Tax Free Lump Sum / Unused Annual Allowance

MPC1234

I wonder if someone can tell me if my plan falls within tax rules:
1.  I'm 61 and have a personal pension pot valued at £500k across 2 pensions of approx equal value. 
2. I still work. I'm a higher rate tax payer earning over £80K per year and have done for several years.
3. I make pension contributions of around £15k per year and have done for the last 4 years
4. My wife and I are about to sell our home for around £850k and want to rent elsewhere in the UK for 12 months to see if we like the area before buying.
Can I:
1. Using my unused pension allowance for the 3 previous years (25k x 3) and this year (25k), I'd like to make a one-off contribution into my pension of £100k (from the house sale) then claim tax relief on it via self assessment to gain a £40k tax refund which I might add to my pension pot in future tax years
2.  Then in 12 months' time I'd like to withdraw the £100k from my pension as a tax-free lump sum as I might need it for any new property purchase. But I probably will not want to start taking my pension - I just want the lump sum.
Is this possible or am I setting myself up for a fall??
Thanks in advance for any guidance.

QrizB

Welcome to the forum.

MPC1234 said:

I wonder if someone can tell me if my plan falls within tax rules:
1.  I'm 61 and have a personal pension pot valued at £500k across 2 pensions of approx equal value. 
2. I still work. I'm a higher rate tax payer earning over £80K per year and have done for several years.
3. I make pension contributions of around £15k per year and have done for the last 4 years
4. My wife and I are about to sell our home for around £850k and want to rent elsewhere in the UK for 12 months to see if we like the area before buying.
Can I:
1. Using my unused pension allowance for the 3 previous years (25k x 3) and this year (25k), I'd like to make a one-off contribution into my pension of £100k (from the house sale) then claim tax relief on it via self assessment to gain a £40k tax refund which I might add to my pension pot in future tax years
2.  Then in 12 months' time I'd like to withdraw the £100k from my pension as a tax-free lump sum as I might need it for any new property purchase. But I probably will not want to start taking my pension - I just want the lump sum.
Is this possible or am I setting myself up for a fall??
Thanks in advance for any guidance.

Your plan might fall down at point 1. Your maximum pension contribution in a given tax year can't exceed your taxable earned income. If your income is £80k and you're already contributing £15k (incl. tax relief) to your pension, you can only contribute another £65k (incl. tax relief). If the £15k is a contribution from 40% taxed income, it's worth £25k after tax relief and you can only contribute another £55k.

You could have split it across the tax years, but you're now a week late for that. I guess you could split it across this tax year and next?

Does your wife work? Can she make use of her pension allowances?

Regarding point 2, as you're over 55 you are able to access your pensions.Whether it's a good idea to crystallise £400k of your pension at thsi time will depend on a whole host of other factors which others are much better placed to comment on than I am.

microcristallina

Hopefully someone more knowledgeable will be along but one pitfall I can see is that when you take the £100k you would trigger the money purchase annual allowance and only receive tax relief on future contributions of up to £4k.

ColdIron

Only if it's taken as taxable income. If it's taken as the tax free component, the MPAA doesn't kick in

MPC1234

My £15k pension contribution is via salary sacrifice, so it includes tax relief.  My understanding is that the annual pension allowance is £40k per year, and I can carry forward unused allowances from previous 3 tax years (hence 3 x £25k then £25k more for this tax year = 100K)

QrizB

MPC1234 said:

My £15k pension contribution is via salary sacrifice, so it includes tax relief.  My understanding is that the annual pension allowance is £40k per year, and I can carry forward unused allowances from previous 3 tax years (hence 3 x £25k then £25k more for this tax year = 100K)

But you can't contribute more than your taxable earned income in any given tax year. As you haven't told us you're earning £115k per year, you can't contribute £115k.

Put another way; if we ignore minimum wage law for a moment, could you salary sacrifice £115k this year? If you can, great, you can use your other £100k of allowances, either via salsac or RAS. If your salary is too low, then you can't contribute that much.

MPC1234

Thanks QrizB.  I think I understand what you're saying.  So I could contribute an extra £50k this year (made up of £30k from me, then 20% from Pension provider when deposited, then 20% from HMRC via self assessment).....then do the same on 6 April next year.  This would have the effect of giving me an extra £100k in my pension from the £60k contribution.
I'd then have to work out the pros and cons of crystallising my pension......couldn't I just take the £100k lump sum tax free in a year or so's time and ask them to continue with the same investment choices I currently have and not touch the pot until I want to start monthly drawdown in 3/4 years time??  I can't see the difference between crystallising and not.  I understand i can only get tax-free 25% once.

QrizB

MPC1234 said:

Thanks QrizB.  I think I understand what you're saying.  So I could contribute an extra £50k this year (made up of £30k from me, then 20% from Pension provider when deposited, then 20% from HMRC via self assessment).....then do the same on 6 April next year.  This would have the effect of giving me an extra £100k in my pension from the £60k contribution.

Yes; it would be more beneficial to contribute as much of it by salary sacrifice if you can, as you'll benefit from NI savings too, but if you can't get all £50k contributed that way, making personal contributions is next-best.

Dazed_and_C0nfused

MPC1234 said:

My £15k pension contribution is via salary sacrifice, so it includes tax relief.  My understanding is that the annual pension allowance is £40k per year, and I can carry forward unused allowances from previous 3 tax years (hence 3 x £25k then £25k more for this tax year = 100K)

There is no pension tax relief with salary sacrifice.  You are agreeing to a reduced salary in return for your employer contributing more to your pension.  You sacrifice £15k and £15k ends up in your pension with no tax relief added as it is an employer contribution.

You do personally avoid paying tax and NI on the £15k salary you sacrificed but that isn't part of the contribution, it's simply an employer contribution of £15k (which is costing you far less in lost take home pay).

So I could contribute an extra £50k this year (made up of £30k from me, then 20% from Pension provider when deposited, then 20% from HMRC via self assessment).....

You are looking at the figures from the wrong end. 

If you pay £30k into a relief at source scheme such as a SIPP or personal pension then £7,500 in basic rate tax relief will be added by the pension company giving you a fund of £37,500.

You don't then get an extra 20% from HMRC.  Your basic rate band is increases by £37,500 so you can pay more 20% tax and less 40% but the personal tax saving is dependent on how much higher rate tax you pay.  If you paid 40% tax on say £10,000 then a contribution of £37,500 would save you £2,000 (£10,000 taxed at 20% instead of 40%).  That £2,000 benefits you, it is never added to your pension fund so you would still have a fund of £37,500.

If you actually want to get £50k into your pension fund (without using salary sacrifice) you need to handover £40k to the pension company.  They will add £10k on basic rate tax relief.