Can you make an easy 10k by making voluntary pension contributions and withdrawing 25% at 55?

stuffforsell09

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

I see what you are getting at now and thanks for the detailed explanation. It's still not a bad return considering that most banks pay 1% of less on instant savings accounts. Also most work pension pots return at least 3% - 5% per annum (even this year with the stock market crash in March, my pension pot is up by 3%). So that's another 3% - 5% gain on top of the 6.25%. 

Thrugelmir

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

I see what you are getting at now and thanks for the detailed explanation. It's still not a bad return considering that most banks pay 1% of less on instant savings accounts. Also most work pension pots return at least 3% - 5% per annum (even this year with the stock market crash in March, my pension pot is up by 3%). So that's another 3% - 5% gain on top of the 6.25%. 

Stock markets rise and fall. The shorter the time window the greater the volatility you potentially expose yourself too. 

jimi_man

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

I see what you are getting at now and thanks for the detailed explanation. It's still not a bad return considering that most banks pay 1% of less on instant savings accounts. Also most work pension pots return at least 3% - 5% per annum (even this year with the stock market crash in March, my pension pot is up by 3%). So that's another 3% - 5% gain on top of the 6.25%. 

This can also be improved by 20% - as alluded to earlier - by being a higher rate taxpayer whilst working and a basic rate taxpayer in retirement, or a basic rate taxpayer whilst working and able to withdraw it all within your personal tax allowance when retired. 

Audaxer

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

That's true. However if the OP was earning no other income from 55 and managed to withdraw the remaining taxable pension income up to his personal tax allowance every year, he wouldn't pay any tax on these withdrawals in additional to the £50k tax free. So I think it is possible that over a number of years he could get the whole lot, or most of it, withdrawn without being liable for tax.

Albermarle

Audaxer said:

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

That's true. However if the OP was earning no other income from 55 and managed to withdraw the remaining taxable pension income up to his personal tax allowance every year, he wouldn't pay any tax on these withdrawals in additional to the £50k tax free. So I think it is possible that over a number of years he could get the whole lot, or most of it, withdrawn without being liable for tax.

Yes but it is better for clarity to look at the two issues separately.
There is unambiguous 25% tax free , regardless of any other income .
Then the other 75% is taxable , but you may or may not actually pay tax depending on your other income , tax code , how much you withdraw each year etc 

Albermarle

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

I see what you are getting at now and thanks for the detailed explanation. It's still not a bad return considering that most banks pay 1% of less on instant savings accounts. Also most work pension pots return at least 3% - 5% per annum (even this year with the stock market crash in March, my pension pot is up by 3%). So that's another 3% - 5% gain on top of the 6.25%. 

Another advantage is that all growth and dividends paid from investments within the pension are not subject to capital gains or dividend tax. In most circumstances paying into a pension is the best way to save for retirement .

Audaxer

Albermarle said:

Audaxer said:

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

That's true. However if the OP was earning no other income from 55 and managed to withdraw the remaining taxable pension income up to his personal tax allowance every year, he wouldn't pay any tax on these withdrawals in additional to the £50k tax free. So I think it is possible that over a number of years he could get the whole lot, or most of it, withdrawn without being liable for tax.

Yes but it is better for clarity to look at the two issues separately.
There is unambiguous 25% tax free , regardless of any other income .
Then the other 75% is taxable , but you may or may not actually pay tax depending on your other income , tax code , how much you withdraw each year etc 

I still thought it was worth making the point for the OP that it would be possible to get it all out tax free if only drawing up to his personal tax allowance each year, as many posters have previously advised that they do just that.

drumtochty

The Op has intentionally left out details of his age etc as he only really wants positive responses. He has accepted that he is only getting an extra £12,500 tax free cash as the other £37,500 tax free cash was already in the pot to begin with!

 I bet he is still saying to people that putting £50k extra in his pension pot will get him £50k tax free cash.

I also think has has not thought about how to get the remaining £37,500 taxable money out the pension without paying income tax.

stuffforsell09

drumtochty said:

The Op has intentionally left out details of his age etc as he only really wants positive responses. He has accepted that he is only getting an extra £12,500 tax free cash as the other £37,500 tax free cash was already in the pot to begin with!

 I bet he is still saying to people that putting £50k extra in his pension pot will get him £50k tax free cash.

I also think has has not thought about how to get the remaining £37,500 taxable money out the pension without paying income tax.

No I never said or meant that

bluu2k

Albermarle said:

stuffforsell09 said:

Albermarle said:

stuffforsell09 said:

I'm sure this has been asked many times before but can't find an answer on here.
As an example, If I was 50 years old and in employment, earning £25k per annum. Would it be possible to make voluntary pension contributions into your work pension (for every £1000 invested it will be increased by £250 to £1250). Then at 55 withdraw up to 25% of my pension pot tax free?
I'm thinking that over five years I would contribute an extra £40k into my pension from savings and salary (which is automatically increased to £50k due to tax relief) and then at 55 withdraw 50k from my pension tax free, I would of earnt 10k for free! 
Are my calculations correct?

For a basic rate taxpayer in employment and in retirement , the tax benefit of a pension is 6.25% .eg
Pay in £80 - tax relief of £20 added = £100 
Take £25 tax free and pay tax on the £75 = £85 
If you can claim higher rate tax relief on the way in , or pay no tax on the way out ( due to having a low income ) the benefit is much larger.

Thanks for response. But not sure that this is correct or relevant to my question. Please note that the government allows Tax payers to take 25% of their pension pot Tax free after 55.

What I said is 100% correct. To use your figures instead :
You already have a pension pot of £150K - you add £40K more and £10K tax relief is added- so £200K in total .
From this you can take £50K from this tax free . So far so good .
What you are missing is that if you had not made  the extra contribution , you could have taken £37.5K tax free from the £150 K, when you reached 55.
.So you have gained £12.5K tax free by adding the £40K . The benefit of not having to pay taxes on £12.5K is £2.5 K .
So by adding £40K you have gained £2.5K 'free money' , which miraculously is a gain of 6.25% 

Hmm, I can see from a slightly different angle with you @Albermarle:

Scenario 1: If not to add £40K in his SIPP, after 5 years he will have £40K existing cash, plus 37.5K cash withdrawn from SIPP, tax free (i.e., £77.5K cash in hand), and £112.5K in SIPP to invest.

Scenario 2: If top up his SIPP pot with £40K, after 5 years time he can withdraw £50K, tax free, and will have his £150K in his SIPP account? Yes, this £150K now is subject to tax, but:
(a) as long as he does not withdraw any more penny, he will not have to pay tax. So he will have his full £150K in SIPP pot to invest, instead of having only £112.5K as in Scenario 1 (i.e, having 'extra' £37.5K for investment).
(b) if his income in any particular year(s) becomes less than his personal tax free allowance, he can withdraw that different amount (£12,500 minus his income that year), which means his tax free amount becomes higher than £50K he already withdrew.
(c) if he wants to be have £77.5K cash in hand as in Scenario 1, he now can withdraw £34,375 from his SIPP pot, leaving the balance of £115,625, which is £3,125 larger than his original (which translates into £2.5K 'free money' after paying 20% tax).
So (a) and (b) would be much more profitable in compared with (c)?

Just my humble calculations, not sure if I get it correctly?