Does the Increased MPAA offer a 6.25% tax free return on £10,000? allowance 16 March at 12:34PM in Pensions, annuities & retirement planning 2 replies 239 views

chlove

If you draw a pension, chances are you were restricted to contributing £4000 annually to any new pension, rising to £10,000 in April 2023. 

Providing your income was at least £10,000, you could invest £10,000 on April 6th,  collect £2500 in tax relief, take 25% tax free - £3125 - and draw the remaining £9375 at 937.50 pcm before the end of the tax year.

If existing income is below £40,000 that's £7500 after 20% income tax, plus the tax free £3125 = £10,625, a 6.25% return. Even after platform charges of say, 0.5%, that's 5.75%, or £575 for filling a couple of forms.

If you keep your pension in cash, there's no loss if markets crash and no additional fees to reduce % return.

I did something similar, twice, while the MPAA was £4000 to boost income to just under tax allowances, so free of all tax, when taking early retirement, before state pension put me into a 20% tax bracket forever. If your income is between £0 and £6250 and your spouse can fund you or you have savings, the return is 20% less fees. Yay!

If the additional £9375 pushes your income above £17,570 tax free interest allowance falls to £1,000 so inconvenient if you have more than £33,000 on deposit (sob ... ), and the rules change at age 75.

If the £10,000 contribution puts you over the £1.8 million lifetime pension allowance, you probably don't need  £625 from HMRC but for us ordinary mortals earining (much) less than £40,000 each in pensions:

.... are there any other downsides to this £625 tax break (£1,250 for a couple) for filling a couple of forms?

zagfles

chlove said:

If you draw a pension, chances are you were restricted to contributing £4000 annually to any new pension, rising to £10,000 in April 2023. 

Providing your income was at least £10,000, you could invest £10,000 on April 6th,  collect £2500 in tax relief, take 25% tax free - £3125 - and draw the remaining £9375 at 937.50 pcm before the end of the tax year.

If existing income is below £40,000 that's £7500 after 20% income tax, plus the tax free £3125 = £10,625, a 6.25% return. Even after platform charges of say, 0.5%, that's 5.75%, or £575 for filling a couple of forms.

If you keep your pension in cash, there's no loss if markets crash and no additional fees to reduce % return.

I did something similar, twice, while the MPAA was £4000 to boost income to just under tax allowances, so free of all tax, when taking early retirement, before state pension put me into a 20% tax bracket forever. If your income is between £0 and £6250 and your spouse can fund you or you have savings, the return is 20% less fees. Yay!

If the additional £9375 pushes your income above £17,570 tax free interest allowance falls to £1,000 so inconvenient if you have more than £33,000 on deposit (sob ... ), and the rules change at age 75.

If the £10,000 contribution puts you over the £1.8 million lifetime pension allowance, you probably don't need  £625 from HMRC but for us ordinary mortals earining (much) less than £40,000 each in pensions:

.... are there any other downsides to this £625 tax break (£1,250 for a couple) for filling a couple of forms?

EARNED income. Pension income won't count. And your numbers are wrong anyway - if you're subject to the MPAA and have earned income of over £10k you could only put £10k gross in including employer conts, so £8k net even assuming no employer conts, and claim £2k tax relief. You're not getting any more than the usual tax incentive to pay earnings into a pension anyway.

Plus there's HMRC recycling rules to check.

Albermarle

Providing your income was at least £10,000, you could invest £10,000 on April 6th,  collect £2500 in tax relief

This is the flaw in your post. The £10K limit ( like the current £4K limit) includes all inputs into the pension. So tax relief and any employers contributions are included. So assuming no employer input, then the max you can add is £8000 + £2000 tax relief added.