Investing lump sum without paying lots of tax

Green_hopeful

Just looked at the DC pension which has lost quite a bit of money. Thank goodness I am not relying on the money it predicts it will pay out. I will have a better look at putting money into a pension. 

Albermarle

Your approx current salary. No salary beyond what I have earned this financial year of £23k

So as you are getting a payout of £80K after tax , your total taxable income in this tax year must be around £120K ?

If this is correct you are going to be taxed very heavily in this tax year. This why some level of pension contribution keeps being suggested as you will get a lot of the tax back in tax relief in your pension. You can only really do this during this tax year.

Normally if you have a DC employer pension, you take it with you when you leave and should be OK to just add to it like it was now a personal pension. However there some types where you can not, so a quick call to the pension provider should answer your question definitively.

My most recent pension doesn’t seem to predict paying out very much at all but perhaps that is because I am comparing DB and DC pensions. 

This is partly because DB pensions are in general much better than DC ones and cost employers a lot more to fund ( which is why they have largely disappeared in the private sector)

However pension projections for DC pensions tend to be a bit pessimistic as well.

The DC pension pot could be accessed at any time from age 55

Green_hopeful

Thank you. I think my income this year will be about £120k (I will know for sure this week) but I get £30k tax free and my normal personal allowance. I have already paid tax on the £23k. 

Doctor_Who

Albermarle said:

If this is correct you are going to be taxed very heavily in this tax year. This why some level of pension contribution keeps being suggested as you will get a lot of the tax back in tax relief in your pension. You can only really do this during this tax year.

As Albermarle says, the option to get 40% tax relief on pension contributions is only going to be available to you for this tax year since you need to have enough relevant taxable income (you appear to have more than enough for this year assuming the payout is classed as relevant UK earnings) to cover the gross pension payment (upto £60K if we ignore annual allowance carry forward). However, if you were to leave it until the next tax year, and are then not working, you are limited to £2880 net + £720 tax relief.

vacheron

Green_hopeful said:

Thank you. I think my income this year will be about £120k (I will know for sure this week) but I get £30k tax free and my normal personal allowance. I have already paid tax on the £23k. 

Sounds like this 80k could be a potential reduncancy / PILON payout based on the above.  In which case anything above the £30K tax free will be considered as "earned income" for income tax purposes. From my experience your only option to avoid any tax on the excess would be to put it into a pension (using carry forward allowances from previous years if neccessary). 

Putting this money into savings which pay out in the next financial year (or into ISAs) would avoid any tax hit on the interest, but not the (potentially huge) income tax hit in  this financial year. 

By putting the money into a pension you avoid paying about £40K (rough guess) in Income Tax and you can then draw 25% of this down tax free in 2 years time when you are 55.

Would that £40K (rough guess) not allow you to retire a little earlier and use the proceeds to your own advantage in a couple of years rather than giving it all to the treasury?

Green_hopeful

I think I need some pensions advice as I don’t know enough to even know what I don’t know. Quite nervous about finding someone who can explain it to me in a way I can understand. It’s funny how as a reasonably educated person who has managed my own money for 30 years cannot understand pensions or even just investments. I suppose it is more fraught because I don’t want to make a mistake. 

dunstonh

Just looked at the DC pension which has lost quite a bit of money. Thank goodness I am not relying on the money it predicts it will pay out. I will have a better look at putting money into a pension. 

It doesnt give predictions.  It gives projections.  Predictions are something that is likely to happen.   Pension providers use projections which are synthetic and based on assumptions.    Those assumptions are typically pessimistic.

2022 was a negative year.    Around 1 in 5 years (over the long term) are negative. 

Really liking the responses from the other regular posters higher up.   They are bang on the money

Doctor_Who

Green_hopeful said:

I think I need some pensions advice as I don’t know enough to even know what I don’t know. Quite nervous about finding someone who can explain it to me in a way I can understand. It’s funny how as a reasonably educated person who has managed my own money for 30 years cannot understand pensions or even just investments. I suppose it is more fraught because I don’t want to make a mistake. 

I think that might be a good idea, but you should have gained some useful knowledge from reading the above posts. You have time so there shouldn't be any need to rush. If you are going down the pension route then the main thing is to get the contributions in to the pension before the end of the tax year. Deciding on what investments to hold in the pension can come later.

retiringtoosoon

pensions is the right answer

Albermarle

Green_hopeful said:

I think I need some pensions advice as I don’t know enough to even know what I don’t know. Quite nervous about finding someone who can explain it to me in a way I can understand. It’s funny how as a reasonably educated person who has managed my own money for 30 years cannot understand pensions or even just investments. I suppose it is more fraught because I don’t want to make a mistake. 

The key fact about a pension in your case is tax relief.

In simple terms, if you pay pension contributions out of pay already taxed, then the tax you have paid is refunded to your pension ( up to a limit)
With some employers your pension contributions are taken out of your pay before tax, in which case there is no tax refund, as you have paid no tax in the first place.

For example if you are a basic rate taxpayer then you need to earn £1000 to get £800 in your take home pay. If you add that £800 to a savings account you have £800 in that account. If you add £800 to a pension, £200 tax relief will be added, so you have  £1000 in your pension.
If you are a higher rate taxpayer you get even more tax relief, which is why pension is the favourite money destination normally for higher rate taxpayers.
Now when you withdraw money from that pension you may some tax but you still have an advantage normally, especially if you are a higher rate taxpayer.

Pensions: Everything you need to know for retirement - MSE (moneysavingexpert.com)

Tax and pensions | Help with tax and your pension | MoneyHelper