Downsize to add into a pension?

Nick9967

Hi all since my original thread today was such a debacle I'll try again,

Having thought of all the ways to maximise my "pot" that I can prior to partial retirement (53 now target 58) the most logical seems to be , down size the house (was planning this anyway), and take that portion of the money and add to my pension pot using the backdating available in order to get the tax relief. 

I need circa £320k to enable me to draw down £20k for a fixed period of between 20 and 23 years I think, that's all I need it for.

If I downsize and take £125k out I could in theory put that into my PP , get 20% TR and then take my 25% , rest into DD 

Is there any logic which tells me not to do this?

Private Pension Pot	£280,000
House Downsize Gross	£150,000	(From £125k Net using 3 years worth of backdating at current salary level )
Total PP	£430,000
25%	£107,500
Mortgage Completion	£19,500
Immediate outlay  (Motorhome)	£50,000
Into Drawdown	£322,500
Cash Back up	£38,000

HappyHarry

£125k net payment makes a gross contribution of £156,250.

Just to confirm - your earnings will be at least £156,250 this tax year?

HappyHarry

I have many more questions;
(1) Why do you only require income for 20-23 years after age 58? What happens then?
(2) Why are you intending to take 25% tax-free cash straight away?
(3) What are you intending to do with the tax-free cash? 
(4) Are you aware of the recycling rules regarding tax-free cash (hint - you may be breaking them).


Whilst pensions are wonderful investment vehicles, due to their tax-efficient status, it may be worth considering other products as well, such as ISAs and General Investment Accounts for some of the "downsize" money. These accounts can be tax-efficient, and readily accessible with little or no tax charge. 

Nick9967

HappyHarry said:

£125k net payment makes a gross contribution of £156,250.

Just to confirm - your earnings will be at least £156,250 this tax year?

No , as I mentioned i would use the backdating system available , unless i have it very wrong, my salary is circa 40, so should be able to pay in 3 x 40 ish into my pension in one tax year using the previous 3 years available to me ,(I will have paid very little in over those 3 years)  this is how i understood it , have i got it wrong?

Marcon

Nick9967 said:

HappyHarry said:

£125k net payment makes a gross contribution of £156,250.

Just to confirm - your earnings will be at least £156,250 this tax year?

No , as I mentioned i would use the backdating system available , unless i have it very wrong, my salary is circa 40, so should be able to pay in 3 x 40 ish into my pension in one tax year using the previous 3 years available to me ,(I will have paid very little in over those 3 years)  this is how i understood it , have i got it wrong?

Yes, afraid so. Your earnings in this tax year need to support the extra contributions - hence HH's helpful reply.

HappyHarry

Nick9967 said:

HappyHarry said:

£125k net payment makes a gross contribution of £156,250.

Just to confirm - your earnings will be at least £156,250 this tax year?

No , as I mentioned i would use the backdating system available , unless i have it very wrong, my salary is circa 40, so should be able to pay in 3 x 40 ish into my pension in one tax year using the previous 3 years available to me ,(I will have paid very little in over those 3 years)  this is how i understood it , have i got it wrong?

You are talking about using carry forward, and have made the same error that many people make.

You must have sufficient pensionable earnings in the tax year to support the contribution. i.e. to use carry forward to make a pension contribution of £156,000, you need to have pensionable earnings of £156,000 in the same year.

e.g. If you earn £45,000, then you can contribute £40,000 to a pension using this year's annual allowance, and then use carry forward (if you did not make full use of previous year's contributions) to contribute another £5,000. 

Nick9967

HappyHarry said:

I have many more questions;
(1) Why do you only require income for 20-23 years after age 58? What happens then?
(2) Why are you intending to take 25% tax-free cash straight away?
(3) What are you intending to do with the tax-free cash? 
(4) Are you aware of the recycling rules regarding tax-free cash (hint - you may be breaking them).


Whilst pensions are wonderful investment vehicles, due to their tax-efficient status, it may be worth considering other products as well, such as ISAs and General Investment Accounts for some of the "downsize" money. These accounts can be tax-efficient, and readily accessible with little or no tax charge. 

Hi,
to answer your points,
(1) i have a property available to me at that point which is in my name (the person living in it now would be 110, that isn't going to happen) so that's my second wave of income/cash
(2) The 25% is undecided really , I have 2 specific things I want to do , clear mortgage at circa £19k and by a long awaited for motorhome for around £50, I'd like £10-20k in my immediate bank account for "who knows what" 
(3) As above 
(4) I don't know how I would as this would all happen whilst employed and paying into my pension, at least that's what i thought!
Your last point is really the type of ting i was looking for answers in, views on the best way to use that £125k that will be available to me , pension,. ISAS, cash in the bank etc etc?

Nick9967

HappyHarry said:

Nick9967 said:

HappyHarry said:

£125k net payment makes a gross contribution of £156,250.

Just to confirm - your earnings will be at least £156,250 this tax year?

No , as I mentioned i would use the backdating system available , unless i have it very wrong, my salary is circa 40, so should be able to pay in 3 x 40 ish into my pension in one tax year using the previous 3 years available to me ,(I will have paid very little in over those 3 years)  this is how i understood it , have i got it wrong?

You are talking about using carry forward, and have made the same error that many people make.

You must have sufficient pensionable earnings in the tax year to support the contribution. i.e. to use carry forward to make a pension contribution of £156,000, you need to have pensionable earnings of £156,000 in the same year.

e.g. If you earn £45,000, then you can contribute £40,000 to a pension using this year's annual allowance, and then use carry forward (if you did not make full use of previous year's contributions) to contribute another £5,000. 

So for me to be specific, if I earn £40k for this year and for the previous 3 years for arguments sake, for each of those years I've only paid in 2.5k gross into the pension, then I have £125k cash burning a hole in my pocket, what's the most I can pay into a pension?

Thanks for the help by the way that's why this place is so useful!

HappyHarry

Nick9967 said:

HappyHarry said:

I have many more questions;
(1) Why do you only require income for 20-23 years after age 58? What happens then?
(2) Why are you intending to take 25% tax-free cash straight away?
(3) What are you intending to do with the tax-free cash? 
(4) Are you aware of the recycling rules regarding tax-free cash (hint - you may be breaking them).


Whilst pensions are wonderful investment vehicles, due to their tax-efficient status, it may be worth considering other products as well, such as ISAs and General Investment Accounts for some of the "downsize" money. These accounts can be tax-efficient, and readily accessible with little or no tax charge. 

Hi,
to answer your points,
(1) i have a property available to me at that point which is in my name (the person living in it now would be 110, that isn't going to happen) so that's my second wave of income/cash
(2) The 25% is undecided really , I have 2 specific things I want to do , clear mortgage at circa £19k and by a long awaited for motorhome for around £50, I'd like £10-20k in my immediate bank account for "who knows what" 
(3) As above 
(4) I don't know how I would as this would all happen whilst employed and paying into my pension, at least that's what i thought!
Your last point is really the type of ting i was looking for answers in, views on the best way to use that £125k that will be available to me , pension,. ISAS, cash in the bank etc etc?

If I may suggest;
(1) If that property is already in your name, then all well and good. I don't know the circumstances, but you should be aware that if it's not in your name now, then you should not count on it. If it has been gifted to you, then you may be caught by a local authority's "deliberate deprivation" rules.
(2) That sounds great. 
(3) Irrelevant now!
(4) If you were to add an unusually large sum to your pension, and take 25% out very soon after, it can be considered to be recycling, even if the contribution takes place prior to the withdrawal. You need at least two full tax years between contribution and taking the tax-free cash. The rules are complex, but it would be best to check them out carefully beforehand.

Considering you may only be able to add approx. £40k (gross) to a pension, that will leave in the region of £85k to use elsewhere. As this money is not an emergency fund, and will need to fund 20-23 years of your retirement, an investment may be appropriate. An ISA initially for £20k would be tax efficient. If the rest were put in a general investment account, then there would likely be minimal income tax / dividend tax / CGT to pay, and £20k per year could be swept into the ISA.

kuratowski

Could think about downsizing the house now, while still working, and then you could put 40k per year into the pension over 4 years, just ready by the time you retire.

Nick9967

I was basically going from this statement which seems to be widely available:

Although my calcs are a bit wild I thought

Me pay in £32k , tax relief £8k = £40k and can do this for 3 years in total if i haven't done it previously?

So I could use £96k and gain £24k tax relief?

Or am I miles off the point?

You can contribute up to 100% of your earnings to your pension each year or up to the annual allowance of £40,000 (2021/22). This means the total sum of any personal contributions, employer contributions and government tax relief received, can’t exceed the £40,000 annual pension allowance.

Contributions that exceed your annual salary or the £40,000 allowance are subject to an annual allowance charge in line with income tax. Under the right circumstances you may have the option to carry forward any unused allowances from the previous three years, totalling up to £120,000, on top of your current year’s annual alowance.

Pension carry forward allows you to make pension contributions over the annual allowance and still receive tax relief. In the current tax year you can contribute up to £40,000 to your pension and can carry forward any unused allowance from the previous three years.