Should I pay a lump sum into my pension
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https://www.gov.uk/government/publications/your-new-state-pension-explained/your-state-pension-explained
At 6/4/16, two calculations were done to establish the starting amount for new state pension.
Let's suppose Joe Smith had become a member of a Contracted Out Pension Scheme when he started work and stayed in it for much of his career.
He was 60 in 2016 and asked for a State Pension forecast.
He had more than 30 years NI at that point so under old rules was entitled to a full basic state pension of £119.30. To this was added any additional state pension to which he might have been entitled less a deduction for contracting out.
Let's suppose his ASP was £80 but his COD was £70.
His entitlement to SP would have been £129.30.
Under new rules the calculation would have been a full NSP of £155.65 (because he has 35+ years NI) less the Contracted Out Pension Equivalent so £85.65.
His starting amount was the higher of the two.
As he had several years to go before SPA, he had the opportunity to increase his starting amount as explained in the link above.0 -
OK so State Pension sorted at full amount. Don't worry too much about how it was calculated OP.
What about the question in Post 2 - do you earn enough to pay this money into a pension and get tax relief?
Before you make any decisions just check on here about how much and how you will contribute to the pension as different methods can have different tax benefit outcomes depending on amounts and earnings.0 -
What about the question in Post 2 - do you earn enough to pay this money into a pension and get tax relief?
I'd have to spread it out over a couple of tax years. As it would be paid near the end of a tax year that's easy to do.Before you make any decisions just check on here about how much and how you will contribute to the pension as different methods can have different tax benefit outcomes depending on amounts and earnings.
Different methods? I'm not sure what different methods there are. Naively I assume that you hand a sum, or sums, of money to the pension company and what counts is the amount paid in in each tax year.0 -
I think what is meant by this statement is that it is not clear from your posts if you are an employee, self employed etc .Different methods? I'm not sure what different methods there are. Naively I assume that you hand a sum, or sums, of money to the pension company and what counts is the amount paid in in each tax year.
If you are an employee on PAYE , then different employers have different systems for pension contributions .0 -
Different methods? I'm not sure what different methods there are. Naively I assume that you hand a sum, or sums, of money to the pension company and what counts is the amount paid in in each tax year.
There are four main ways an employee might contribute to a pension.
If we look at two very common ones you can see the difference.
Employee A earns £10k/year with no other taxable income
They contribute £1,000/year under a "net pay" scheme.
They pay exactly the same amount of tax as they otherwise would (£0) and have £1,000 in their pension fund
Employee B also earns £10k/year with no other taxable income.
They contribute £1,000 under a "relief at source" scheme.
They pay exactly the same amount of tax as they otherwise would (£0) but have£1,250 in their pension fund by virtue of the basic rate tax relief added by the pension company (courtesy of HMRC).0 -
I see what you are getting at. As it's a lump sum I thought was obvious that it wouldn't be paid into an employer's scheme, but I guess there might be circumstances where a lump sum could be paid into an employer's scheme.0
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There are and a few people have popped up on here having come a cropper, particularly it seems with large local authority/civil service type schemes where you can pay a lump sum which attracts no immediate tax relief i.e. it doesn't reduce your pay for tax purposes in the month you pay it and no basic rate tax relief at source is added.
You could easily contribute say £10,000 and expect £2-£2.5k tax relief but if you have only earned say £13,000 the tax refund would only normally be £100. Simply because you have only paid £100 tax in the first place.0 -
I see what you are getting at. As it's a lump sum I thought was obvious that it wouldn't be paid into an employer's scheme, but I guess there might be circumstances where a lump sum could be paid into an employer's scheme.
As an alternative, you could live off the lump sum and increase your contributions to your employer scheme for example. Particularly good approach if on a Salary Sacrifice scheme at work.
Has the same "cash" effect as contributing the lump sum direct to a scheme but tax outcomes could be different.
Quite a few people take this approach as they get nearer retirement - live of saved cash for n-months whilst maximising pension contributions.
You haven't mentioned your age or family circusmstances. Other options to consider are a LISA (if under 40) and opportunity to make use of spouse / partner pension and /or LISA.
Not trying to be difficult but getting the best return on your cash isn't always a straightforward answer to the question asked on the forum.0 -
Interesting. I can't see how it would be beneficial overall. I thought either the tax relief comes from having that part of your salary untaxed or it's added to the pension, but it would be the same amount either way. I guess it's more complicated than that.As an alternative, you could live off the lump sum and increase your contributions to your employer scheme for example. Particularly good approach if on a Salary Sacrifice scheme at work.
Has the same "cash" effect as contributing the lump sum direct to a scheme but tax outcomes could be different.You haven't mentioned your age or family circusmstances. Other options to consider are a LISA (if under 40) and opportunity to make use of spouse / partner pension and /or LISA.
Not trying to be difficult but getting the best return on your cash isn't always a straightforward answer to the question asked on the forum.
I did mention that I'm 55. My wife earns more than me and has vastly better pension provision. From a tax relief perspective, she would probably get higher rate relief on some of this if it went into her pension funds, but that would increase the imbalance between our pension situations.
I thought I knew that it was complicated, but the more I learn, the less I think I understand it.0 -
Interesting. I can't see how it would be beneficial overall. I thought either the tax relief comes from having that part of your salary untaxed or it's added to the pension, but it would be the same amount either way. I guess it's more complicated than that.
Essentially the same outcome subject to the points made earlier about whether you have taxable salary to offest aginst in employer scheme.
The other potential benefit / disbenefit of trickling it in via monthly payslip deductions is you "Pound Cost Average" and avoiding the mental anguish if investments fall just after you have paid in which some prefer although investements may rise just afterwards.
I did mention that I'm 55. My wife earns more than me and has vastly better pension provision. From a tax relief perspective, she would probably get higher rate relief on some of this if it went into her pension funds, but that would increase the imbalance between our pension situations.
Sorry, I missed age reference.
When do you both plan to retire? you could, for example, pay it in via wife's pension and get more tax relief followed by your wife taking a Tax Free Lump Sum and you paying that in to yours to get your own tax relief.
All legal, and could be part of an overall plan in some circumstances.
Pension imbalance may not be a problem if you both end up as BR taxpayers in retirement and are running a "shared" plan. Imbalance is more of an issue where one half will get less than prsonal tax allowance in pension income and the other is paying more tax as a result or if one has a DB pension that drops to say 50% for spouse on their death
I thought I knew that it was complicated, but the more I learn, the less I think I understand it.
I think of it like one of those Russian Dolls with layers of "optimisation" that can be used.0
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