Pension Top up query

Tommohawk

Hi all - embarrassingly simple query regarding pension top up. If I add a lump sum to my pension pot, I will get tax relief. However, when I take my pension I will get taxed on it (basic rate) So the question is, am I up on the deal? The sums seem to suggest I would be eg;
I have £8000. Pay that into pension, it gets topped up by tax relief to £10,000. Take 25% as lump sum on retirement, gives £2500, remaining £7500 pays tax at 20%, so tax is £1500, leaving £6000 after tax. So total out is then £8500.
Are my sums correct? BTW I am aware of general rules regarding how much one can contribute etc.
Thank in advance

Marcon

Yes, assuming tax rates don't change - and that the amount you've invested doesn't change between the time you invest and the time you draw it. Remember it could go down as well as up!

Tommohawk

ok that great thanks!

Dazed_and_C0nfused

Yes, it is the standard 6.25% increase that arises on a relief at source contribution.

100% attracting (basic rate) tax relief on the way in but only 75% being taxed on the way out.

£8,000 + 6.25% = £8,500

Albermarle

If you are a basic rate taxpayer when you make the contribution and a basic rate taxpayer when you take the pension the benefit is 6.25% as you have calculated ( £500/£8000 X 100) .However this is a minimum . If you are a higher rate taxpayer when you contribute and a basic rate taxpayer in retirement than the benefit is significantly more . Or if you pay no /little tax in retirement , perhaps for a few years before state pension arrives , the benefit is also greater .
Plus all investment gains ( hopefully !) and dividends are protected from tax in a pension.

MallyGirl

don't forget that the first £12k income will be taxed at 0% so if there isn't much in there, and you aren't earning elsewhere, then it can come out tax free

dunstonh

20% tax relief on the contribution but its effectively 15% when you draw assuming the full amount is above your personal allowance.    As the state pension is less than the personal allowance, then some tax free income will be available. Plus, if you retire earlier than state pension age you may have the whole personal allowance.  
Pensions also have tax free growth  (no income tax, dividend tax or capital gains tax).  And they are outside of the estate and not subject to IHT.

gambleruk

Just a quick question on this, if you are 54 and you take redundancy halfway through the tax year after earning say 12k with no plans to work the tax year after could you then say open a sipp with 8k so with the 2k tax relief withdraw the full 10k tax free once you reach 55 ?

AlanP_2

gambleruk said:

Just a quick question on this, if you are 54 and you take redundancy halfway through the tax year after earning say 12k with no plans to work the tax year after could you then say open a sipp with 8k so with the 2k tax relief withdraw the full 10k tax free once you reach 55 ?

You can withdraw from a pension / SIPP at Age 55+ but whether you will get it all out tax free depends on your overall income situation and personal tax allowance.

On the face of it if the £10k was your only income in that tax year then yes, but if you had BTL income or other pension payments etc. then they would need factoring in to the tax situation.