Annual pension tax relief for someone with no private pension (Already Retired).

BigBlueSky

My parents are both retired and apart from savings (and part time self employment) their only pension is the state pension. 

They don't earn enough to pay tax.

Are they able to contribute to a private pension (even though they are already passed retirement age) and receive the annual pension tax relief ?

Thanks in advance

jamesd

As long as they haven't reached their 75th birthday they can each pay in £2880 a tax year and 25% will be added to give basic rate tax relief of 20% to get a gross of £3600. The relief is added even if they pay no income tax. They can take out 25% - £900 - tax free and the rest - £2700 - is taxable. If £2700 of personal allowance is available there will be no tax due and the net gain £720. If none is available the gain is £180.

If the earnings from self-employment are more than £3600 they can pay in up to their individual earnings instead, assuming that they aren't working through limited companies.

BigBlueSky

jamesd said:

As long as they haven't reached their 75th birthday they can each pay in £2880 a tax year and 25% will be added to give basic rate tax relief of 20% to get a gross of £3600. The relief is added even if they pay no income tax. They can take out 25% - £900 - tax free and the rest - £2700 - is taxable. If £2700 of personal allowance is available there will be no tax due and the net gain £720. If none is available the gain is £180.

Thanks, that makes sense.  One is 69 and the other is 72, so that would be OK.

I doubt the net gain of £720 will take them into having to pay tax either so that is good.

Can they just take out the 25% (ie £900) easily, or do you need to do it as an annuity ?

Thanks in advance

jamesd

You can take it all as a  lump sum using UFPLS or can take 900 lump and monthly non-annuity income using drawdown. Drawdown can be in arbitrary lumps, doesn't have to be regular. If they use UFPLS they will probably have to reclaim tax.

Zanderman

Have look at the (rather long but useful) thread about doing this at https://forums.moneysavingexpert.com/discussion/5580163/paying-2880-into-pension-when-retired

No annuities involved.  Just drawdown, But they need to decide whether UFPLS or not.

The most obvious thing for them to do, in my view, is to both open a Hargreaves Lansdown Sipp, pay in 2880 each (assuming they have that spare money available), leave it uninvested - i.e. as cash, wait for the tax relief of 720, then withdraw as much as they like/need (i.e. don't feel constrained by the 25% tax free part) by UFPLS.  If you read the thread you'll see advice on how to do this without actually 'closing' the pension (i.e. by leaving some money in) which helps them, next year, to do the same as they don't have to open another.

AnotherJoe

BigBlueSky said:

jamesd said:

As long as they haven't reached their 75th birthday they can each pay in £2880 a tax year and 25% will be added to give basic rate tax relief of 20% to get a gross of £3600. The relief is added even if they pay no income tax. They can take out 25% - £900 - tax free and the rest - £2700 - is taxable. If £2700 of personal allowance is available there will be no tax due and the net gain £720. If none is available the gain is £180.

Thanks, that makes sense.  One is 69 and the other is 72, so that would be OK.

I doubt the net gain of £720 will take them into having to pay tax either so that is good.

Can they just take out the 25% (ie £900) easily, or do you need to do it as an annuity ?

Thanks in advance

The £720 is tax free. Thats why its £720, its the 25% tax free sum from £3600

If they fill in tax returns (sounds unlikely but just in case they should NOT put that as income.

BigBlueSky

AnotherJoe said:

The £720 is tax free. Thats why its £720, its the 25% tax free sum from £3600

If they fill in tax returns (sounds unlikely but just in case they should NOT put that as income.

Thanks.  Yes, they have tax returns - I believe there is a section for pension contributions.

BigBlueSky

Zanderman said:

The most obvious thing for them to do, in my view, is to both open a Hargreaves Lansdown Sipp, pay in 2880 each (assuming they have that spare money available), leave it uninvested - i.e. as cash, wait for the tax relief of 720, then withdraw as much as they like/need (i.e. don't feel constrained by the 25% tax free part) by UFPLS.  If you read the thread you'll see advice on how to do this without actually 'closing' the pension (i.e. by leaving some money in) which helps them, next year, to do the same as they don't have to open another.

Thank you.  Will take a look into that.

Is Hargreaves Lansdown going to be the cheapest way of doing this? - I moved away from them myself a few years back due to very high fees. 

molerat

If keeping in cash then there are no charges.

BigBlueSky

jamesd said:

If the earnings from self-employment are more than £3600 they can pay in up to their individual earnings instead, assuming that they aren't working through limited companies.

Just checked.  For the last tax year 2019/20 their earnings were approx £1,000 from self employment, £250 from bank account interest, and £7,000 from state pension - total approx £8,200.

I assume this means they can only put in the £3,600 (£2,880 net of bonus) ?

OldBeanz

BigBlueSky said:

jamesd said:

If the earnings from self-employment are more than £3600 they can pay in up to their individual earnings instead, assuming that they aren't working through limited companies.

Just checked.  For the last tax year 2019/20 their earnings were approx £1,000 from self employment, £250 from bank account interest, and £7,000 from state pension - total approx £8,200.

I assume this means they can only put in the £3,600 (£2,880 net of bonus) ?

Yes they pay £2880 into their SIPP..