Hypothetical question regarding paying in to pension

zolablue25

Hi


I had this thought while I couldn't sleep last night and so I thought I would pass it on to the experts so atht I may understand the mechanics a bit better.


Let's say that I have a pension pot that, when added to my state pension, would take me up to the annual tax threshold. If I were then to receive a lump sum of, say, £50,000 through lottery/premium bonds/inheritance etc would it be better to put that money in to ISAs (obviously not all at once) or a pension fund? If I put it in to a pension I know I would get the tax relief but I would pay tax on the income later.



Oh, let's also assume that I am a lower rate tax payer at the moment (because I am).

Linton

zolablue25 wrote: »

Hi


I had this thought while I couldn't sleep last night and so I thought I would pass it on to the experts so atht I may understand the mechanics a bit better.


Let's say that I have a pension pot that, when added to my state pension, would take me up to the annual tax threshold. If I were then to receive a lump sum of, say, £50,000 through lottery/premium bonds/inheritance etc would it be better to put that money in to ISAs (obviously not all at once) or a pension fund? If I put it in to a pension I know I would get the tax relief but I would pay tax on the income later.



Oh, let's also assume that I am a lower rate tax payer at the moment (because I am).

If you are a basic rate tax payer both whilst working and in retirement the tax rebate you get on contributions matches the tax paid when you drawdown except for the 25% tax free. So the net benefit of the pension is 20% of 25%=5% of the total.


Note that you cannot contribute more into a pension each year than your earned income - PBs, inheritance, lottery etc are not earned income. So if you wanted to put £50K net (=£75K gross) into your pension it would need to be split over a number of years

zolablue25

Linton wrote: »

If you are a basic rate tax payer both whilst working and in retirement the tax rebate you get on contributions matches the tax paid when you drawdown except for the 25% tax free. So the net benefit of the pension is 20% of 25%=5% of the total.


Note that you cannot contribute more into a pension each year than your earned income - PBs, inheritance, lottery etc are not earned income. So if you wanted to put £50K net (=£75K gross) into your pension it would need to be split over a number of years

Thanks Linton. Yes, I understand that I couldn't put it all in at once I was just wondering about the maths of it all and you have cleared that up nicely with your response.

Mnd

And I believe that if you die before 75 your pot would be paid to your benificiarys tax free☺

AlanP_2

Linton's calculation is correct but the way I look at it is as per this example:

£10,000 Gross Pension Contribution

As a BR taxpayer means £8k cash contributed.

25% TFLS = £2,500

Pay 20% tax on the £7500 means £6000 for me.

Total Cost (to me) = £8,000
Total Return (to me) = £8,500

A guaranteed* 6.25% return which given savings rates at the moment is a fantastic return.

* Assuming tax rates on pensions don't change.