£40k into pension?

antdon

Hi All

A very naive question, so please be gentle

I am 61
I already receive a small pension from a previously deferred Superannuation pension..  £6.5K pre tax

I also have a current pension at work with Aviva currently worth approx £75k

I have approx £40k sat in a bank languishing at nearly no interest.. 

I  have considered putting this into my Aviva pension..

My questions are 
1.   is it worth it?  I believe the government add 25% tax relief??   but.
2.  Surely if I add this to my pension, when i come to drawing this down I will be paying tax on 25% of it..

So, is it really worth doing?
 

Dazed_and_C0nfused

Will you earn £40k this tax year?

1.  They add 25% to relief at source contributions but that equates to 20% tax relief i.e. you pay say £800 and £200 tax relief is added.  Gross contribution £1,000 with £200 (20%) tax relief.

2.  75% of it will be taxable.  How much tax you will pay depends on your other taxable income in the tax year(s) you withdraw taxable income from the pension.

MallyGirl

You cannot contribute more than you earn - do you earn £40k? Pension income doesn't count towards this.

jamesd

As long as you have gross earnings of at least £40k then you can do it and it's worth doing. You are prohibited from receiving tax relief for gross personal contributions in excess of gross pay. Employer contributions above that level are allowed and are included within the annual allowance 40k plus carry-forward limit. As long as you have earnings above 40k and carried forward unused annual allowance from the previous three tax years available you can do more than 40k. Earnings and annual allowance calculations must be done individually and you have to be within both limits.

Pension capital and income payments and savings and investment gains do not count as eligible earnings for this purpose. Your superannuation is pension income and doesn't count but you are allowed to use that income to fund pension contributions within the earnings limit, no restrictions on recycling pension income into new contributions other than earnings and annual allowance.

25% will come out tax free and the other 75% is taxable income. Often some of the taxable income can be taken free of tax within the income tax personal allowance. If everything happens at basic rate you make 6.25% profit at no significant risk by doing it. The main potential risk is an increase in income tax rates which reduces the gain to below 6.25% but is unlikely to eliminate all of the gain. If some income is at higher rate on the way in and basic rate on the way out the gain is increased.

I've assumed that the pension lifetime allowance isn't a limiting factor for you.

antdon

MallyGirl said:

You cannot contribute more than you earn - do you earn £40k? Pension income doesn't count towards this.

Thanks for the reply

I currently earn £36k

The thing I am struggling with is..
I get tax relief when i put the money in, but, then they tax it at pretty much the same amount when I take it out...
so, again is it worth it???

Dazed_and_C0nfused

Ignoring investment return (or loss) and any provider fees you can get a 6.25% profit if you are a basic rate payer now and when you take the pension income.

Say you pay £8,000 into a relief at source pension.  With tax relief you have a pension fund of £10,000.

Then you take the £10,000 out.  £2,500 is a TFLS and £7,500 taxable.  Tax due on the £7,500 is £1,500 so you are left with £8,500 (£2,500 TFLS + £6,000 taxable income after tax)

You started with £8,000 and now have £8,500.

antdon

Many thanks for the replies...

Very helpful...

ex-pat_scot

antdon said:

MallyGirl said:

You cannot contribute more than you earn - do you earn £40k? Pension income doesn't count towards this.

Thanks for the reply

I currently earn £36k

The thing I am struggling with is..
I get tax relief when i put the money in, but, then they tax it at pretty much the same amount when I take it out...
so, again is it worth it???

if you can contribute via salary sacrifice, then you get 32% tax relief on your contributions.

When you draw your pension, 25% is tax free.
The remainder is taxed at your marginal rate, so if you were to already have sufficient income to be earning £12500 pa and hence paying BR tax, then you'd pay 20%.
Hence overall you would have an effective tax rate at withdrawal of 15% (3/4 taxed at 20% and 1/4 not taxed).

Albermarle

antdon said:

Many thanks for the replies...

Very helpful...

To use a similar example .
You add £8K and get £2k tax relief = £10K .
After you have stopped working you take the £10 K out.
£2500 is tax free
£7500 is taxable so this is added to your £6.5K pa pension which is also taxable , so you have £14 K taxable but a personal allowance of £12570 , so you only pay £286 tax .
So you gained £2K in tax relief and only paid £286 of it back . Not bad .....
Once you get the state pension that has to be added in though and you will be back to 'only' 6.25% benefit,

MallyGirl

or you split that £7500 taxable withdrawal over 2 years so no tax is paid

arty688

Interesting, So when coming close to retirement the best thing to do is to put as much as you can into your pension less the £40k and leaving yourself £12.5 as tax free earnings and top up your salary with savings as you won't need savings when you retire. O because it will be in the pension pot. Or you could even use 0% credit cards or re mortgage to cover you income in the last couple of years..