Absolute complete and utter pension dunce warning!!

NoMore

Dansmam said:

Linton said:

The total pension contributions you personally can make in a tax year and get the tax relief is limited to your gross earnings. So you will be ok if you simply divert your salary to AVCs.

There is another limit of £40k in a tax year for all pension contributions, including employer’s ,where things get more complicated, especially for db pensions.  Unused allowance can be carried over from the previous 3 years.  So unless you are very well paid you should be OK.

You can only pay in the equivalent of earnings above minimum wage though, so can't quite divert whole salary. 

 🙂

That only applies to Salary Sacrifice contributions, and is to do with Salary Sac rules not Pension rules. You can pay all of your Salary into a pension if you want, just not via Salary Sacrifice.

Albermarle

wend33 said:

Dazed_and_C0nfused

You should also check your State Pension forecast on gov.uk as you are likely to need to buy some additional National Insurance years to reach the standard new State Pension amount (£185.15/week).

When checking your forecast it is important to read the whole thing, don't just look at the headline figure.

I have already checked this and I have to work/pay three more years to get my full state pension.

If you have to buy NI qualifying years to get up to full state pension , then you should do this. It is an absolute bargain.
Around £850 buys you over £250 pa of index linked guaranteed income . To buy that income as an annuity in the open market would cost at least £7000 !
Before doing anything you need to talk to these people.
Contact the Future Pension Centre - GOV.UK (www.gov.uk)

The tax advantages of adding to your AVC ( or other pension) have been described in detail above .
However your AVC will presumably be invested in funds linked to the financial markets ( unless it is held in cash which would be unusual) , which has not been mentioned yet .
Also you say you have a six figure sum in cash savings . Of course this is good, but currently the value of cash savings is being significantly eroded by inflation .As interest rates are well below inflation then your money is losing value all the time .
A £100K sum on Jan 1st 2022 will only be worth around £95K by the end of the year.
If you will be keeping/using your savings over a long period of time then you should consider investing some of them to try and beat inflation.
Of course if you add savings to your AVC , and these are invested within the AVC , then this will partly happen anyway. Sort of killing two birds with one stone. 

drummersdale

xylophone said:

Isn't there also a warning about people who take a lump sum and it raises your taxable income. ..I could be wrong. ..

 An example.

 A  standard rate tax payer (only income is his salary of say £30,000 a year)  decides on reaching age 55 that he will access an old personal pension pot of say £80.000.

He takes his tax free PCLS ( £20,000), but  thinks that he could use the balance to finance an extension.

The balance is taxable as income in the year of receipt.

His income for the year is now £90,000.

He will pay tax at higher rate on part of that income.

And having taken more than the tax free PCLS also means that he has become subject to the Money Purchase Annual Allowance in respect of his contributions to his DC workplace pension.

I am slightly bemused/concerned about this - I am looking to partially retire this year as a Civil Servant - salary c£50,000 - Tax Free Lump Sum c£75,000 - does this mean the taxman will view my taxable income as c£125,000 and tax me accordingly?  Slightly takes away from the idea of a "Tax Free Lump Sum" if you then get taxed for getting it!

MX5huggy

drummersdale said:

xylophone said:

Isn't there also a warning about people who take a lump sum and it raises your taxable income. ..I could be wrong. ..

 An example.

 A  standard rate tax payer (only income is his salary of say £30,000 a year)  decides on reaching age 55 that he will access an old personal pension pot of say £80.000.

He takes his tax free PCLS ( £20,000), but  thinks that he could use the balance to finance an extension.

The balance is taxable as income in the year of receipt.

His income for the year is now £90,000.

He will pay tax at higher rate on part of that income.

And having taken more than the tax free PCLS also means that he has become subject to the Money Purchase Annual Allowance in respect of his contributions to his DC workplace pension.

I am slightly bemused/concerned about this - I am looking to partially retire this year as a Civil Servant - salary c£50,000 - Tax Free Lump Sum c£75,000 - does this mean the taxman will view my taxable income as c£125,000 and tax me accordingly?  Slightly takes away from the idea of a "Tax Free Lump Sum" if you then get taxed for getting it!

No, the TFLS, is exactly that, in the example the rest of the pension pot was also taken as a lump sum (this is not an option with your pension) and hence taxable as income in that tax year. 

MallyGirl

drummersdale said:

xylophone said:

Isn't there also a warning about people who take a lump sum and it raises your taxable income. ..I could be wrong. ..

 An example.

 A  standard rate tax payer (only income is his salary of say £30,000 a year)  decides on reaching age 55 that he will access an old personal pension pot of say £80.000.

He takes his tax free PCLS ( £20,000), but  thinks that he could use the balance to finance an extension.

The balance is taxable as income in the year of receipt.

His income for the year is now £90,000.

He will pay tax at higher rate on part of that income.

And having taken more than the tax free PCLS also means that he has become subject to the Money Purchase Annual Allowance in respect of his contributions to his DC workplace pension.

I am slightly bemused/concerned about this - I am looking to partially retire this year as a Civil Servant - salary c£50,000 - Tax Free Lump Sum c£75,000 - does this mean the taxman will view my taxable income as c£125,000 and tax me accordingly?  Slightly takes away from the idea of a "Tax Free Lump Sum" if you then get taxed for getting it!

No. If you only tax the tax free PCLS (pension commencement lump sum) then there will be no additional tax above your normal earned income. The above example is taking the taxable bit as well (i.e. the remaining 75%)

drummersdale

Thanks @MX5huggy & @MallyGirl - I'll tell them I don't need the defibrillator now!  

Bobinyorkshire

I had a similar dilemma with an NHS pension. I reduced my hours to 0.5 WTE initially which helped with the stress and after some really useful advice here I opened a SIPP and put in my salary equivalent minus my NHS contributions from my savings. I’ll continue to put in the max for next year. Then withdraw up to PA each year and use additional savings to live on. I’ll take my NHS pension when the SIPP funds are used up