basic relief and you claiming excess relief.

But perhaps the key takeaways for you, if you have never used the process before, are:

(a) you need to have £32k of free cashflow up front, to be able to put into the pension scheme. You can't just put £24k of cash in and have it turn into £40k.

If you put only £24k into the pension up front, it would only be grossed up to £30k with the basic rate relief, and you would only get back a maximum of £6k from the tax man. The £30k gross pension investments would have cost you £18k which is the right ratio, but falls short of the £40k you wanted to achieve. So, £32k cash up front is the key number, if you are looking to raid your savings accounts or take out a personal loan to get the money to give to the pension provider.

(b) You only get the full 40% relief if you were actually paying 40% tax on the last £40k of your earnings. If your salary is only £50k for example, you are a 'high rate taxpayer', but you did not pay the high rate on all the £40k so you would not get high rate relief on all the £40k. You would get less than £1k back from HMRC when you do your tax return. Whereas if you earn £90k you would have paid 40% tax on so much of your salary that you would easily get the full relief on the full £40k pension contribution, and get the full £8k back in your tax return.

It looks like a £4K limit would mean being able to funnel £40K through for a tax saving of £8K only once thereafter £4K/year for an £800 tax saving per year.

If you put £40k gross in your pension at a net cost of £24k, but then draw out £10k tax free and £30k taxable - and need to pay 40% tax on the remaining £30k taxable - leaving you with £28k cash, as you had described in a previous post; the total profit from the wheeze is £4k, as you mentioned in that previous post. But now you are saying 'a tax saving of £8k only once', when it only looks like a gain of £4k to me. I don't know if that's a typo or if you are presuming something different.

Once you have taken an income from your (non-DB) pensions, the restrictions kick in on how much can be contributed, and the £40k limit becomes much lower - the money purchase annual allowance of £4k. If you want to maximise the amount of money that can be stuffed into your pension and have a high salary to get high rate relief on lots of money, it would be wise to not draw out any more than the tax free 25%, and then the restriction down to a £4k 'money purchase annual allowance' would not apply, so you could stuff tens of thousands more money into your pensions, obtaining the 40% relief on an ongoing basis. And then do the drawdowns of the rest of the money at a measured pace in retirement.

You may struggle to fund the cashflow for this though, if you're only taking out the tax free lump sum elements and not taking any of the taxable elements (i.e. £24k net cash in, but only £10k out to avoid triggering the reduced limit).

Another thing:

Paying in to DB pension with main employer. Enrolled in NEST by secondary employer.

So some of your annual £40k limit will be taken up with your employee and employer contributions to NEST, and with the amount by which the value of your DB pension grows from one year to the next as you earn more service.

Meaning that unless you have available carry-forward of previous years' £40k limits, you won't have the capacity to be able to make cash contributions for the full £40k gross contribution (£24k net cost after tax reclaim) that you had planned, because your existing Nest contributions and DB service increases will use up some of your annual allowance.

Likewise if you do start taking anything other than the tax-free lump sum cash from your DC plan, and are faced with the reduced MPAA £4k allowance instead of the nicer £40k one, be aware that the gross value of your employers and employees contributions to Nest will eat into that £4k.

This does seem to have derailed quite a bit from the purpose of this thread (paying £2880 into pension when retired) as those people on the previous 800 posts are not at all bothered by high rate relief, £40k limits, £4k MPAA restrictions etc and are just focussed on the practicalities of getting their £720 relief on a £3600 gross contribution. Next time I suggest starting a new thread if you can't find one suitable...

nigelbb

@bowlhead99 Thanks very much for your detailed response.

Sorry for the slight derailment of the thread but as I said the principle is the same. The wheeze is being able to pay money into a pension scheme & get tax relief but also to be old enough to be able to withdraw a portion of that money as income tax free.

With a combination of pensions & salary I am better off than I have ever been in my life but I still don't have tens of thousands in spare cash to operate a tax dodge. I am well into the 40% tax band but would never have enough spare cash to use up the three years carry forward £40K allowance. It does however look worthwhile to put any spare cash I have into the pension plan & not to increase monthly repayments to pay off the mortgage early as I had intended. Paying into the pension plan then drawing down just the tax free allowance to pay off the mortgage early is the most tax efficient way to do it.

Nothing makes you more interested in pensions than the imminent prospect of benefiting from one. When I was in my 20s I left an employer after just under five years & by the rules of the pension scheme I was obliged to take a refund of my contributions. At the time I was delighted with an unexpected windfall of over £1000. Goodness knows how many thousands of pounds that rule will have cost me. It's especially galling as subsequently the rules of that pension scheme changed so that a refund of contributions was obligatory only with less than two years contributions.