Helping friend with pension

MallyGirl

Dazed_and_C0nfused said:

MallyGirl said:

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?

Yes £50k gross so she only puts in £40k

Not sure I understand your figures?

It is 25% that gets added (which is 20% of the gross) so to end up with £50k within the pension you need to hand over £40k.

Thanks - corrected 

Marcon

QrizB said:

squirrelpie said:

QrizB said:

If she was earning £135k, then (allowing for her £10k already paid) she could pay £125k gross (£100k net) into a pension and contribute her entire inheritance in a single year.

She can't if it's a newly-opened SIPP as is being discussed. Her membership of the pension scheme must have existed at the time she is theoretically contributing for.

As I understand it she needs to have been a member of *a* pension scheme, not necessarily the one she's paying into. Her workplace pension will qualify.

Correct. A lot of people get hopelessly confused by carry forward, and this (plus earnings in the 'current' tax year) are the two main areas which are responsible for that confusion.

PootleF

On the ‘too good to be true’ thought - have you and your friend considered not just the tax incentive to save into a pension, but also the tax paid on taking it out? 

She will be entitled to 25% of her pension tax free (assuming that total tax free cash across all of her pensions is under the limit), but will pay tax as normal on the remainder. If she might need some of the money whilst still working, that could offer poor value - as if she earns £60k per year she would pay 40% tax on any additional money taken out of her pension. 

I’m all in favour of pension saving - but taking money not currently subject to tax and putting it into a place where it is (mostly) taxed when withdrawn might not be optimal. At the very least, she should consider when/if she will need the money, and whether as a result some of it may be better eg in ISAs, where capital growth is also tax free, but there is no tax to pay on withdrawal 

DRS1

She might benefit by spreading the contribution over a number of years.  Pay in just enough to get her down to basic rate tax.

Of course she is going to have to decide where to park the money in the meantime.

Can she get some of it into an ISA?