Paying £2,880 into a pension in retirement - not worth it?

FIREDreamer

Scenario: Retiring in June at age 60 (eek), no LTA left but will have about £18,000 lump sum allowance available when i get my transitional certificate. Drawdown pot is of a size (£300k) such that, along with an annuity and DB pensions (totalling circa £38k pa), it cannot realistically be emptied without paying 40% tax on most of it at some point due to fiscal drag. Also, the fully paid up (confirmed) state pension in 7 years (£11.5k pa) pretty much uses up the rest of the 20% band as it stands today.

Basic Rate taxpayer in retirement otherwise. Everything currently in a taxable environmemt will be ISA’d before state pension age or spent on property maintenance and nice things.

Pay in £2,880. Gets grossed up to £3,600. Fine.

Get out £900 tax free but the remaining marginal amount will be taxed at 40% at some future point. So £2,700 x 60% = £1,620 plus the £900 tax free yields £2,520 - a loss of £360.

So not worth doing? 

If pensions made me pay 40% tax in the future it might be worth doing in those tax years for 40% relief plus inheritance tax mitigation I suppose?

Will definitely do the £2,880 for my non taxpaying wife though.

FIREDreamer

IvanOpinion said:

You say you have ISAs so you could take up to £50,270 from your pension and any additional needs from your ISA. That would avoid moving into the 40% bracket.

The LTA is being removed/abolished on 6th April. I also suspect that over the next few years allowances may increase reducing the fiscal drag (although who knows? they could equally be reduced), governments have a habit of changing their minds, usually when it suits them.

@I@IvanOpinion

Exactly - but can only take £80k out of the pension in 7 years at basic rate tax leaving £200k plus at 40% tax when taken - so pointless paying the £2,880 merry-go-round? Do you agree.

Definitely pointless when no tax free allowance remains.

Sarahspangles

Is the fact that you can leave your SIPP a to a beneficiary also a consideration? I was thinking it was possibly a way to provide a survivor's pension.

michaels

Personal allowance transfer from you non tax paying wife could also increase your headroom to an extent

ColdIron

If I understand it once the SP kicks  in your income will be £49,500 (£38,000 + £11,500) so about £770 BR headroom
But don't forget that pension contributions reduce the amount of tax paid at 40%

I make annual £3,600 gross contributions and it increases my basic rate band by that gross contribution. So £37,700 becomes £41,300This effectively raises the higher rate threshold by £3,600 from £50,270 to £53,870 (or £41,300 + £12,570) which will easily cover your £52,560 (£49,500 + £2,700 £3,060). In fact you'll have more BR headroom at £1,310. So it's worth doing

FIREDreamer

ColdIron said:

If I understand it once the SP kicks  in your income will be £49,500 (£38,000 + £11,500) so about £770 BR headroom
But don't forget that pension contributions reduce the amount of tax paid at 40%

I make annual £3,600 gross contributions and it increases my basic rate band by that gross contribution. So £37,700 becomes £41,300This effectively raises the higher rate threshold by £3,600 from £50,270 to £53,870 (or £41,300 + £12,570) which will easily cover your £52,200 (£49,500 + £2,700). In fact you'll have more BR headroom at £1,670. So it's worth doing

“But don't forget that pension contributions reduce the amount of tax paid at 40%”

But pointless if you can only get it out at 40% though? Admittedly there is some tax free cash available but once that limit goes (only £18,000 available) it’s pointless. Well, neutral at best. Inheritance tax avoidance is a factor I suppose.

ColdIron

Sorry, I was looking at it from another angle, that the withdrawals now would push you into HR tax

If you make the £2,880 contributions now and withdraw while you are still a basic rate tax payer you get the usual 6.25% or £180 gain, even if you withdraw just enough from your pot to keep you within basic rate

If you make those contributions now but don't withdraw until you pay 40% tax you would be worse off

FIREDreamer said:

Get out £900 tax free but the remaining marginal amount will be taxed at 40% at some future point. So £2,700 x 60% = £1,620 plus the £900 tax free yields £2,520 - a loss of £360.

However after you start to make withdrawals from your pension pot that push you into HR tax, especially with the SP payments, the £2,880 contributions make sense again

You will get £720 basic rate relief but also £720 higher rate relief

When you take out the £2,700 x 60% = £1,620 plus the £900 tax free = £2,520 plus the £720 higher rate relief you claimed when making the contribution yields £3,240 - a gain of £360

If you contribute and withdraw at the same rate you will be better off

FIREDreamer

ColdIron said:

Sorry, I was looking at it from another angle, that the withdrawals now would push you into HR tax

If you make the £2,880 contributions now and withdraw while you are still a basic rate tax payer you get the usual 6.25% or £180 gain, even if you withdraw just enough from your pot to keep you within basic rate

If you make those contributions now but don't withdraw until you pay 40% tax you would be worse off

FIREDreamer said:

Get out £900 tax free but the remaining marginal amount will be taxed at 40% at some future point. So £2,700 x 60% = £1,620 plus the £900 tax free yields £2,520 - a loss of £360.

However after you start to make withdrawals from your pension pot that push you into HR tax, especially with the SP payments, the £2,880 contributions make sense again

You will get £720 basic rate relief but also £720 higher rate relief

When you take out the £2,700 x 60% = £1,620 plus the £900 tax free = £2,520 plus the £720 higher rate relief you claimed when making the contribution yields £3,240 - a gain of £360

If you contribute and withdraw at the same rate you will be better off

Once the lump sum allowance is gone (only £18,000 left and uncrystallised pot of £60,000 at retirement uses £15,000 of that) then it isnt worth it.

I can get £20,000 out as two small pots (£7,500 taxable each time) if I take one a year for fwo years before state pension age without hitting 40% tax. This leaves a future tax free lump sum allowance of £18,000 - £10,000 (25% of remaining £40,000 uncrystallised) = £8,000 tax free available.

So might be worthwhile to pay £32,000 over 8/9 years to get the tax free bit if it helps me avoid 40% tax in any of those years (fiscal drag makes this a possibility).