Adding £120k Lump Sum to pension pot just before retirement

MPC1234

Hi....I'm a 63 year old male, married, higher rate tax payer earning £80k pa. and looking to retire in the next couple of years. I currently have a couple of pension pots with a value of £350K and £200K and I'm contributing about £15k per year directly via employer salary sacrifice scheme into the larger pot so I get the tax relief on that without having to claim higher rate refund via a tax return. I have no other taxable income.
I have £120k savings in cash and stocks/shares ISAs.
My questions are: 
1. Would it be beneficial for me to use up to £120k to top up my pension (using 3 years carry forward rule)?
2. Could I add the £120k the day before I retire to take advantage of the tax relief.....and then retire and take my pension the next day/next week, and withdraw the £120k as my tax free lump sum and invest elsewhere?  Thereby increasing my pot by the tax amount but at no real cost to me (apart from losing the ISA tax relief on my savings)
3. What would be the approx. optimum amount for me to add as a lump sum?
Or should I lay off the wacky baccy? 

Mutton_Geoff

If you are earning £80k a year, that is the limit (inc your current £15k) on your contribution if you have carry forward available. You can't use carry forward to exceed relevant earnings.

The technique of paying in whilst you are still employed and then drawing out is valid. I did it this year, paid in savings etc so my contributions matched the amount of income I had paid higher rate tax on in the 2022/23 tax year then mid April in the new tax year, drew it back out. You will be partially crystallising your pots if you want to draw out the £65k as TFC to the tune of £195k (ie £260k less the £65k TFC). If you draw any of the remainder, MPAA rules kick in.

Dazed_and_C0nfused

1.  Yes, the more in the pension the better the retirement is the general rule.  Especially if higher rate tax relief is in the equation.

2.  If you only earn £80k how do expect to be able (within pension contribution rules) to add £120k in one tax year 🤔.  Even if salary sacrifice down to NMW and then make a ~£20k gross RAS contribution that would only be £80k.

3.  Optimum in heat sense?  Most money in the pension full stop.  Most money with tax relief on it all.  Most money which attracts higher rate relief?

Marcon

Could you afford to pay more into your pension now/each year until you retire, which would get you round the problem of not being able to contribute the full £120K at the last minute?

MPC1234

Dazed_and_C0nfused said:

1.  Yes, the more in the pension the better the retirement is the general rule.  Especially if higher rate tax relief is in the equation.

2.  If you only earn £80k how do expect to be able (within pension contribution rules) to add £120k in one tax year 🤔.  Even if salary sacrifice down to NMW and then make a ~£20k gross RAS contribution that would only be £80k.

3.  Optimum in heat sense?  Most money in the pension full stop.  Most money with tax relief on it all.  Most money which attracts higher rate relief?

OK....so I can't the 3 years carry forward rule does not apply to my earnings in each of those 3 years (3 x 80k).....it only applies to current year (1 x 80k)?  So I am limited to just a total of £60K pension contribution.

HappyHarry

MPC1234 said:

Dazed_and_C0nfused said:

1.  Yes, the more in the pension the better the retirement is the general rule.  Especially if higher rate tax relief is in the equation.

2.  If you only earn £80k how do expect to be able (within pension contribution rules) to add £120k in one tax year 🤔.  Even if salary sacrifice down to NMW and then make a ~£20k gross RAS contribution that would only be £80k.

3.  Optimum in heat sense?  Most money in the pension full stop.  Most money with tax relief on it all.  Most money which attracts higher rate relief?

OK....so I can't the 3 years carry forward rule does not apply to my earnings in each of those 3 years (3 x 80k).....it only applies to current year (1 x 80k)?  So I am limited to just a total of £60K pension contribution.

 Not quite. Your annual allowance for this year is £60k, and it was £40k for the previous three years.

You can carry forward any unused annual allowance from the previous three years. Your total contributions must still be less than or equal to your earnings this year.

This means that you could use this years' £60k allowance and carry forward an unused £20k from a previous year, making total contributions equal to your earnings of £80k.

MPC1234

Marcon said:

Could you afford to pay more into your pension now/each year until you retire, which would get you round the problem of not being able to contribute the full £120K at the last minute?

Thanks very much. That's probably the answer if I can't use £40k for each of the past 3 years

Albermarle

MPC1234 said:

Marcon said:

Could you afford to pay more into your pension now/each year until you retire, which would get you round the problem of not being able to contribute the full £120K at the last minute?

Thanks very much. That's probably the answer if I can't use £40k for each of the past 3 years

As the previous post explained, you can use a part of the carry forward, so you can add £80K gross this tax year, which is the maximum constrained by your actual earnings.

Albermarle

If you are earning £80k a year, that is the limit (inc your current £15k) on your contribution if you have carry forward available. You can't use carry forward to exceed relevant earnings.

I am always surprised that so many new posters are actually aware of a relatively obscure rule about carrying forward unused allowances, and yet > 90% have misunderstood it.

najan49

One thing to consider is increasing your salary sacrifice, so you save tax and NI, and covering your living expenses from your existing savings.

Grumpy_chap

Albermarle said:

I am always surprised that so many new posters are actually aware of a relatively obscure rule about carrying forward unused allowances, and yet > 90% have misunderstood it.

I'm not surprised that there is good awareness of the carry forward rules. 

The possibility of carry forward always seems to be high in the pension provider websites if searching for "what is the most I can pay into pension?"  I always assumed this was because it is in the business interests of the pension providers for an individual to pay in £60k plus (£40k x 3), total £180k than be under the impression that the limit on contributions is £60k.  (I note the details around this mean that very few people can actually pay in the £180k this year regardless of earnings).

The restriction on total contributions to earned income is the more obscure rule so far as I can make out.  Most of the pension provider and advice websites seem to have this important nugget squirrelled away somewhere in the depths.  Certainly lower than the "pay in £180k" which is better for the pension provider business model.