Government pension Query

eric4395

Hi Everyone looking for advice regarding my gov pension. I am still working and plan  to continue for at least another year. My gov pension is due on my 66th birthday in Dec. I know you can defer it but I would prefer to take it and reinvest it in another pension plan /scheme probably with  true potential where I have a previous works pension lying. How would this work regarding tax as if I just took my gov pension  and done nothing it would be taxed at 40% but if I was to transfer it straight into true potential say by direct debit every week then how would that work. Would I need to inform HMRC that is what I'm doing which I am hoping stops me paying 40%tax on it.. Does this sound feasible and sensible.

Linton

Say you want to get £100 into your pension.  As you are paying with money that has already been taxed you actually give True Potential £80.  HMRC will add the £20 basic rate tax you have paid directly into your pension.  This leaves you with the £20 higher rate tax that you want back.  It would probably get sorted out after the end of the tax year but you can let HMRC know by phone, letter or possibly via your tax account that you are making regular net pension contributions and they will adjust your employment tax code.  

Note - when making net pension tax calculations always work in terms of the gross contribution, otherwise you could easily get very confused.

Albermarle

It would work but you would have to be paying enough 40% tax on your earned income to claim back the 40% tax relief . The tax paid on the pension does not count .

Dazed_and_C0nfused

Linton said:

Say you want to get £100 into your pension.  As you are paying with money that has already been taxed you actually give True Potential £80.  HMRC will add the £20 basic rate tax you have paid directly into your pension.  This leaves you with the £20 higher rate tax that you want back.  It would probably get sorted out after the end of the tax year but you can let HMRC know by phone, letter or possibly via your tax account that you are making regular net pension contributions and they will adjust your employment tax code.  

Note - when making net pension tax calculations always work in terms of the gross contribution, otherwise you could easily get very confused.

That doesn't seem quite right.

If the op is a higher rate payer they will effectively be paying 40% tax on their State Pension so the net benefit from £100 is £60.

They pay £60 into their (presumably) relief at source pension and this is grossed up to £75.

This increases their basic rate band by £75 this potentially saving £15 higher rate tax (£75 taxed at 20% rather than 40%).

So £100 State Pension has become £90 (£75 in the relief at source pension and £15 less tax paid).

NottinghamKnight

True potential have a reputation for being very expensive just for information.

xylophone

True potential have a reputation for being very expensive just for information.

I see that the OP said

I would prefer to take it and reinvest it in another pension plan /scheme probably with  true potential where I have a previous works pension lying. 

Perhaps he has never done a cost comparison?

I wonder what kind of pension scheme his current employer is offering and whether or not it is possible to increase contributions to it?

Linton

Albermarle said:

It would work but you would have to be paying enough 40% tax on your earned income to claim back the 40% tax relief . The tax paid on the pension does not count .

Agreed - it is an assumption that the OPs earned income after paying the pension exceeds £50K.  Were that not to be the case then the £20 higher rate relief would be less, possibly zero.

Linton

Dazed_and_C0nfused said:

Linton said:

Say you want to get £100 into your pension.  As you are paying with money that has already been taxed you actually give True Potential £80.  HMRC will add the £20 basic rate tax you have paid directly into your pension.  This leaves you with the £20 higher rate tax that you want back.  It would probably get sorted out after the end of the tax year but you can let HMRC know by phone, letter or possibly via your tax account that you are making regular net pension contributions and they will adjust your employment tax code.  

Note - when making net pension tax calculations always work in terms of the gross contribution, otherwise you could easily get very confused.

That doesn't seem quite right.

If the op is a higher rate payer they will effectively be paying 40% tax on their State Pension so the net benefit from £100 is £60.

They pay £60 into their (presumably) relief at source pension and this is grossed up to £75.

This increases their basic rate band by £75 this potentially saving £15 higher rate tax (£75 taxed at 20% rather than 40%).

So £100 State Pension has become £90 (£75 in the relief at source pension and £15 less tax paid).

I dont quite get your point but I dont think that fundamentally we are saying anything different....
1) Whether the money actually came from the SP or from employment should not matter, it could all have gone into the OPs bank account, or he could have paid from his employment earnings and used the SP for living expenses
2) As in the reply to Albemarle my figures assume that the OP is a higher rate tax payer from his employment earnings and would be due the full £20 in higher rate tax relief after paying for the pension.
3)  The objective in my calculation was to get £100 into the pension.  Your approach only gets £75 into the pension which is why there is £5 less in basic rate relief and £5 less in higher rate relief.

Dazed_and_C0nfused

But the op is only getting £60 extra income net in the first place, not £80.

So I cannot see how you can end up with £100.

After tax deducted when the pension is paid, relief at source added and any higher rate tax adjustment claimed the effective tax rate is 10%.

Albermarle

Maybe another way to look at it is that to get £100Net the OP as a HRT would have to earn £166.66.
If they put this £100 in their pension the provider will add £25 and by reclaiming the HRT they will get another £25.
So they will have earned £166.66 and ended up with £150 , a reduction of 10%.

I must admit I have always been confused why you do not recover all the tax paid .

Linton

I think you need to work in gross terms always to avoid getting confused.  The net result of paying after tax and receiving tax refunds should be the same as paying before tax.  There isnt 10% to be lost.

If the OP paid £100 pretax into his pension he would end up having paid no tax on the £100 and would have £100 in his pension.
Now look at making a net payment from taxed income using the same original £100:
The £100 is taxed at 40% leaving £60.  £20 is borrowed from savings.  So £80 can be paid into the pension which is increased to £100 by HMRC with £20 basic rate relief.  HMRC then refund the £20 higher rate tax.  This refund is returned to savings repaying the loan.  The net effect  is that no tax has been paid on the original £100 which is now safely lodged in the pension.
In practice this temporary loan wont happen since SP is actually paid without any tax deducted.