How does a personal pension work?

XRS

Apologies if this is a bit basic.

I want to clarify my understanding of how contributions into a personal pension are dealt with. For example, if I make a lump sum contribution into a personal pension of say £7,800 I understand that the fund managers add £2,200 immediately, representing the current basic rate of tax at 22%. As a higher rate taxpayer I would then need to make a claim via my tax return to claim a further £1,800.

My question is: what happens to the £1,800? Do I receive a tax refund or is it automatically added to my personal pension?

I have seen various articles in which either scenario is implied, so clarification would be appreciated

jem16

You get a tax refund - yours to do what you like with.

So you could get tax relief on the tax relief by putting it into your pension or go out and spend it all.

XRS

Thanks, I wondered about that

I have seen, where people were suggesting putting shares into a SIPP, they suggested that the final £1,800 is credited to the pension fund. I guess they assumed that you reinvested it.

How long does it usually take HMRC to turn around the refund?

jem16

The extra 18% is handled through your tax return so it all depends when you fill that in.

dunstonh

As Jem says, its via the tax return so you will pay less tax. Therefore the "extra" money is in your pocket and not in the pension.

XRS

Thanks for that. Any ideas on likely turnaround time for a refund from HMRC?

Another question on this subject relates to the taking of the 25% cash lump sum. Assuming I have more than one personal pension fund can I deal with each separately, and draw the cash at different times?

jem16

XRS wrote: »

Thanks for that. Any ideas on likely turnaround time for a refund from HMRC?

I submitted my tax return online and had a refund within 10 days into my bank account. However remember the tax return isn't due until the new tax year.

Another question on this subject relates to the taking of the 25% cash lump sum. Assuming I have more than one personal pension fund can I deal with each separately, and draw the cash at different times?

As far as I know yes if each one is separate.