Pay a lump sum into a pension question.

Veteransaver

bjorn_toby_wilde said:

Veteransaver said:

Idpullthecurtain said:

I am a pension novice so it would be great if I could check some things with forum members.

Am I right about this: if I paid 100k (for example) as a lump sum into private pension.  This would attract a 25% attract a 25% tax top up from the government?  So I would be paid £25k.
So this bonus is the price I pay for locking away the sum until Im 57? 

Is this correct?  TIA

You'd need to have taxable earnings of at least 125k this tax year, and also have sufficient remaining allowance from the previous 3 years (current maximum you can contribute is £60k in a tax year but was previously £40k before 23-24 tax year. 

Unless I’m mistaken the OP would need taxable earnings of £60k this year, not £125k.

You can contribute 100% of earnings up to £60k but more than that would have to come from previous years allowance carried forward.

Op gave £100k in their example. Which would be £125k grossed up
You can't use previous year allowances. You used to be able to carry back contributions,eg you could have them treated as if they were made in previous tax years. This was useful for example if you were a high rate taxpayer in previous years but no longer a high rate taxpayer in the current year.
Alas you can no longer do this though and relief can only be obtained on the current earnings of the tax year they are made.
The carry forward rule purely applies to the maximum annual contribution so you can use up previous year allowances, useful maybe if you got a large unexpected bonus, but it can never exceed the relevant earnings for the year it is made.
At £60k annual allowance though you'd need to be earning some serious income to take advantage of using previous years allowances.

Idpullthecurtain

Ive got a lot to learn about pensions.  Thanks for this info.

If a person earned 35k pa (for the past 3 years) and had 100k capital, we are saying they couldnt pay this lump sum into a pension and attract the Gov tax top up?

TIA

Pipthecat

MX5huggy said:

  So if I had that amount, I could deposit as a lump sum, and 25% would be added to it by Govt?
It seems crazy to me. 

That’s how pensions work, in exchange for locking money away you receive tax relief on the contributions. 

Worth emphasising that you are locking that money away. You may not be accessing that money for years. When you do you will also be paying tax on it, subject to the various allowances.  

If I had 100K to deposit in my pension, I would do so over a number of years whilst also maxing out my annual ISA allowances. In addition to the regular ISA, I would look into the Lifetime ISA as this looks to be very useful in your situation

NoMore

Idpullthecurtain said:

Ive got a lot to learn about pensions.  Thanks for this info.

If a person earned 35k pa (for the past 3 years) and had 100k capital, we are saying they couldn't pay this lump sum into a pension and attract the Gov tax top up?

TIA

First stop thinking of it as a government top up or bonus, its tax relief and as such its related to your taxable earnings, you don't get tax relief on more than your taxable relevant earnings, doesn't matter if you have a large Annual Allowance available and savings to use it, you need the relevant earnings to cover the tax relief.

Idpullthecurtain

Pipthecat said:

MX5huggy said:

  So if I had that amount, I could deposit as a lump sum, and 25% would be added to it by Govt?
It seems crazy to me. 

That’s how pensions work, in exchange for locking money away you receive tax relief on the contributions. 

Worth emphasising that you are locking that money away. You may not be accessing that money for years. When you do you will also be paying tax on it, subject to the various allowances.  

If I had 100K to deposit in my pension, I would do so over a number of years whilst also maxing out my annual ISA allowances. In addition to the regular ISA, I would look into the Lifetime ISA as this looks to be very useful in your situation

Thanks.
I have been maxing out my ISA annually, thats already done.
I am over 39 so Lifetime ISA isnt relevant to me.

Dazed_and_C0nfused

Idpullthecurtain said:

Ive got a lot to learn about pensions.  Thanks for this info.

If a person earned 35k pa (for the past 3 years) and had 100k capital, we are saying they couldnt pay this lump sum into a pension and attract the Gov tax top up?

TIA

Correct. Their (total) personal contribution is going to be limited by the £35k.

Ignoring any auto-enrolment type contributions that are paid normally they could could pay £28k and the pension company will add 25% to make a gross contribution of £35k.

The fact that they would only be paying ~£4.5k in income tax doesn't prevent them getting £7k in pension tax relief.

But their earnings limit the gross contribution to £35k.

MX5huggy

If your employer offers Salary Sacrifice pension contributions this is a better way of contributing to the pension. Because instead of 20% tax relief (25% top up if you like). Your income before tax and NI is put in the pension so £100 going into pension instead £100 minus 28%, £72 into pension which gets its 25% added for £90 ends up in the pension. Salary Sacrifice contributions are limited to national minimum wage rules. 

If I had £100k today I would salary sacrifice an extra £10k per year for the next few years. 

In either case I would stop “maxing” ISA’s I would save in pension over saving in ISA  if the saving is for retirement. 

Grumpy_chap

Idpullthecurtain said:

Ive got a lot to learn about pensions.  Thanks for this info.

If a person earned 35k pa (for the past 3 years) and had 100k capital, we are saying they couldnt pay this lump sum into a pension and attract the Gov tax top up?

TIA

Correct.

The maximum an individual with relevant earnings of £35k can contribute to a pension is £35k (gross) as personal contributions.  

Employer contributions (but not employee) can be made in addition to that £35k limit.

If the employer operates Salary Sacrifice, making the maximum via that process will be more tax efficient overall.  The remainder (NMW) can then be made as personal contributions.