Paying in a lump sum - good idea?

Overwatch

Hi everyone. I need some advice.

I'm 52. After 28 years of contribution to my workplace pension, I was TUPE'd to another employer 3 years ago. Since then I've been paying into a new pension with Aviva (with matching contributions from my employer).

I've recently inherited £10,000. I have very adequate savings, and have no immediate need for this money. I've maxed out my ISA limit for this year.

I understand that I can pay lump sums into my pension, and will get tax relief on this. So paying the £10k into my Aviva pension seems like a sensible option, especially in a world of low interest rates.

I would appreciate your thoughts, and thank you in advance for your help!

ermine

It depends what you want to do. For instance if your pension is a DB pension, then a better way could be to pay your 10k into a DC SIPP pension, which you could take in three years time or longer if you wanted to retire a little bit early without taking the DB pension.

You must make sure that the total of your pension contributions including existing ones don't exceed your gross earnings for that tax year.

If you are a higher rate tax payer then there is an awful lot to be said for doing this as a pension contribution. If you have salary sacrifice available, even as a basic rate taxpayer then there's a lot to be said for using this lump sum into your works pension, because you would save 32% not 20%. All depends on your particular earnings and tax situation, and what sort of pension the Aviva one is. You don't only have to have or pay into one pension.

jamesd

Is the work pension using salary sacrifice? If it is, increasing the sacrifice would be a better way to do it because you get the NI saving on top of the income tax benefit.

So far as low interest rates go, it's worth starting to learn about peer to peer lending.

If your savings are sufficiently good you might consider choosing to stop paying income tax now, reaping the benefit of your past prudence.

You can do this by increasing pension contributions now, knowing that in three years 25% of it will be available to you tax free and the rest taxable. The locked away and inaccessible handicap of pensions will soon no longer apply to you and you should include this in your financial planning. If pension contributions can't be high enough you could consider suitable amounts of VCT use. Being three or more years from 55 is a particularly good time to greatly increase pension contributions because it helps with potential tax free lump sum recycling issues.

You will eventually have to pay income tax again, probably, but only when your income after pension contributions is above personal allowance, savings allowance, starter rate for savings and relief you might get from sensible VCT use. Depending on income and how much of your money is in things like ISAs you might be able to get and stay largely income tax free.