Pension / Investment help

DGazza

Hi
I've currently got approx £150000 sitting in my current account and a few old ISAs which is earning next to nothing in interest. 

I’ve been watching the rises in fixed term accounts and will look to invest in two or three either one or two year accounts. 

I’m due to hit 55 in a few months time and while I’ve a decent amount in my pension funds I don’t have enough to fully retire and maintain a similar lifestyle. 

My pensions have all dropped this year due to market forces as I’m sure everyone is aware. The reason I’m posting in here is to ask if there’s any benefit maxing out my pension deposits for this year (and previous years as I was well short of the limit). Obviously I’d get the tax relief added but that would be used when withdrawing as I’d be above the threshold so it would cancel itself out , I think? 

Any suggestions on what to do greatly appreciated 
thanks 

Pat38493

DGazza said:

Hi
I've currently got approx £150000 sitting in my current account and a few old ISAs which is earning next to nothing in interest. 

I’ve been watching the rises in fixed term accounts and will look to invest in two or three either one or two year accounts. 

I’m due to hit 55 in a few months time and while I’ve a decent amount in my pension funds I don’t have enough to fully retire and maintain a similar lifestyle. 

My pensions have all dropped this year due to market forces as I’m sure everyone is aware. The reason I’m posting in here is to ask if there’s any benefit maxing out my pension deposits for this year (and previous years as I was well short of the limit). Obviously I’d get the tax relief added but that would be used when withdrawing as I’d be above the threshold so it would cancel itself out , I think? 

Any suggestions on what to do greatly appreciated 
thanks 

Are you earning money in some kind of employment?  You can only contribute to the pension up to the amount you are earning in any one year.  Are you a higher rate taxpayer?

Also what do you mean by being "over the threshold" - do you mean that your pension funds would go above the Lifetime allowance or are you still talking about the £40K per years contributions limit?

Are you aware that you can roll over your unused limits of 40K from the previous 3 years (it seems like you are from your comment about prior years)?

For most cases you would be much better off putting it in the pension, but this depends a bit on more information, in particular what you mean by "over the threshold".

What's for sure is that having it in a current account on zero or very small interest is not the best.

If you post some more information about the above and also what kind of pension funds you have and what is in them, I think the posters here can help you better.

dunstonh

The reason I’m posting in here is to ask if there’s any benefit maxing out my pension deposits for this year (and previous years as I was well short of the limit).

yes there will be in most scenarios.

Obviously I’d get the tax relief added but that would be used when withdrawing as I’d be above the threshold so it would cancel itself out , I think? 

No it would not be cancelled out.   Only 75% is subject to tax. 25% is tax free.   So, the tax payable would be less than the relief received.

MallyGirl

DGazza said:

The reason I’m posting in here is to ask if there’s any benefit maxing out my pension deposits for this year (and previous years as I was well short of the limit). Obviously I’d get the tax relief added but that would be used when withdrawing as I’d be above the threshold so it would cancel itself out , I think? 

you get tax relief on the way in - depending on what tax band you are in that could be significant. If you can salary sacrifice into your pension then that adds more due to NI savings.
One the way out many people are one band down so they were 40% tax payers when earning but are only 20% tax payers when drawing down, plus 25% is tax free on the way out. Pensions usually win until you get into LTA territory

Albermarle

I’m due to hit 55 in a few months time and while I’ve a decent amount in my pension funds I don’t have enough to fully retire and maintain a similar lifestyle

Probably better if you gave a bit more detail about all the pensions. Particularly your current workplace one ( assuming you have one) and how contributions are made to it ( after tax, before tax or by salary sacrifice) and your current salary.

Dazed_and_C0nfused

The reason I’m posting in here is to ask if there’s any benefit maxing out my pension deposits for this year (and previous years as I was well short of the limit). Obviously I’d get the tax relief added 

Just to be clear you cannot make pension deposits for tax years which have ended.

You may have unused annual allowance which can allow a larger contribution in the current tax year but any tax relief due will be based on what happens in this tax year, not any previous ones.

bostonerimus

Max out the pensions. You get tax relief going in, tax free growth and then only pay income tax on 75% of what you take out. There's an argument to be made for doing an ISA too as it give you flexibility, but the pension is the better value for money.

DGazza

Thanks for the replies. 

A bit more detail below. 

I’m a higher rate tax payer so I presume I’d get 40% tax relief of whatever I transfer into my pension. Is it as simple as I put £100000 in and get an additional £40000 added? 

My current pensions are a bit of a mess as I have six different pots due to different company pensions throughout the years. Ive only been with my current employer for about three years and the company match contributions up to 7.5%. Contributions are taken before tax. 

By saying I would be over the threshold I meant the basic rate tax free allowance, £12750. I hadn’t factored in the fact that the first 12750 is tax free so that discounts my previous thought that the tax relief would be cancelled out. 

Thanks

Bimbly

If you are a higher rate tax payer and you take a chunk of your savings - say, £10,000 - into your pension, the pension provider will add the 20% basic tax relief - £2,500 - to your pot. The remaining 20% comes back to you via HMRC by changing tax bands and doesn't go into the pension.

Sounds like you are either paying your pension using net pay or salary sacrifice. You could increase your pension contributions from your salary to the max and live off your savings, so it all goes into the pot over time. Salary sacrifice has the advantage of also saving your national insurance contributions, but you can't salary sacrifice below minimum wage.

Dazed_and_C0nfused

DGazza said:

Thanks for the replies. 

A bit more detail below. 

I’m a higher rate tax payer so I presume I’d get 40% tax relief of whatever I transfer into my pension. Is it as simple as I put £100000 in and get an additional £40000 added? 

My current pensions are a bit of a mess as I have six different pots due to different company pensions throughout the years. Ive only been with my current employer for about three years and the company match contributions up to 7.5%. Contributions are taken before tax. 

By saying I would be over the threshold I meant the basic rate tax free allowance, £12750. I hadn’t factored in the fact that the first 12750 is tax free so that discounts my previous thought that the tax relief would be cancelled out. 

Thanks

I think you've got a bit confused with this.

If you pay by relief at source the pension company adds 25% to what you pay so £100k would become £125k in your pension fund (£125k x 20% basic rate relief = £25k).

The £125k increases your basic rate band meaning you could also pay less 40% tax and more at 20%.  This is a personal tax saving benefitting you, it doesn't get added to your pension fund.

If you pay by net pay, which I think is what you seem to be doing then you don't get any pension tax relief at all.  But your taxable pay is reduced by £100k so you avoid paying tax in the first place on that income.  That is is the simplest option as you immediately get the maximum possible tax saving.  Although it isn't great for very low earners who don't pay tax in the first place.

I presume you are aware about the different limits for pension contributions, having £100k to pay in doesn't necessarily mean you are able to.