Best interest rate versus paying into a pension

kevinwlewis

i am 65. Still working. Have not topped up my private pension for 10 years. The best instant access interest rates is NS and Investments Bonds at 1.1% . I have been advised that if i invest my whole profits for my last business year,which i can afford to do, the government will  top it up by 20%. Could i then withdraw the allowable tax free cash from the pension pot which I've built up over the years. It sound too good to be true. Am i being misled?

mark55man

you can, but only if you have taxable income in this tax year of as much as you intend to pay in.  say you earned £10K this year, even though this is less than your personal allowance, because it was taxable you could pay this into your pension (Pay £8K then the pension provider will top it up to £10000).

If you earned 41K then there is a limit called the annual allowance of £40K which (its complicated) can be carried over for 3 years - but you can only pay money into your pension that is taxable this year even if you are using allowances from previous years.  There are online calculators available.

There are a number of recent threads on this (search annual allowance).  The only biggie that would stop this is if  if you have already taken some income from a defined contribution pension, ie more than the tax free sum - in this case you Annual Allowance is restricted to £4000.  This is called MPAA.

If you have no taxable income this year, you can still do the above to the gross amount of £3600 ie a net payment of £2880 (if I recall correctly) and you can do that even as a pensioner 

mark55man

PS you can't withdraw all your tax free cash and then reinvest it in your pension - that is called recycling, and you need to wait for an expert to come along as the rules for that are very complicated, although mainly designed to stop large scale abuse

PPS - your own pension provider may charge or put some obstacles in the way especially if its quite an old scheme.  But most platforms would allow this.  

AnotherJoe

kevinwlewis said:

i am 65. Still working. Have not topped up my private pension for 10 years. The best instant access interest rates is NS and Investments Bonds at 1.1% . I have been advised that if i invest my whole profits for my last business year,which i can afford to do, the government will  top it up by 20%. Could i then withdraw the allowable tax free cash from the pension pot which I've built up over the years. It sound too good to be true. Am i being misled?

Well, they will top it up by 25% (for example, £80 -> £100) and you can (by definition) withdraw the allowable tax free cash. That's because its "allowable"

And you could do that whether or not you put any money in this year.

But obviously if you did add as your adviser sugegsts, yes you'd be taking out the topped up money.

Many of us stuffed our pensions in later years because its not like when much younger when the money is inaccessible for many years.

jamesd

kevinwlewis said:

 I have been advised that if i invest my whole profits for my last business year,which i can afford to do, the government will  top it up by 20%. Could i then withdraw the allowable tax free cash from the pension pot which I've built up over the years. It sound too good to be true. Am i being misled?

Adds 25% not 20% for a personal contribution and yes it's a good deal. But it'd normally be done as a company contribution allowable for corporation tax deduction and not subject to dividend or income tax and not NI either. Nothing added to a company contribution but still a good deal because nothing is taken away first..

The limit is currently £160,000 in one tax year: 40k  this years allowance and the other 120k if there was unused allowance from previous years, assuming all 40k for each was unused.

You can even use the small pot rule up to three times in your life to take some taxable money from a pot of up to 10k, emptying that pot. This doesn't trigger the MPAA restriction to 4k of contributions in future years.

The rules are there to encourage pension use and can sometimes be very beneficial.

It'll probably be best to continue using business contributions but if next year you decide that you want to recycle some of the tax free lump sum we can discuss that. Or if you have a spouse we can explain how to do it for them so they can get the tax relief this tax year - and they also get to take out a tax free lump sum after paying in with tax help.

kevinwlewis

Thankyou everyone for your replies. I am a self employed  sole trader and not registered as a company.  There is a lot to take in so i need to re read everything. Would be  better to use some of my savings, currently in Stocks and Shares ISAs and cash ISAs and best performing savings accounts, and invest all except some emergency savings into a pension . Then if i need this pension money i can withdraw a lump sum which the government have topped up by 20% or 25%. 

Albermarle

kevinwlewis said:

Thankyou everyone for your replies. I am a self employed  sole trader and not registered as a company.  There is a lot to take in so i need to re read everything. Would be  better to use some of my savings, currently in Stocks and Shares ISAs and cash ISAs and best performing savings accounts, and invest all except some emergency savings into a pension . Then if i need this pension money i can withdraw a lump sum which the government have topped up by 20% or 25%. 

AS a self employed sole trader , HMRC will add basic rate tax relief to your pension contributions . This means if you contribute £80 they add £20 . If you contribute £100 they add £25 .
There are some limits to this , one important one is that you can not get more tax relief than you have actually paid in tax in this tax year ( or estimated tax ) So you can not just pile all savings in and expect tax relief, regardless of your current income /tax situation.
Also when you take money from the pension , only the first 25% is tax free, the rest is taxable ( exactly how much depends on your overall tax situation. 
This government site maybe useful for you.
https://www.pensionsadvisoryservice.org.uk/

jamesd

kevinwlewis said:

I am a self employed  sole trader and not registered as a company.  There is a lot to take in so i need to re read everything. Would be  better to use some of my savings, currently in Stocks and Shares ISAs and cash ISAs and best performing savings accounts, and invest all except some emergency savings into a pension . Then if i need this pension money i can withdraw a lump sum which the government have topped up by 20% or 25%. 

Yes. Getting close to or over 55 changes things a bit.

What you might do is pay 40k a year into a pension if you have at least that much income. Also take out 7.5k every rolling twelve month period (not tax or calendar year) because that's the easiest of the tax free lump sum rules and it'll slow the depletion of savings.

jamesd

There are some limits to this , one important one is that you can not get more tax relief than you have actually paid in tax in this tax year ( or estimated tax )

That is true for VCTs, not pensions. For pensions you get tax relief on 100% of earnings provided you have annual allowance available and assuming no tapering applies. This includes earnings on which no tax has been paid, which means relief can exceed tax due.