I have been left a £50,000 inheritance, I want to add it to my pension pot.

NormalNorman

At 64 is there time to pay it all in to the pension due to limits, then is there there an opportunity left to get it out mostly tax free having benefiting from the tax relief? Personally I don't think the pension route is worth it as no other perks on the contribution such as NI relief from sal sac or employer contributions. I would go the S&S ISA route for flexibility and simplicity. And perhaps just 'waste' a little bit on yourself.

ali_bear

Another option for you is to invest the money (up to 50k) in premium bonds. The capital will sit there and not grow (no interest earned) but you will be getting occasional prizes paid out directly and these are not taxed. It is easy to set up if you go to https://www.nsandi.com/products/premium-bonds

tichtich

Since you will probably want to put the money into an ISA or pension pot (or some combination of the two), it may be helpful to clarify the different tax treatments of those two wrappers.

Both wrappers are tax-advantaged, in the sense that you pay no tax on any interest, dividends or capital gains that you make inside the wrapper. In that respect, ISA and pension pot are the same.

However, the wrappers differ in a significant way with respect to withdrawing money from the wrapper. 75% of the money you withdraw from a pension pot is considered to be income, and so attracts income tax. The other 25% is tax-free. (This is the so-called "tax-free lump sum", but it doesn't have to be withdrawn as a single lump sum.) Money withdrawn from an ISA is, of course, considered to be just withdrawal of savings from a savings account, so is not taxed.

To compensate you for having to pay income tax when you withdraw money from a pension pot, you get "tax relief" when you put the money into the pot. I think this is easier to understand in the case of someone who is making pension contributions from earned income. If that person didn't get tax relief on the contributions, they would end up paying income tax twice on the same income: once when they pay it into the pot and again when they take it out. So the tax relief is there primarily to prevent double taxation. In practice, there is a net benefit from the tax relief, because you avoid tax on the whole amount on the way in but only pay tax on 75% of the amount on the way out. (And there can be additional advantages, for example for higher rate tax payers.)

For someone like you who would be paying in a non-income lumpsum, the term "tax relief" is a bit of a misnomer, since there is no income tax to relieve. Nevertheless, you still get the "tax relief" added on the way into the pot, to compensate you for having to pay income tax on the way out (which you wouldn't have to pay if you put the money in an ISA instead.)

In short, the tax benefit of putting some of your money into a pension pot instead of an ISA is that you will have 25% added in "tax relief" on the way in, but only have 15% (75% of 20%) deducted on the way out. This amounts to a 6.25% gain overall. However, this assumes that the basic rate of income tax stays at 20%. If it goes up, the benefit will be less. If it went up as high as 30%, you could even be worse off in the pension pot than you would have been in an ISA.

There is an additional possible income tax advantage to the pension pot. If you have any unused personal tax allowance, you could set withdrawals from the pot against that unused allowance and effectively make those withdrawals tax free. However, given your situation (forces pension and closeness to retirement age), you may have no unused personal allowance, or you may already have enough in your pot to take maximum advantage of this option.

By the way, I'm not clear whether your existing pension pot with Aegon is a workplace pension or a SIPP (self-invested pension). I'm only familiar with SIPPs. I don't know whether workplace pension providers let you add additional unearned lump sums. If not, I suppose you could open a new SIPP for some of the inherited money. But perhaps that wouldn't be worth the trouble.

Grumpy_chap

https://forums.moneysavingexpert.com/discussion/comment/81895801#Comment_81895801

"

For someone like you who would be paying in a non-income lumpsum

"

Except, of course, the OP cannot pay a non-income lump sum into their pension. The maximum tax-relievable contribution (gross) is capped to the individual's earned income.

Now, the individual can pay 100% of their earned income into the pension and then use the lump sum today to back-fill the gap in their finances, which achieves largely the same outcome as paying in the lump sum.

tichtich

https://forums.moneysavingexpert.com/discussion/comment/81895883#Comment_81895883

The OP is talking about how to deploy his inheritance, not how to deploy his earnings for the past year (which he has probably already spent on living costs). But it is indeed the fact that he had those earnings that allows him to deploy part of his inheritance into a pension pot.

P.S. I take back my point about "tax relief" being a misnomer in this case, since at least some of the amount added by HMRC could be considered relief on the tax that he may have paid on some those earnings.

saajan_12

What exactly is your aim in adding it to your pension?

If you want to invest it to use during your retirement, then you could just put it in a stocks & shares ISA, with a good balance of bonds or fixed income investments. The appreciation / interest is not taxable.

The difference by adding it to a pension is that you get an additional tax relief amount, basically getting back the income tax you would have paid if it was earned income. However when withdrawing it from your pension, you pay income tax on whatever you draw at the time. So you don't know if this will be a benefit or a cost to you, ie would you gain more income tax relief now than you pay later?

ader42

The other benefit of course is the 25% tax free amount.

Being able to get £50k into the pension over the course of a few years, with the added Tax Relief makes it £62,500 and £15,625 of that is Tax Free. The remainder (£46,875) is likely to be withdrawn at 20% Income Tax, which is £37,500 net. £15,625 + £37,500 = £53,225. So even without any investing of the £50k (by keeping it in cash in the pension for example) OP gets a £3,225 “freebie” over time.

OP will be getting state pension in 2 years time, plus the forces pension, so unable to withdraw it all using combination of tax-free and taxable at 0% using Personal Allowance. If OP is planning on stopping work in 2 years time then he won’t get it all in the pension in time.

OP, if you have a partner maybe some can go in their pension. Otherwise put in what you can for the tax free cash and tax relief.