Overpayment into a private pension

kendricks1

Hi,having read a few articles on overpayment into a sipp and back dating for last 3 years.

What is the actual benefit being as you get taxed on drawing it eventually from the pension after the initial 25% non taxable amount.

My situation is a pay a nhs pension thats deducted at source,with other investments for the first time this year I will pay 40% tax,if I pay a lump sum into my private sipp am I correct in thinking this will bring me under the 40% bracket?

Any thoughts would be much appreciated thanks

Sam_666

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions

Dazed_and_C0nfused

https://forums.moneysavingexpert.com/discussion/6663810/overpayment-into-a-private-pension

You can never back date pension payments so you've misunderstood whatever you have read.

If you contribute to a personal pension or SIPP then that will normally be via the relief at source method.

This is where the pension company adds 25% to your payment (20% of the gross amount) and the gross contribution increases your basic rate band.

So for higher rate payers it can be very tax efficient (depending on how much higher rate tax you pay) as you avoid some (or all) 40% tax.

eskbanker

https://forums.moneysavingexpert.com/discussion/6663810/overpayment-into-a-private-pension

What do you actually mean by 'overpayment' into a SIPP? On the face of it, that would mean paying more into a pension than the allowance that would receive tax relief, which isn't generally a good idea, but if you just mean making contributions above your existing ones, but attracting tax relief, then that would generally be sensible, although it would normally be regarded as paying into a pension rather than overpaying as such…

Grumpy_chap

https://forums.moneysavingexpert.com/discussion/6663810/overpayment-into-a-private-pension

You cannot overpay into a pension and back date the contributions.

What you can do is use carry-forward of unused Annual Allowance, subject to certain rules.

Annual Allowance is never more than £60k per year but, based upon your comment that you will pay 40% tax for the first time this year, the restriction on your contributions is likely to be earned income rather than the £60k limit.

You are not able to pay into a pension (gross) more than relevant earnings. If your relevant earnings are lower than £60k, the Annual Allowance becomes irrelevant and carry-forward is not available to you.

Income from investments are not relevant earnings.

webmasterpolo

Hi Kendricks

"back dating for last 3 years" this is called Carry Forward. This is possible if you have not maximised the 60k annual allowance for pension contributions in previous years, and you have income of more than £60k in the current tax year and want to contribute more than 60k now. Few will need this.

"What is the actual benefit". Often the tax relief is greater than the tax taken on the income in retirement. For example if you are paying 40% tax while working yet will only be paying 20% tax in retirement there is an obvious margin. In addition to the margin you also get 25% tax free.

For example, 40% tax payer earning 70k puts £10k into his private pension, so all of this 10k would be tax relived at 40%.

This is uplifted to £12,500 by the pension and there is a further £2,500 tax relief to be claimed on self assessment. Effectively making the cost of the £12.5k gross contribution only £7.5k net net (10k in minus 2.5k refund), thus 5k or 50% up.

On retirement when a basic rate tax payer, taking 10k out of the pension, the maximum tax payable would be 20% or 2k, so 5k relief on the way in and max 2k tax on the way out.

The 2k can also be reduced through various means but no need to cover here as this proves the actual benefit.

dunstonh

What is the actual benefit being as you get taxed on drawing it eventually from the pension after the initial 25% non taxable amount.

You picked up on one thing already. The 25% TFC. So, straight away you have a benefit as the tax payable later on is less than than the tax relief received.

You also have no income tax, no dividend tax and no capital gains tax on the internal growth and income.

This is why pensions are more tax-efficient than tax-free ISAs. Even more so if you are a higher rate taxpayer in your working life.

Marcon

"back dating for last 3 years

" this is called Carry Forward. This is possible if you have not maximised the 60k annual allowance for pension contributions in previous years, and you have income of more than £60k in the current tax year and want to contribute more than 60k now. Few will need this.

That's a very common (and oft repeated!) misconception. See

https://forums.moneysavingexpert.com/discussion/6659623/annual-allowance-and-salary

and note the post from @hugheskevi on 14 March at 9.26 am.

LHW99

Also could be useful if you have an irregular income, which on odd years will take you into a high(er) tax band. It allows making a larger pension contribution than you otherwise might be able to, and reduces the amount of income subject to the higher rate tax (and could restore things like child allowance, PSA…)

hugheskevi

What is the actual benefit being as you get taxed on drawing it eventually from the pension after the initial 25% non taxable amount.

A few other benefits (repeating ones already discussed for convenience), starting with benefits that apply tfor all:

• 25% tax free lump sum - this can be particularly valuable for public service pension members, as the lump sum commutation rate in public service pensions is extremely poor, and it is often better to forego a lump sum and keep the higher taxable income. Having a separate DC pension with 25% tax free lump sum can provide valuable, tax-efficient flexibility.
• Lower marginal rate - if you are a higher or additional rate taxpayer now but will be a basic rate taxpayer in retirement, that is a significant tax benefit
• Free of tax during accumulation - no income tax, dividend tax, or capital gains tax
• Can double as life assurance - the pot of money can be inherited tax-free should you die early, which might reduce how much life assurance you choose to have as pension savings get larger

Useful in specific circumstances:

• Salary sacrifice - if the employer offers it. avoid National Insurance contributions on the contribution and maybe even get some or all of the employer National Insurance savings passed on (restricted to £2,000 from 2029)
• Lower Student Loan repayments - if using salary sacrifice for pension contribution, Student Loan repayment will be reduced.
• Lower Child Maintenance payments, due to income being lower from pension contributions
• Increase means-tested benefits such as Universal Credit - as well as tax savings, get higher means-tested benefits as pension contributions reduce income
• Get basic rate tax relief on gross contributions up to £3,600 p/a, even if not a taxpayer

And for higher earners:

• Qualify for child benefit - using a pension to keep adjusted net income under £60,000 can mean entitlement to full Child Benefit
• Avoid 60% income tax by keeping adjusted net income under £100,000 to avoid the effective 60% income tax rate between £100-125K as the Personal Allowance is withdrawn
• Qualify for free Child Care by keeping adjusted net income under £100,000 by pension contributions
• Inheritance Tax avoidance - pensions are outside of estate (removed from 2027)

Storcko14

Excellent summary. This is generally under-appreciated by many IMO.