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

Albermarle

bluu2k 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% 

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Scenario 1: If not to add £40K in his SIPP, after 5 years he will have £40K existing cash, plus 37.5K cash withdrawn from SIPP, tax free (i.e., £77.5K cash in hand), and £112.5K in SIPP to invest.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

Your calculations seem OK but you have just brought another variable into the calculation. Which is that some of the potentially taxable money might not actually get taxed , depending on the OPs circumstances at the time of withdrawal . In this case clearly the tax benefit of saving into a pension improves over the minimum 6.25%. 
However the original post contained some misunderstanding about the actual  tax free cash , which was the subject I was addressing .