Contributing to pension after leaving employment

LoScozzese

I retired last year and began taking my DB pension.  I also had a short-term DC pension with the same employer and I’ve left that alone, as I don’t plan to draw on that for another few years.

My question is, with the ability to save about £250 per month, would I be better putting that into the DC pension or into a regular savings account at, say, 5.5% (Bank of Scotland)?  Would my contributions to the DC pension get any tax relief, even though my income now is solely from other pensions and, if so, would that outweigh the interest I could earn with the bank?

I’m not great with this sort of thing and need fairly simple explanations that don’t assume a lot of knowledge.

Thanks in advance for any help or advice you can give me.

molerat

With no relevant income you are limited to contributing £2880 net per year into a pension which the taxman will add another 25% bringing the gross up to £3600, that means you can only contribute £240 per month.  If you take that £3600 out at basic rate tax you will lose £540 in tax giving you a net return of 6.25% on that £2880.  But that money only needs to be in the pension for maybe a couple of months and can be withdrawn an put elsewhere to earn more interest.

LoScozzese

molerat said:

With no relevant income you are limited to contributing £2880 net per year into a pension which the taxman will gross up to £3600, that means you can only contribute £240 per month.

Thanks for the information.  So I’d definitely be better off putting the cash into my pension.

What is classed as relevant income?  I have enough from other pensions (don’t get my state pension yet) to pay income tax.

molerat

LoScozzese said:

molerat said:

With no relevant income you are limited to contributing £2880 net per year into a pension which the taxman will gross up to £3600, that means you can only contribute £240 per month.

Thanks for the information.  So I’d definitely be better off putting the cash into my pension.

What is classed as relevant income?  I have enough from other pensions (don’t get my state pension yet) to pay income tax.

Pretty much pay from employment, pension income does not count.

LoScozzese

molerat said:

If you take that £3600 out at basic rate tax you will lose £540 in tax giving you a net return of 6.25% on that £2880.  But that money only needs to be in the pension for maybe a couple of months and can be withdrawn an put elsewhere to earn more interest.

That wee bit is confusing me.

Does that mean I can use the DC pot like a bank account, put in £240, wait a few months and withdraw £240 + 25% (£300) and stick that somewhere else?  Won’t I pay 20% income tax on that and be back where I started?

molerat

Taking it out and paying 20% tax gives you £180, a return of 6.25% after tax, more than you would get keeping that in the bank for a whole year..  Many people put the £2880 in as a lump each year and withdraw it as soon as the tax is added.  That cash is then put into an interest paying account until next year and repeat.

MX5huggy

LoScozzese said:

molerat said:

If you take that £3600 out at basic rate tax you will lose £540 in tax giving you a net return of 6.25% on that £2880.  But that money only needs to be in the pension for maybe a couple of months and can be withdrawn an put elsewhere to earn more interest.

That wee bit is confusing me.

Does that mean I can use the DC pot like a bank account, put in £240, wait a few months and withdraw £240 + 25% (£300) and stick that somewhere else?  Won’t I pay 20% income tax on that and be back where I started?

No because you take out 25% tax free and pay 20% tax on the remaining 75% presuming you are a 20% tax payer. The net benefit to you is 6.25%.

LoScozzese

molerat said:

Taking it out and paying 20% tax gives you a return of 6.25% after tax.  Many people put the £2880 in as a lump each year and withdraw it as soon as the tax is added.  That cash is then put into an interest paying account until next year and repeat.

Sorry for labouring the point but my impression was that I deposit £2880 which gets 25% added to become £3600.  At the subsequent withdrawal of that sum, 20% income tax on £3600 = £720 and £3600 - £720 = £2880.

Or do I only pay the income tax on the difference, i.e. the £720?

I told you I wasn’t good at this sort of thing!

molerat

When you withdraw from a pension you get 25% tax free and the remaining 75% is taxable so on £3600 £900 is tax free and £2700 taxable which at 20% deducts £540 leaving you £720 - £540 = £180 in profit.

Dazed_and_C0nfused

LoScozzese said:

molerat said:

Taking it out and paying 20% tax gives you a return of 6.25% after tax.  Many people put the £2880 in as a lump each year and withdraw it as soon as the tax is added.  That cash is then put into an interest paying account until next year and repeat.

Sorry for labouring the point but my impression was that I deposit £2880 which gets 25% added to become £3600.  At the subsequent withdrawal of that sum, 20% income tax on £3600 = £720 and £3600 - £720 = £2880.

Or do I only pay the income tax on the difference, i.e. the £720?

I told you I wasn’t good at this sort of thing!

You are missing a key factor.

You pay the £2,880.  The pension company, courtesy of HMRC, add £720 in basic rate tax relief. 
NB. Whether you have paid £720 in tax is irrelevant for RAS contributions.

You now have a pension fund of £3,600.

You decide to take the whole lot out.

£900 is the 25% TFLS and £2,700 is taxable income.  If 20% tax is owed on the taxable element you get £2,160 after tax.

Total returned is £900 + £2,160 = £3,060.

So your £2,880 has increased by 6.25%.

You need to check provider fees to ensure they don't reduce the benefit.

And doing this means you will usually then be limited to contributing £10,000/year (gross) so if planning on working again might not be the best option.

LoScozzese

Thanks @molerat and @Dazed_and_C0nfused, it’s all clear now.