Downsize to add into a pension?

HappyHarry

Nick9967 said:

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!

£40k gross (including this year's £2.5k) as that is your pensionable earnings. In this situation, you cannot use carry forward, so previous years' contributions are irrelevant.

kuratowski above makes a very valid suggestion if you are determined to use pensions.

Nick9967

HappyHarry said:

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.

Thanks Harry
I wasn't aware of the "2 tax year" break between paying in and drawing 25%, i need to check the detail of this clearly as i'll be adding about 25 ish to my total pot so its a big addition

Nick9967

HappyHarry said:

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.

That Property is already in my name, so should avoid all such targets from LA's

HappyHarry

Nick9967 said:

HappyHarry said:

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.

Thanks Harry
I wasn't aware of the "2 tax year" break between paying in and drawing 25%, i need to check the detail of this clearly as i'll be adding about 25 ish to my total pot so its a big addition

This article is fairly good: https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/pensions-recycling/

You have asked before if you should use a financial adviser. There are some gaps in your knowledge that could leave you in a precarious position, so it might be a saving to you by using one.

Nick9967

Calcs adjusted thanks guys for your help, very very useful, plans have changed to accomodate and stay legal haha!

HappyHarry

Nick9967 said:

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.

The link in your post makes clear the rules: 

One of the key pension annual allowance carry forward rules is that you can’t receive tax relief on contributions in excess of your earnings in any tax year. For example if a person earns £60,000 in a tax year, they can only contribute up to £60,000 to their pension that tax year. No matter how much unused allowance they have remaining from the previous three years, they can only bring forward £20,000 so that their pension contributions equal their annual salary.

SomeMadeUpName

Can I ask a question about the recycling concern that was raised earlier in the thread.

It's a genuine question, I am new to this pension planning world and thought I had an idea of how recycling worked but this makes me wonder:

So using the OP as a worked example:

If the OP sells a property (or any other asset) and then uses those funds to radically increase contributions over say 3or4 years.

Then in the 5th year starts drawdown and takes a tax free lump.

Surely there is no breach of recycling as the funds going into the pension can be clearly shown to have come from the sale of the asset (which the OP if free to do as he pleases with). Is that not the case?

Or viewing it another way the OP is able to live off the funds from the asset sale for 3or4 years meaning all his earned income is free to be paid into pension. How is that recycling, even if a lump is drawn relatively soon after?

If the OP then used the tax free sum to make a further substantial pension contrib then I would see that as a breach for sure. Correct?

But if the OP instead spanked the lump sum on elective spends then is that not what a lot of folks do when a pension pot becomes available?

I mean, don't a lot of people push significant sums into their pensions in the last few years before stopping, then take the tax free lump they can once pension pots become available?

Genuine confusion here, so please let me know.

Thx

HappyHarry

Four years of £40k contributions before drawing tax free cash will not be a cause for concern.

a one off contribution of £125k followed shortly after by a withdrawal of maximum tax free cash is a different scenario, and is likely to fall foul of the recycling rules. 

SomeMadeUpName

Further to my question above:

In the article linked to for advice on recycling it is stated:

"However, the important part of this test is that the increase must be deemed to be ‘because of the PCLS’."

So doesn't the fact the increased contributions can be demonstrably linked to the asset sale income mean the OP would be in the clear.

He might get looked at, but couldn't he strongly defend?

And again, I am asking, not asserting, so OP please do not listen to me, I could be entirely wrong. I'm just curious for my own education purposes.

HappyHarry

In this situation, the OP wouldn’t make the large one off contribution if it were not for the PCLS. 

If HMRC declared it as recycling, as I suspect they would, then of course a defence would be put forward, but I wouldn’t like to bet on it being successful. 

Example three in this link may give some food  for thought: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133850