Worth me adding lump sums to my works pension?

AandP

Hi, I'm looking to retire this August (aged 59) and it's been mentioned that it would be a good idea to put a lump sum both before and after the 5th April into my current works pension before I leave. The pension is a defined contribution pension.
I am already receiving a final salary pension from a previous employment so I would like to take my "pot" from my current employment pension within the next 2 years as 2 lump sums to minimise the amount of tax I need to pay.

I may be missing the point entirely but as I see it at the moment for every £80 I put into my pension the company will add £20 which sounds great. But it seems when I want to take my pot I will need to pay tax on it at the basic rate of 20% on 75% of what I take out. Doesn't that mean I'm being taxed 20% on the money I've added myself? Ie not that much better off but with added risks?

If you need any other info please ask.

Bravepants

I'm not sure whether you have confused the company adding 20% with the government adding 20%. You company might make an additional contribution up to a certain limit, but I suspect that you ARE talking about the 20% uplift from HMG.

When any income above your income tax allowance (£11850 per year from April) it will be taxed at 20%, BUT 25% will be tax free. So in total you will pay 15% tax on anything above your allowance, in other words you make 5% because of the tax free component.

It really depends on how much per annum you will take out. With your £11850 a year allowance and 25% tax free it turns out you can drawdown some £15800 per year (11850/0.75) from your pension and not pay any tax on it. Any other taxeable income you will pay your normal rate of tax.

Dox

You pay in £80, the provider claims £20 on your behalf from HMRC and adds it to the pot = £100. If you are a higher rate taxpayer, you can normally reclaim further tax relief via your tax return.

You immediately draw £100 from the pension. £25 is tax free, £75 is taxed at 20% (assuming you are a basic rate taxpayer) = net income of £85.

That's an instant return of 6%. If you are in a low risk fund (i.e. low risk to capital), you may well see some growth in the fund before you come to draw on it - and remember that funds held within a pension scheme are tax-advantaged (e.g. interest builds up tax free within the pension scheme).

bluenose1

As Dox says that is still a return of 6% even if you do pay tax.
My employer offers salary sacrifice so that means for every £68 I put into my pension the pension pot increases by £100, a 17% return if I have to pay tax on 75% if it.
Does your employer offer salary sacrifice on monthly contributions? If so you need to consider this.
I intend to increase my pension contributions to as much as possible the year before I intend to retire.

I note you say you are already receiving a final salary pension. I am not sure if this affects how much you can put into your current pension scheme. Think I have read £10k per annum maximum.

kidmugsy

bluenose1 wrote: »

I note you say you are already receiving a final salary pension. I am not sure if this affects how much you can put into your current pension scheme. Think I have read £10k per annum maximum.

Nope. It doesn't affect it.

UPDATE: I've realised why you thought £10k. It's the old restriction on how much you could contribute if you'd started drawing from a DC pension in excess of your TFLS. That £10k has since been lowered to £4k.

Why should DB pensions be treated more favourably than DC pensions? It's a riddle wrapped in a mystery inside an enigma. Or maybe it's because MPs and Civil Servants get DB pensions. Who can tell?

kidmugsy

AandP wrote: »

Hi, I'm looking to retire this August (aged 59) and it's been mentioned that it would be a good idea to put a lump sum both before and after the 5th April into my current works pension before I leave.Ie not that much better off but with added risks?

If your employer would pay some extra, or if you are using salary sacrifice (often called "smart" pension contributions) then it would be to your advantage to contribute more yourself.

If neither applies why not contribute to a SIPP and then leave the money as cash rather than investing it? That way you take no investment risk.

Be sure to check the restriction on how much you can contribute to a DC pension in a tax year when you do drawdown from a DC. if you restrict your withdrawal to your tax-free lump sum you will be unrestricted except for the ordinary £40k Annual Allowance and your own gross pay. If you take a penny more you will be restricted to a £4k p.a. contribution. This restriction is called MPAA but happily can be avoided by making your contribution before you start to take out any of the non-TFLS money.

"The money purchase annual allowance will only start to apply from the day after you have taken flexible benefits and so any previous savings are not affected." Source:
https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-annual-allowance

AandP

Many thanks for all your replies. Following further investigations it looks like I can put a lump sum from my savings into my pension but as it won't be via payroll the tax addition of 20% won't be added automatically. It's been suggested that I would need to contact HMRC who after getting the details would send me a cheque instead? The question this now raises is, will the sum from HMRC be taxed at 20%? The reason I'm asking is that if it went into my pension pot, when I took it out there would be tax only payable on 75% of it rather than all of it. Is this what I have to do and does it make sense?
Thanks.

kidmugsy

AandP wrote: »

it looks like I can put a lump sum from my savings into my pension but as it won't be via payroll the tax addition of 20% won't be added automatically.

A young member of my extended family once did that: chaos ensued. Far too much of his time was taken up trying to untangle things. He opened a SIPP for his use in future.

Linton

AandP wrote: »

Many thanks for all your replies. Following further investigations it looks like I can put a lump sum from my savings into my pension but as it won't be via payroll the tax addition of 20% won't be added automatically. It's been suggested that I would need to contact HMRC who after getting the details would send me a cheque instead? The question this now raises is, will the sum from HMRC be taxed at 20%? The reason I'm asking is that if it went into my pension pot, when I took it out there would be tax only payable on 75% of it rather than all of it. Is this what I have to do and does it make sense?
Thanks.

No you are looking at things the wrong way. Think in terms of gross contributions....

Say you want to get £10K into your pension. Therefore you shouldnt be taxed on £10K. The problem is you have already paid £2K tax on the £10K because it is coming from your taxed pay. So what happens is that you put in £8K, HMRC return the £2K tax you have already paid into your pension leaving you with a total contribution of £10K in your pension on which you havent paid any tax.

But if you have put £10K into your pension tax free then you will need to pay tax on it when you take it out. The government gives you the added bonus of not taxing you on 25% which means that you only will pay £1500 tax, whereas if you hadnt put the money in a pension you would have paid £2K tax.


This is all assuming that you are within the basic rate tax band both when you put the money in and when you take it out.

AandP

Thanks, all very confusing as this morning I have been on the phone to Blackrock (works pension) and they said as my contribution wasn't going in by my normal payroll ie from my savings I'd have to contact HMRC who would give me the extra 20%. On phoning HMRC just now they said once I have put in my lump sum and have paperwork to prove it they would send me a cheque for 20%?

If it helps I want to add 14k into my works pension this year before I retire. And yes I am paying 20% tax now and will do after I retire.

SuzieSue

AandP wrote: »

Thanks, all very confusing as this morning I have been on the phone to Blackrock (works pension) and they said as my contribution wasn't going in by my normal payroll ie from my savings I'd have to contact HMRC who would give me the extra 20%. On phoning HMRC just now they said once I have put in my lump sum and have paperwork to prove it they would send me a cheque for 20%?

I thought that 20% was usually added automatically by the pension scheme to contributions made from net pay.

Is that not the case?