The benefits of using unused pension allowances

lumpsum123

Hi!
I have just received an inheritance in the form of a lump sum and have been exploring what to do with it.

It seems to me that one option would be to pay a lumpsum into my pension, taking advantage of the unused allowances from previous tax years - my reasoning being that this would give my pension pot a boost whilst allowing me to to take advantage of the tax benefits.

What are the views on this particular approach?  

What do I need to be aware of if I pursue this?

I should say that I am a higher-rate tax payer and earn more than the current £60,000 allowance .

Any thoughts gratefully received...

Marcon

lumpsum123 said:

Hi!
I have just received an inheritance in the form of a lump sum and have been exploring what to do with it.

It seems to me that one option would be to pay a lumpsum into my pension, taking advantage of the unused allowances from previous tax years - my reasoning being that this would give my pension pot a boost whilst allowing me to to take advantage of the tax benefits.

What are the views on this particular approach?  

What do I need to be aware of if I pursue this?

I should say that I am a higher-rate tax payer and earn more than the current £60,000 allowance .

Any thoughts gratefully received...

If you want to top up your retirement savings in a tax efficient manner, then a pension contribution is still the best way to do it, especially for a higher rate taxpayer (a statement which might need to be revisited later this week...!).

You need to earn enough in the tax year in which you make the contribution to cover the whole of your gross lump sum contribution (ie including tax relief at the basic rate, assuming you are paying this into a relief at source scheme, where the provider adds the 'tax top up' at basic rate).

You will only get higher rate relief to the extent you have paid higher rate tax in the first place. If you pay a lump sum of (say) £55,000 but have only paid higher rate tax on £30,000, only £30,000 of your £55,000 contribution will get the 'extra' tax relief; the other £25,000 will only get basic rate relief.

Albermarle

This sounds like a sensible idea.
Would it be into a workplace pension? 
At work how are your current pension contributions made?
Salary sacrifice
Relief at source ( after tax)
Net pay ( before tax) 

Secret2ndAccount

You haven't given us numbers (and you don't have to). Are you sure you've understood the rules correctly? In any year, you can only pay in as much as you earn. So if you earn 50k, you can only pay in 50k including any tax relief.  If you earn 100k then we come up against the annual allowance. That's 60k (including employer's contribs too), but this part (only this part) you can use up the last 3 years of unused allowance. 
So unless you earn in the region of 60k, your salary is going to be your limiting factor.
Technically, you can pay in more than you earn, but you won't get any tax relief which is the main benefit of pension contributions. So usually it is not a good idea.

Pipthecat

lumpsum123 said:

one option 

Age and home ownership can be key factors.  How long are you locking this money away for, might you need it before you retire? Do you have an expensive mortgage that might be worth paying off?  If these are not concerns then I would maximise your pension.

af1963

The details also depend on how big an inheritance, and how much over the higher rate threshold you earn.

 At the moment, one approach could be to pay just enough extra in to your pension so that you contribute the entire excess over the higher rate threshold. ( Ideally by increasing any salary sacrifice at work, to save on NI payments as well, but if that's not an option, just into a SIPP).  Effectively this gets 40% tax relief.  ( Pay in £8k, top up to £10k, and get £2k back in reduced tax bill so you've paid £6k to get £10k in your pension.)

If that leaves spare money, further choices could be to either pay more into the pension this year, getting tax relief on the additional amount at 20%, or possibly to hold on to it outside your pension until subsequent tax year(s), where you could again contribute enough to maximise higher rate relief.

Possible that things change on Wednesday ... although the rumour mill now seems to have moved on from suggesting tax relief will be changed to a fixed rate.