Is contributing 100% of relevant earnings advantageous?

FatherAbraham

I'm considering the situation within the last (tax) year of working before retirement.

If one's relevant earnings for the tax year were below £60,000, would it be advantageous to make a relief-at-source (RAS) gross contribution of 100% of those earnings to a personal pension before the tax year ended?

In particular, the first £12,570 of relevant earnings fall into the personal allowance, so would not have been subject to income tax when earned. A net contribution of only £10,056 will be grossed up via RAS to £12,570 within the pension fund, resulting in a gain of £2,514. The income tax rate on withdrawals from a pension fund is only 75% of the rate on relevant (employment) earnings, because of the pension commencement lump sum.

With some savings to bridge the gap, one could make this contribution before, for example, commencing drawdown and triggering Money Purchase Annual Allowance.

This seems like an opportunity not to miss (although perhaps not sensible for anyone paying a marginal income-tax rate of 40% in retirement).

Are there traps which I've overlooked?

zagfles

Yes, and you could do it with earnings over £60k if you have carry forwards available. It works whatever your tax rate, as you can always drawdown the extra after retirement in the retirement tax year and make taxable income the same as it would have been, while increasing your PCLS. But you'd need to have spare LSA available (unlikely if you're going to be a 40% taxpayer in retirement, unless you have other non-pension income sources).

If sal sac is available, even if you've used up (or have enough to use up) the LSA it's nearly always worth max sal sac (or if part time down to the NI primary threshold) in the retirement year so you avoid as much NI as possible, again you can make taxable income the same as it would have been by drawing down more after retirement before the end of the tax year.

DRS1

The trap you haven't mentioned are the pension recycling rules. But it is not clear if anyone has actually fallen foul of them.

zagfles

https://forums.moneysavingexpert.com/discussion/comment/82027882#Comment_82027882

Yes good point. You could usually arrange things to avoid falling foul of the recycling rules eg by taking a large enough PCLS so that the extra conts aren't as much as 30% of the PCLS.

Cobbler_tone

It’s a tax deferral + partial uplift strategy, not pure arbitrage
The benefit depends on:

Timing of withdrawals
Income in retirement
Use of personal allowance

I know someone personally who did something similar and ended up falling into 40% tax whilst drawing a fair bit of it out.

I intend to top up my wife's final year to match her earnings.