Is putting lump sum into pension a 'no-brainer'? 14 January at 6:17PM in Pensions, annuities & retirement planning 16 replies 1.4K views

zoothornrollo_2

I'm in the fortunate position of being about to receive a lump sum of c.£80,000. As I am 52, my instinct is that the best thing to do with a big chunk of it is to feed it into my pension over the coming few years (without hitting the £40k annual allowance). As then I will benefit from higher rate pensions tax relief, which will boost the sum significantly - and it can still be accessed tax-free at age 58 if we really need the money (possible investment losses allowing). 
Either that or pay down our mortgage, which is substantial. But surely we'd be better off taking the pensions tax relief (plus hopefully investment gains!) and paying down the mortgage with my tax-free lump sum at pension access age?
The only slight snag is that I'm not sure I can take a 25% lump sum from my workplace pension and continue to pay into it, as I would want to do until state pension age probably.
But that can be got around by putting this money into a SIPP. Would that then entail me having to do an annual tax return? I would be careful not to exceed the annual £40k (workplace and SIPP contributions combined) - but would HMRC know that from its systems or would it demand a tax return?
Am I missing something here?

Albermarle

Your general idea is good. Higher rate tax relief is very generous and if you can take full advantage of it, then it is usually a good idea to do so. Quite a few on here ( including me) loaded up our pension pots in the last few years of working, to do just what you are suggesting.
The only slight snag is that I'm not sure I can take a 25% lump sum from my workplace pension and continue to pay into it, as I would want to do until state pension age probably.
Normally this should not be a problem, so you need to check this with the provider. What you must not do is to take anything over and above the 25% tax free lump sum. If you take any taxable income at all, you will be restricted to £4K pa maximum you can put in your pension.
But that can be got around by putting this money into a SIPP. Would that then entail me having to do an annual tax return? You do not have to fill in a self assessment return to claim higher rate tax relief, but you would have to just inform HMRC about your contributions.
How do make your contributions from salary now? 
Out of taxed pay- before tax is taken off- or by salary sacrifice ?

zoothornrollo_2

Thanks Albermarle - very helpful. 
I have a DC scheme and contributions are made through payroll out of gross pay: so I get NI as well as income tax relief but I am not sure it is 'salary sacrifice' as such, as my salary on all the payroll info has remained the same (i.e., I have not taken a salary reduction in return for pension contributions). As an aside I think this is a quite confusing area - i.e., 'salary sacrifice' gets used all the time for paying for something out of gross pay, when they are not quite the same thing as far as I understand.
Anyway, I am v interested in your point re. taking the 25% lump sum and continuing to contribute possibly not being an issue as I had always believed it would be? Is this a historical thing - ie, employer schemes are more flexible now in this regard?

Albermarle

If it is not salary sacrifice, then you will not be getting any NI savings.
However if the contributions are taken out before tax ( a confusingly named net pay arrangement) then you will get the full tax relief, without having to do anything.
If you add to a separate pension, then the provider will add basic rate tax relief and you claim back the higher rate relief.
You will get it either as a rebate or with an increased tax code, so your take home pay will increase. Either way it comes back to you and does not go into the pension.

Some employer/pension schemes in general have more flexibility about what you can do than others. You need to check with them. For sure if you had separately a modern SIPP, it would not be an issue.

tigerspill

It's was a "no brainer" for me.  I dumped as much as I was allowed into my pension during the last few years I was working.  Used up all my carry forward allowances.  All via salary sacrifice with tax and NI relief at 42%.  The way my scheme worked (there were a DC and DB elements), I was allowed to take 25% of the TOTAL pension value inc. the DB part so I took nearly everything out tax free.  

YBR

zoothornrollo_2 said:

I'm in the fortunate position of being about to receive a lump sum of c.£80,000. As I am 52, my instinct is that the best thing to do with a big chunk of it is to feed it into my pension over the coming few years <snip>
Either that or pay down our mortgage, which is substantial. 

There's nothing to stop you doing both, and that doesn't have to be 50:50.

zoothornrollo_2

YBR said:

zoothornrollo_2 said:

I'm in the fortunate position of being about to receive a lump sum of c.£80,000. As I am 52, my instinct is that the best thing to do with a big chunk of it is to feed it into my pension over the coming few years <snip>
Either that or pay down our mortgage, which is substantial. 

There's nothing to stop you doing both, and that doesn't have to be 50:50.

Well yes, if the sum was a bit larger maybe. I already use up at least half my £40K annual allowance with monthly contributions so will be limited a bit in that respect.
But if I use carry forward I could put most of that 80K into pension quite rapidly. Then pay down the mortgage with 25% lump sum when I'm 58 - more than I would be able to now. Plus I'm reasonably optimistic on equities for the next six years (although this if anything is the weakness with the plan)....

Albermarle

zoothornrollo_2 said:

YBR said:

zoothornrollo_2 said:

I'm in the fortunate position of being about to receive a lump sum of c.£80,000. As I am 52, my instinct is that the best thing to do with a big chunk of it is to feed it into my pension over the coming few years <snip>
Either that or pay down our mortgage, which is substantial. 

There's nothing to stop you doing both, and that doesn't have to be 50:50.

Well yes, if the sum was a bit larger maybe. I already use up at least half my £40K annual allowance with monthly contributions so will be limited a bit in that respect.
But if I use carry forward I could put most of that 80K into pension quite rapidly. Then pay down the mortgage with 25% lump sum when I'm 58 - more than I would be able to now. Plus I'm reasonably optimistic on equities for the next six years (although this if anything is the weakness with the plan)....

Yes you can use carry forward if available, so you can add more than £40K to a pension in a tax year.
However you have to have a large enough salary in that tax year to make use of it . As a simple example, you can not contribute personally £60K to a pension, if you only earn £50K, however much carry forward you have.
If you did have a large enough salary to make use of the carry forward, it could be only some of it would get the higher rate relief. You can not get more higher rate tax relief than higher rate tax you have paid.

MEM62

zoothornrollo_2 said:

As I am 52, my instinct is that the best thing to do with a big chunk of it is to feed it into my pension over the coming few years (without hitting the £40k annual allowance). As then I will benefit from higher rate pensions tax relief, which will boost the sum significantly - and it can still be accessed tax-free at age 58 if we really need the money (possible investment losses allowing). 
Either that or pay down our mortgage, which is substantial. But surely we'd be better off taking the pensions tax relief (plus hopefully investment gains!) and paying down the mortgage with my tax-free lump sum at pension access age?

It doesn't have to be either/or.  You could look at a combination of both.  Your pension is about as tax-efficient as savings can get and therefore is probably most efficient use of the cash.  That is probably the direction in which I would throw most of it.  However, lowering your LTV on your next mortgage renewal may also bring benefits in lower interest charges and lower monthly payments.  It is very much a case of looking at your overall circumstances.         

zoothornrollo_2

Albermarle said:

If you did have a large enough salary to make use of the carry forward, it could be only some of it would get the higher rate relief. You can not get more higher rate tax relief than higher rate tax you have paid.

Well you learn something new every day! Thank you

zoothornrollo_2

MEM62 said:

zoothornrollo_2 said:

As I am 52, my instinct is that the best thing to do with a big chunk of it is to feed it into my pension over the coming few years (without hitting the £40k annual allowance). As then I will benefit from higher rate pensions tax relief, which will boost the sum significantly - and it can still be accessed tax-free at age 58 if we really need the money (possible investment losses allowing). 
Either that or pay down our mortgage, which is substantial. But surely we'd be better off taking the pensions tax relief (plus hopefully investment gains!) and paying down the mortgage with my tax-free lump sum at pension access age?

It doesn't have to be either/or.  You could look at a combination of both.  Your pension is about as tax-efficient as savings can get and therefore is probably most efficient use of the cash.  That is probably the direction in which I would throw most of it.  However, lowering your LTV on your next mortgage renewal may also bring benefits in lower interest charges and lower monthly payments.  It is very much a case of looking at your overall circumstances.         

We are about six months into a five-year fix. If we pay a lump sum (or more than one) into our mortgage now, will it reduce our payments immediately?