Cash into Pension
Discussion
Hi,
Hoping to hear if my idea has merit…
I’m 52 with a Group Personal Pension Scheme (Aegon) through my employer. Assuming my pension pot is accessible from 55, I’m thinking of adding cash savings to my pension each year up to the £40K limit for the next 3 years. As a higher rate tax payer I’m assuming that I can claim the 20% + 20% Tax back to also go into my pension pot. Then hypothetically retire at 55, accessing my pension pot which could include a 25% Tax free lump sum and I’d keep yearly withdrawals under the 40% Tax bracket.
To me this seems a good way to regain some of the income Tax I’ve paid. Is my plan flawed?
A
Hoping to hear if my idea has merit…
I’m 52 with a Group Personal Pension Scheme (Aegon) through my employer. Assuming my pension pot is accessible from 55, I’m thinking of adding cash savings to my pension each year up to the £40K limit for the next 3 years. As a higher rate tax payer I’m assuming that I can claim the 20% + 20% Tax back to also go into my pension pot. Then hypothetically retire at 55, accessing my pension pot which could include a 25% Tax free lump sum and I’d keep yearly withdrawals under the 40% Tax bracket.
To me this seems a good way to regain some of the income Tax I’ve paid. Is my plan flawed?
A
PurpleMoonlight said:
Do you really mean retire at 55?
How long would your pension pot last withdrawing £50,000 odd pa from it?
Not long at that amount!! How long would your pension pot last withdrawing £50,000 odd pa from it?
However I'm thinking of a quiet life from 55. Maybe £25K per annum for 12 years, then reducing. Made up of £11K from pension (max. Tax free allowance) and the rest from savings & assets.
A
Sounds like a good plan to me. Not dissimilar to my own.
Just a few additional points:
-You can use previously years unused annual allowance (up to 3 years I think)
-You can only get HRT relief on your salary in the current tax year that you would pay HRT on.
-Beware potential for forthcoming budget changes limiting tax relief. See current thread.
Just a few additional points:
-You can use previously years unused annual allowance (up to 3 years I think)
-You can only get HRT relief on your salary in the current tax year that you would pay HRT on.
-Beware potential for forthcoming budget changes limiting tax relief. See current thread.
Your plan appears to be “pay money in to pension”, followed by “take money out of pension”.
Which is, err, what they’re for!
Given the relatively short timeframe, it might be wise to check what the fund is investing in, as it may assume your retirement age will be later, so you may be exposed to more risk at this point than is ideal.
Also as above, if you’re making payments in using net pay , ie outside straight salary sacrifice, base rate tax should be added automatically, and you’ll have to claim the higher rate back when you do your tax return in the following year.
Which is, err, what they’re for!
Given the relatively short timeframe, it might be wise to check what the fund is investing in, as it may assume your retirement age will be later, so you may be exposed to more risk at this point than is ideal.
Also as above, if you’re making payments in using net pay , ie outside straight salary sacrifice, base rate tax should be added automatically, and you’ll have to claim the higher rate back when you do your tax return in the following year.
A_993 said:
Hi,
Hoping to hear if my idea has merit…
I’m 52 with a Group Personal Pension Scheme (Aegon) through my employer. Assuming my pension pot is accessible from 55, I’m thinking of adding cash savings to my pension each year up to the £40K limit for the next 3 years. As a higher rate tax payer I’m assuming that I can claim the 20% + 20% Tax back to also go into my pension pot. Then hypothetically retire at 55, accessing my pension pot which could include a 25% Tax free lump sum and I’d keep yearly withdrawals under the 40% Tax bracket.
To me this seems a good way to regain some of the income Tax I’ve paid. Is my plan flawed?
A
It could be a very good plan. Assuming you have £40k a year of higher rate tax income (as you only get higher rate tax relief on income taxable within this band) then every £40k of gross income you invest into a pension costs you £24k.Hoping to hear if my idea has merit…
I’m 52 with a Group Personal Pension Scheme (Aegon) through my employer. Assuming my pension pot is accessible from 55, I’m thinking of adding cash savings to my pension each year up to the £40K limit for the next 3 years. As a higher rate tax payer I’m assuming that I can claim the 20% + 20% Tax back to also go into my pension pot. Then hypothetically retire at 55, accessing my pension pot which could include a 25% Tax free lump sum and I’d keep yearly withdrawals under the 40% Tax bracket.
To me this seems a good way to regain some of the income Tax I’ve paid. Is my plan flawed?
A
You can take 25% (£10k per £40k of pension value) of this tax free and if you are keeping your other drawings (that is to say your overall income from any other sources) down to zero (capital return only) then you will get £16,000 of tax free pension relief per £40,000 invested and pay no tax whatsoever drawing it out.
So, each £24k cost gives you £10k in tax free income (bringing your net cost down to £14K). You then have £30k in your pension that if you draw down within your nil rate tax band is also tax free.
Even if it was all taken at the basic rate tax level you would only have £6k of tax to pay, therefore leaving you with a huge profit tax wise (half of your money)
You could (given the time frame) leave all of this in cash (rather than funds)within your pension so you have no fund performance to worry about and are just getting the tax relief (not fund performance ups and downs).
As Purple has said, it may make more sense going for salary sacrifice rather than investing the cash you have. This is because the cash you have can be drawn down from as a capital return (non-taxable) and the pension 'salary sacrifice' contributions will save your employer money (that they should share with you).
Either way, a £24k net cost from which you can take £10k tax free and the rest taxable at zero percent is obviously a winner! Just be careful of other taxable income (dividends and interest) that could detract from this.
A_993 said:
JulianPH said:
It could be a very good plan...
Thank you so much. That's the detail I needed to get my head around the options and possible benefits.A
Just shout if you have any other questions.
I did a very similar thing. The years running up to my planned retirement date, I maxed out on my pension payments. I used every penny I could and filled it up. I was in the 40% tax band, so saw the 'top up' allowances as a bonus.
I finished work at 54.5 years of age and lived off savings for 6 months. At 55 I started taking draw-down but did not take out any tax free cash.
I have a few other smaller pensions starting to cut in, over next few years.
My wife also finished work about 2 x months after me, and her work pension ( which she delayed by a year) started to come on line in June this year.
It took quite some planning and we did opt to pile in lots of our earnings to ensure we were fully 'topped up'.
Worked well for us.
I finished work at 54.5 years of age and lived off savings for 6 months. At 55 I started taking draw-down but did not take out any tax free cash.
I have a few other smaller pensions starting to cut in, over next few years.
My wife also finished work about 2 x months after me, and her work pension ( which she delayed by a year) started to come on line in June this year.
It took quite some planning and we did opt to pile in lots of our earnings to ensure we were fully 'topped up'.
Worked well for us.
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