Retired but want to reduce tax - New pension?

dave_ave

I retired from my job a few weeks back and get approx £42k in annual pension.
In order to save on the amount of tax being paid, should I start another pension? If so, what type?
Any advice would be appreciated.

Dazed_and_confused

Unless you are Scottish resident for tax purposes a new pension won't "save" you any tax.

There may be an exception in the current tax year if you expect to be a higher rate taxpayer (because of part year salary and part year pension) but otherwise pension tax relief will just increase the amount in your new pension fund but that is entirely different to saving tax on your current pension.

zagfles

If your only income is pension income you'll only be able to put £3600 gross (2880 net) into a new pension and get tax relief. This tax year, if you had employment earnings from before you retired you could put some/all of that into a pension, but for future years, with no "relevant earnings" you're restricted to 3600 gross


There's a long thread about this on here

zagfles

Dazed_and_confused wrote: »

Unless you are Scottish resident for tax purposes a new pension won't "save" you any tax.

There may be an exception in the current tax year if you expect to be a higher rate taxpayer (because of part year salary and part year pension) but otherwise pension tax relief will just increase the amount in your new pension fund but that is entirely different to saving tax on your current pension.

You're forgetting about the 25% TFLS. That'll save tax. Not a great deal, but it's still a tax saving.

xylophone

Relative (retired, no relevant earnings) would be a higher rate taxpayer if it were not for the fact that (for the moment) contributing the maximum (£2880/£3600 to his SIPP keeps him under the threshold.

Dazed_and_confused

You're forgetting about the 25% TFLS. That'll save tax. Not a great deal, but it's still a tax saving.

True but that still doesn't "save" the op anything on the existing £42k

barnstar2077

Sorry, but can someone explain why starting a new pension is a good plan in this case? Is the idea that you take a tax free lump sum out of the new pension later? Pardon my ignorance,

Dazed_and_confused

A very common suggestion on here is to pay £2,880 into a personal pension or SIPP.

The pension provider adds £720 in basic rate tax relief so you end up with £3,600 in the pension fund.

You don't have to invest it, it can be held in cash (obviously probably losing a little value from inflation) and then for most people they will make a small profit by taking 25% as a tax free lump sum and then paying 20% on the remaining 75%.

If you can manage to withdraw the taxable element in a tax year you have unused Personal Allowance then the "profit" will be greater.

There are also additional marginal gains to be made by some of those who are Scottish resident for tax purposes (20% tax relief against only paying 19% tax on some of the taxable withdrawal).

But unless you are paying tax at a rate greater than 20% it won't save you any tax on your existing income.

greatkingrat

If you have a pension of 42k then you must be getting close to the lifetime allowance anyway.