Helping friend with pension

Skibunny40

My friend has had an inheritance and we were discussing how best to save it for the future. I suggested putting it into her pension, but she reckons it's too good to be true!
She's 54, so am I right in saying she can put the money in now, and start getting the money back (with the tax relief uplift) when she turns 55?

This is how I've tried to break it down simply, but am I correct in my explanation? Any other bits of information I need to include?

Open a low-fee SIPP (Self invested Personal Pension)

You can pay in the higher of either: annual earnings per year for past three tax years or £60k per year. Must deduct gross pension payments made through workplace, both employer and employee contributions.

The pension provider will apply for 20% lower rate of tax relief on your behalf.

You must complete a self-assessment form to claim back the higher rate of tax relief for earnings over £43,663 (Scotland). This will be paid out directly, not paid into your pension.

QrizB

How much does your friend earn? And how much is the inheritance?

Dazed_and_C0nfused

Skibunny40 said:

My friend has had an inheritance and we were discussing how best to save it for the future. I suggested putting it into her pension, but she reckons it's too good to be true!
She's 54, so am I right in saying she can put the money in now, and start getting the money back (with the tax relief uplift) when she turns 55?

This is how I've tried to break it down simply, but am I correct in my explanation? Any other bits of information I need to include?

Open a low-fee SIPP (Self invested Personal Pension)

You can pay in the higher of either: annual earnings per year for past three tax years or £60k per year. Must deduct gross pension payments made through workplace, both employer and employee contributions.

The pension provider will apply for 20% lower rate of tax relief on your behalf.

You must complete a self-assessment form to claim back the higher rate of tax relief for earnings over £43,663 (Scotland). This will be paid out directly, not paid into your pension.

Some things are correct but not everything.

Why would she want to take it out at 55?

The amount she can get tax relief on is limited by her current earnings in this tax year.  What does she expect her P60 to show her income as for 2025-26?

Employer contributions are relevant for the separate annual allowance limit.  Which may well not be of any relevance to her.

Does she already need to complete a tax return?  If not then there is absolutely no need to complete one just to get pension tax relief.

And if she is Scottish resident she will be entitled to relief (from HMRC, not the pension provider) at the intermediate rate, not just higher rate.

Marcon

Skibunny40 said:

My friend has had an inheritance and we were discussing how best to save it for the future. I suggested putting it into her pension, but she reckons it's too good to be true!
She's 54, so am I right in saying she can put the money in now, and start getting the money back (with the tax relief uplift) when she turns 55?

This is how I've tried to break it down simply, but am I correct in my explanation? Any other bits of information I need to include?

Open a low-fee SIPP (Self invested Personal Pension)

You can pay in the higher of either: annual earnings per year for past three tax years or £60k per year. Must deduct gross pension payments made through workplace, both employer and employee contributions.

The pension provider will apply for 20% lower rate of tax relief on your behalf.

You must complete a self-assessment form to claim back the higher rate of tax relief for earnings over £43,663 (Scotland). This will be paid out directly, not paid into your pension.

Carry forward relies on someone having sufficient earned income in the tax year they make (personal) contributions to cover the amount they contribute in that tax year. 

Skibunny40

She wouldn't necessarily want to take it out at 55, I was just trying to explain that the uplift would be relatively immediate, and she wasn't tying up the money for years.

When you say "the amount she can get tax relief on is limited by her current earnings this tax year", surely that only affects what she could pay in for this current tax year? Or do you mean that this tax year's earnings affect how much she could pay in for previous years? (I assumed it would be based on what she earnt in each previous tax year)

How do you apply for the tax relief without completing a SA form? That would be great!

Never knew there was an intermediate rate of tax!! Every day's a school day, so thanks very much!

Skibunny40

QrizB said:

How much does your friend earn? And how much is the inheritance?

I don't know exact figures - but roughly £60k salary and £100k inheritance

MallyGirl

Skibunny40 said:

She wouldn't necessarily want to take it out at 55, I was just trying to explain that the uplift would be relatively immediate, and she wasn'te tying up the money for years.

When you say "the amount she can get tax relief on is limited by her current earnings this tax year", surely that only affects what she could pay in for this current tax year? Or do you mean that this tax year's earnings affect how much she could pay in for previous years? (I assumed it would be based on what she earnt in each previous tax year)

How do you apply for the tax relief without completing a SA form? That would be great!

Never knew there was an intermediate rate of tax!! Every day's a school day, so thanks very much!

She can't pay in for previous years so it is all based on this year's salary. If she earned £100k she could make use of unused allowances from last 3 years to get lots in

Dazed_and_C0nfused

Skibunny40 said:

She wouldn't necessarily want to take it out at 55, I was just trying to explain that the uplift would be relatively immediate, and she wasn't tying up the money for years.

When you say "the amount she can get tax relief on is limited by her current earnings this tax year", surely that only affects what she could pay in for this current tax year? Or do you mean that this tax year's earnings affect how much she could pay in for previous years? (I assumed it would be based on what she earnt in each previous tax year)

How do you apply for the tax relief without completing a SA form? That would be great!

Never knew there was an intermediate rate of tax!! Every day's a school day, so thanks very much!

How can she contribute for any tax year that has already ended 🤔

There is no option to carry back pension contributions, she has missed the boat as far as any tax year prior to 2025-26 is concerned.

There is a form on gov.uk for claiming tax relief on relief at source contributions like those to a SIPP (the relief above that given by the pension company).

Some Scottish residents now have a myriad of 15 income tax rates to contend with!

Skibunny40

Okay, my understanding was wrong - glad I asked!

So if she earns £60k this tax year (& pays £10k pension contributions through employers, no idea in reality , just picked an easy hypothetical figure, assume same for past 3 tax years) she could pay in up to £150k this tax year?

Skibunny40

Skibunny40 said:

Okay, my understanding was wrong - glad I asked!

So if she earns £60k this tax year (& pays £10k pension contributions through employers, no idea in reality , just picked an easy hypothetical figure, assume same for past 3 tax years) she could pay in up to £150k this tax year?

No, I'm still wrong!

She could only pay in up to £50k couldn't she?

Dazed_and_C0nfused

Skibunny40 said:

Skibunny40 said:

Okay, my understanding was wrong - glad I asked!

So if she earns £60k this tax year (& pays £10k pension contributions through employers, no idea in reality , just picked an easy hypothetical figure, assume same for past 3 tax years) she could pay in up to £150k this tax year?

No, I'm still wrong!

She could only pay in up to £50k couldn't she?

Potentially.

But you would need to know what her P60 will show.  She may earn £60k but existing pension contributions might reduce that.  Or it could be £60k after existing contributions.

If she has a defined benefit pension it's a little more complicated but if she never paid anything above her normal scheme contributions it's unlikely to be an issue (for the annual allowance limit).