Paying into a pension without working

armour999

Hi, I have heard that it is allowed to put £3,600 of unearned  income into a pension every year even if one has not worked that year. Is this true?

My case is slightly different as I earned around £2,000 from working in the FY just ending, so could I place £5,600 into a pension?

I have 2 reasons for wanting to do this:

1) Since retiring at 55 I have taken out student debt and paying into a pension will reduce my income towards, and probably below,  the £27,000 cut off for student loan repayments.

2) My income (derived from letting property) will be much lower in a couple of years as I intend to sell a property and then I could access the 'pension pot' money, paying only 15% tax rather than the (20 + 9)% I am expecting to pay at the moment.

I already have one DB pension (PPF administered) which I am taking, another (deferred) DB pension which I am due to take in 2026, and one DC plan. I do not want to pay into the current DC plan as I have a special 0.3% admin rate which would rise to 1% as soon as I took anything out.

I'd like to pay into something which would at least match inflation, so any suggestions welcome.

Thanks, Chris.

Marcon

armour999 said:

Hi, I have heard that it is allowed to put £3,600 of unearned  income into a pension every year even if one has not worked that year. Is this true?

My case is slightly different as I earned around £2,000 from working in the FY just ending, so could I place £5,600 into a pension?

I have 2 reasons for wanting to do this:

1) Since retiring at 55 I have taken out student debt and paying into a pension will reduce my income towards, and probably below,  the £27,000 cut off for student loan repayments.

2) My income (derived from letting property) will be much lower in a couple of years as I intend to sell a property and then I could access the 'pension pot' money, paying only 15% tax rather than the (20 + 9)% I am expecting to pay at the moment.

I already have one DB pension (PPF administered) which I am taking, another (deferred) DB pension which I am due to take in 2026, and one DC plan. I do not want to pay into the current DC plan as I have a special 0.3% admin rate which would rise to 1% as soon as I took anything out.

I'd like to pay into something which would at least match inflation, so any suggestions welcome.

Thanks, Chris.

Maximum you can pay is the greater of earned income or £3,600 (both figures gross - what you'd actually pay is the net amount  and the provider would claim basic rate tax and add to your 'pot'), so in your case you'd pay £2,880 maximum.

Albermarle

I'd like to pay into something which would at least match inflation, so any suggestions welcome

Nobody can give you any kind of guarantee that any investment will beat inflation ( especially when currently inflation is so high)
Of course we all hope that our investments will do that, and statistically in the long term ( >10 years) there should be a very good chance of beating inflation and even seeing some growth above inflation , but only time will tell.

If you are happy with the way your current DC pot is invested , then maybe something similar will be suitable .

squirrelpie

Albermarle said:

Nobody can give you any kind of guarantee that any investment will beat inflation ( especially when currently inflation is so high)

Index-linked gilts kind of give a guarantee to match inflation but I'm not sure I'd want to put all my money in them.

macman

The tax relief alone will add more than twice what inflation will take away. Money invested in a pension fund, whether in gilts or equities, offers no guarantees, but even the worst performing fund should, over the longer term, do much better than even the best rated savings account. at present.

Dazed_and_C0nfused

2) My income (derived from letting property) will be much lower in a couple of years as I intend to sell a property and then I could access the 'pension pot' money, paying only 15% tax rather than the (20 + 9)% I am expecting to pay at the moment.

Will you still be completing Self Assessment returns?

If so you could still be required to make Student Loans repayments.

https://www.litrg.org.uk/tax-guides/students/student-loans/plan-1-student-loans/i-have-fill-tax-return-how-do-self-assessment#toc-how-does-unearned-income-affect-plan-1-repayments-

And I presume you are aware relief at source pension contributions don't reduce your taxable income for income tax purposes?

armour999

Thanks Marcon and everyone else.

Let me see if I've got this straight.

I would pay £2,880 into a pension within the next week, mention that I had done so in this year's tax return and the taxman would then bump it up to £3,600.

If my income (before paying into this theoretical pension) was £30.000, that would leave me with a taxable income of £27,120 of which £120 would be liable for 9% Student Loan Repayment (SLR). i.e. £10.80

I would save £720 in income tax and £259.20 in SLR = £979.20, offset by 15% tax paid on the £3,600 in a couple of years time (assuming no growth) = £540, leaving me approx £440 richer.

Not sure if I've got that last bit right but seems a good deal to me.

Only thing is which pension to select. I really have no clue other than I don't want to pay loads in fees.

armour999

Hi D&C, Yes. I will still be making SA returns.

 

I had to make some Student Loan repayment via SA last year. I believe it was calculated at 9% on all income above £27,000. You link to an article about "plan 1", I'm pretty sure I'm 'plan 2' - does that make a difference.

I don't understand your last para D&C. Are you saying that in my worked example in an earlier post, (I was replying to earlier posts at the same time you posted) my taxable income would still be £30,000 rather than £27,120?

Dazed_and_C0nfused

I would pay £2,880 into a pension within the next week, mention that I had done so in this year's tax return and the taxman would then bump it up to £3,600.

No.  The pension company, courtesy of HMRC, will add the basic rate tax relief to your pension fund.

Do you already complete Self Assessment returns?

Do you expect to be liable to higher rate tax?

If my income (before paying into this theoretical pension) was £30.000, that would leave me with a taxable income of £27,120 of which £120 would be liable for 9% Student Loan Repayment (SLR). i.e. £10.80

The gross contribution would be £3,600 not £2,880.  This would not change your taxable income at all though.

You are also overcomplicating things with reference to 15% tax.  There is no such rate, not even for Scottish residents.  You could have a TFLS and taxable income on which you may be liable to 20%®tax.

armour999

I would of course access the theoretical pension pot being mindful not to exceed the £27,000 SLR threshold in any one FY. This should be no problem if I have sold one property.

Dazed_and_C0nfused

armour999 said:

Hi D&C, Yes. I will still be making SA returns.

 

I had to make some Student Loan repayment via SA last year. I believe it was calculated at 9% on all income above £27,000. You link to an article about "plan 1", I'm pretty sure I'm 'plan 2' - does that make a difference.

I don't understand your last para D&C. Are you saying that in my worked example in an earlier post, (I was replying to earlier posts at the same time you posted) my taxable income would still be £30,000 rather than £27,120?

Link to the plan 2 student loan guidance.

https://www.litrg.org.uk/tax-guides/students/student-loans/plan-2-student-loans/i-have-fill-tax-return-how-do-self-assessment

Relief at source pension contributions never reduce anyone's taxable income.  You receive tax relief from the pension company and the gross contribution also increases the amount of your basic rate band, potentially moving some income from being taxed at 40% into the 20% band.

But I think what you're really interested in is not whether they reduce your taxable income or not but whether they are deducted for student loan purposes.

As you already complete Self Assessment return you can have a play around with your 2020:21 return to see the impact (remembering to discard the changes and not submit them to HMRC).

Or look at the SA calculation notes on gov.uk.

https://www.gov.uk/government/publications/self-assessment-tax-calculation-summary-sa110