Pay into NEST pension, then cash out a few months later

Nebs9999

I'm 65. 66 next March. 20% taxpayer now, will still be a 20% taxpayer when I'm 66. I have a small NEST pension. My question is: Can I contribute, say, £40,000 to my NEST pension in March this tax year, then cash out in April, next tax year, a month later.
The maths seem to be: I pay in £40,000, government tops up with £10,000 tax relief, now £50,000 in my pension pot. When I cash out 25% is tax free, £12,500. The other £37,500 is taxed at 20% (=£7,500 tax) leaving me with £30,000. So I end up with (£12,500 + £30,000 = )£42,500 for my £40,000 initial investment.
Have I missed something, it seems too easy to get a free £2,500? Can I pay in, then cash out, so quickly without penalty.
And as a bonus, if I defer my state pension for a year and keep my income below the tax threshold, it seems that when I cash out then, as my marginal rate of tax will be 0%, I'd get the whole £10,000 tax relief with no deduction.
Any clues?

Marcon

Nebs9999 said:

I'm 65. 66 next March. 20% taxpayer now, will still be a 20% taxpayer when I'm 66. I have a small NEST pension. My question is: Can I contribute, say, £40,000 to my NEST pension in March this tax year, then cash out in April, next tax year, a month later.
The maths seem to be: I pay in £40,000, government tops up with £10,000 tax relief, now £50,000 in my pension pot. When I cash out 25% is tax free, £12,500. The other £37,500 is taxed at 20% (=£7,500 tax) leaving me with £30,000. So I end up with (£12,500 + £30,000 = )£42,500 for my £40,000 initial investment.
Have I missed something, it seems too easy to get a free £2,500? Can I pay in, then cash out, so quickly without penalty.
And as a bonus, if I defer my state pension for a year and keep my income below the tax threshold, it seems that when I cash out then, as my marginal rate of tax will be 0%, I'd get the whole £10,000 tax relief with no deduction.
Any clues?

You can only contribute £40,000 to your NEST pension if you are earning at least £50,000 (assuming no other pension contributions being made by you in this tax year).

NEST has an initial contribution charge of 1.8%, so if you're planning to take out the cash within such a short space of time, a pension scheme which doesn't have a contribution charge would be a better idea.

MX5huggy

Yes basically but…..

will you earn £40000 this tax year?  you can’t pay in more than your earn. At this point you would may of heard of the £60k Annual Allowance but that is only relevant for those that earn £60k or more.

Nest has an unusual fee structure the charge a contribution fee of 1.8% most other pension providers don’t charge a contribution fee but an Annual account (platform fee) calculated daily so Vanguard charge 0.15% 

So Nest would charge you £720

vanguard would be about £10 if you got the money in and out in 8 weeks. 

Dazed_and_C0nfused

And as a bonus, if I defer my state pension for a year and keep my income below the tax threshold, it seems that when I cash out then, as my marginal rate of tax will be 0%, I'd get the whole £10,000 tax relief with no deduction.

How do you propose taking £37,500 in taxable income in a single year whilst keeping your income below the tax threshold?

Marcon

MX5huggy said:

Yes basically but…..

will you earn £40000 this tax year?  you can’t pay in more than your earn. 

OP would need to earn £50,000. NEST is a relief at source scheme so the contribution of £40K would be net, with £10K being added in tax relief (as per OP's post).

Any number of websites say you can 'pay up to 100% of your earnings', but in practice that's the gross contribution so the most you can actually pay in is 80% of your earnings (ie net of tax), because after the tax relief is added at basic rate that brings you up to 100% of your earnings.

Pipthecat

Dazed_and_C0nfused said:

How do you propose taking £37,500 in taxable income in a single year whilst keeping your income below the tax threshold?

I assume this in your pre retirement year and that you are not going to keep working?  The sums might look very different if you are paying higher rate tax on your combined income and pension withdrawal.

af1963

The basic idea is correct, but the amount you can contribute is limited to 80% of your earnings this year ( which can include salary and benefits in kind); this will then be topped up in the scheme to 100% of your earnings.

If you defer SP and have no other income next year, you could withdraw up to 25% of the amount in your pension tax free, plus your annual allowance amount  (£12570) as taxable income covered by your allowance; anything you withdraw above that would be taxed at 20%.

And it doesn't have to be done via Nest and may in fact be cheaper to do elsewhere.

Nebs9999

Thanks everyone for the suggestion of going somewhere else rather than Nest. I hadn't thought of that. Great idea.

As to the amount of contributions, I thought you could use Unused Contributions from earlier years? I'm self employed and total annual income is about £30k, similar for last few years but only made £5k pension contributions. I plan to keep working part time and if I defer my state pension for a year and reduce my work I can easily get down to below the taxable threshold for the year of withdrawl.

As to the withdrawal, I thought it was taxed at your marginal rate of tax BEFORE making the withdrawl? So if I have £12,000 income in the year of withdrawal then my marginal rate of tax is 0%, and regardless of how much I withdraw from my pension pot the first 25% will be tax free and the rest will be taxed at my marginal rate of 0%.

Dazed_and_C0nfused

Nebs9999 said:

Thanks everyone for the suggestion of going somewhere else rather than Nest. I hadn't thought of that. Great idea.

As to the amount of contributions, I thought you could use Unused Contributions from earlier years? I'm self employed and total annual income is about £30k, similar for last few years but only made £5k pension contributions. I plan to keep working part time and if I defer my state pension for a year and reduce my work I can easily get down to below the taxable threshold for the year of withdrawl.

As to the withdrawal, I thought it was taxed at your marginal rate of tax BEFORE making the withdrawl? So if I have £12,000 income in the year of withdrawal then my marginal rate of tax is 0%, and regardless of how much I withdraw from my pension pot the first 25% will be tax free and the rest will be taxed at my marginal rate of 0%.

You've misunderstood a few things there.

Firstly carryy forward of annual allowance won't be of any use to you as you will be limited by your pensionable earnings.

This isn't your "income", it's your taxable profit.  Say that's £25k then £25k (gross) will be the maximum you can contribute.  Your taxable profit would need to exceed £60k before unused annual allowance would be of any use.

Taxable pension income is just a normal part of your overall taxable income and is taxed accordingly.

So £12k profit + £12k pension income will be £24k taxable income and either £11,430 or £12,690 will be taxed at 20% depending on whether you have applied for Marriage Allowance.

QrizB

Nebs9999 said:

As to the amount of contributions, I thought you could use Unused Contributions from earlier years? I'm self employed and total annual income is about £30k, similar for last few years but only made £5k pension contributions.

In any given year, you can't make a gross pension contribution greater than your taxable earnings. With an income of £30k, your maximum gross contribution is £30k. Carry-forward of previous years' allowances doesn't help.

Are you a sole trader or are you a limited company?

Nebs9999 said:

As to the withdrawal, I thought it was taxed at your marginal rate of tax BEFORE making the withdrawl? So if I have £12,000 income in the year of withdrawal then my marginal rate of tax is 0%, and regardless of how much I withdraw from my pension pot the first 25% will be tax free and the rest will be taxed at my marginal rate of 0%.

No, as far as income tax is concerned pensions are a taxable income stream just like eg.a second job. If you have £12k income already, you'll get a little bit at 0% until you run out of personal allowance, then the rest at 20% (potentially rising to 40% if you get into higher rate territory).

Doctor_Who

Nebs9999 said:

Thanks everyone for the suggestion of going somewhere else rather than Nest. I hadn't thought of that. Great idea.

As to the amount of contributions, I thought you could use Unused Contributions from earlier years? I'm self employed and total annual income is about £30k, similar for last few years but only made £5k pension contributions. I plan to keep working part time and if I defer my state pension for a year and reduce my work I can easily get down to below the taxable threshold for the year of withdrawl.

As to the withdrawal, I thought it was taxed at your marginal rate of tax BEFORE making the withdrawl? So if I have £12,000 income in the year of withdrawal then my marginal rate of tax is 0%, and regardless of how much I withdraw from my pension pot the first 25% will be tax free and the rest will be taxed at my marginal rate of 0%.

If only it were so! Yes, the 25% tax free sum from the pension will be tax free, but as Dazed_and_C0nfused says the 75% will be added to your other income and taxed accordingly after the personal allowance.