Minimising tax paid in run up to retirement

jamesd

DBdoobydoo wrote: »

I'm now confused about the £40K annual allowance. If I pay in £24K the pension company adds 20% (£6K) of tax paid then if I withdraw £7.5K as a TFLS so there is £22.5K left in the pension pot how much of my annual allowance have I used? Is it £24K or £30K or £22.5K?

30k.

DBdoobydoo wrote: »

As I have been contributing to my DB pension for the last few years & it's been growing by about £1K/year AIUI I've been using about £16K of my annual allowance so I have £24K/year unused allowance for each of the last three tax years.

That seems right. Your DB pension people can tell you how much was used each year if it's not already on statements you have.

DBdoobydoo wrote: »

My pensions total £17K & my gross salary is £60K. I could earn up to another £30K if I took on extra work but I would only do this if I am able to minimise the tax that I pay & I certainly don't want to take on extra work & be hit with 40% income tax. What is the maximum that I can contribute from my salary into my pension pot in each of the next 3-4 years without exceeding the £40K annual allowance?

Your earlier post seems right. 40k for this year's allowance plus unused from the last three estimated at 24k a year. So 112k potentially. You'd aim for at least 64k to use the 24k from the oldest remaining past year before it expires.

jamesd

Going back to tax free lump sums I've mentioned the 7.5k per rolling 12 months option but there's another one that you could use in a few years. This one adds up the total personal pension contributions in the tax year of taking the lump sum and the two tax years before and after it. From that is subtracted the amount you would have been expected to contribute if you hadn't taken the lump sum. If the increase is less than 30% of the lump sum it's within the allowed limits, else a charge is payable on the excess over the 30%.

Once you've established a pattern of using the whole 40k annual allowance you can take tax free lump sums as you like because the possible increase above what would be expected is nil: you're already doing as much as you can without doing any lump sum recycling.

DBdoobydoo

jamesd wrote: »

30k.

That seems right. Your DB pension people can tell you how much was used each year if it's not already on statements you have.

Your earlier post seems right. 40k for this year's allowance plus unused from the last three estimated at 24k a year. So 112k potentially. You'd aim for at least 64k to use the 24k from the oldest remaining past year before it expires.

Thanks very much for the answers. I'm really grateful as it's much clearer to me now.

If I aim for retirement in April 2023 then I will strive to contribute up to £64K for this tax year to April 2020 less £7.5K TFLS. It might be do-able. I can do as much well paid freelance work as I want all that has been holding me back currently is preferring to have the free time rather than pay 40% tax on what I earn. If I do work extra hard this tax year to use up the allowance from previous years at least I'll know that I won't be working so hard the next three years as I'll only need to contribute £137.5K over the next three tax years after taking £7.5K/year TFLS or around £45K/year.

If I manage to contribute the maximum possible it would give me a pot of £194K in 2023. There would be another £26K to be taken out tax free & after that I just need to draw down at a rate that keeps me out of 40% tax. That would be a good time to defer payment of my state pension as I understand that now it's in payment I can only defer it once. Then start drawing the state pension again 5-6 years later after the pension pot is exhausted.