Pensions lump sum

[tspill]

Originally Posted by YorkshireT

Last IFA I saw suggested I put all my pension money in Woodford’s fund.
Glad I didn’t listen to that idiot.

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That IFA should be struck off as no IFA should have advised that. Completely undiversified and fairly hight risk. But a few years Woodford was trendy.
I did put a few quid into one of his funds as a punt.
Not part of my major investments. I lost probably lost over 20% on that. But at the same time I made four other punts. Two have doubled, the other two up 50ish%. So over all I am happy.
I knew these were all gambles as they were quite niche.
I am at the stage where I am not planning to take more risks that high. Happy with slow and steady lower risk investments now (aka boring).

[disney332]

Originally Posted by tspill

Fair enough. Apologies.

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Thank you for that.

Take care

Disney332

[tspill]

Originally Posted by disney332

This is fun...

£3,600 is the gross contribution

£2,800 is the net contribution after 20% tax relief on the gross.

If pension contributions interact with income tax, where does 25% tax come from? 25% is not a UK rate of income tax.

Disney332

Edit: likewise, if i want to make a £30,000 gross contribution, i give my advisor a cheque for £24,000 (24 +80 x 100 = 30)

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OK, In your example you pay in 24,000 (your actual money). The pension fund adds 6000 (your uplift from 24000). The total is 30000.
The uplift of 6000 onto of your 24000 is 25% (6000/24000).

Gross 100% is the total of net at 80% plus tax at 20%.
20% is 25% of 80% - hence the 25% uplift

See the likes of
pensionbee/pensions-...into-a-pension
Para. 4 - Your pension contributions attract a 25% tax top up from the government. "
Maybe this explains it better than I am doing.

[disney332]

Originally Posted by tspill

OK, In your example you pay in 24,000 (your actual money). The pension fund adds 6000 (your uplift from 24000). The total is 30000.
The uplift of 6000 onto of the 24000 is 25%.

Gross 100% is the total of net at 80% plus tax at 20%.
20% is 25% of 80% - hence the 25% uplift

See the likes of
pensionbee/pensions-...into-a-pension
Para. 4 - Your pension contributions attract a 25% tax top up from the government. "

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But your pension contribution is £30,000 not £24,000.

So to make a £30,000 you need to pay £24,000.

I agree you can spin it your way, but the interaction to income tax which after all, pensions contributions reduce, is undoubted. The tax uplift is always 20% of the grossed up amount.

For a 40% tax payer in the above example he will claim a further 20% when he completes his tax return ...a further £6,000.

[disney332]

Just read your link.

Never looked at it that way. Clearly the destination is the same but the explanation of our journeys is different.

I still say the interaction with pensions and income tax is undeniable.

Perhaps we can agree to disagree

Disney332

[tspill]

Originally Posted by disney332

But your pension contribution is £30,000 not £24,000.

So to make a £30,000 you need to pay £24,000.

I agree you can spin it your way, but the interaction to income tax which after all, pensions contributions reduce, is undoubted. The tax uplift is always 20% of the grossed up amount.

For a 40% tax payer in the above example he will claim a further 20% when he completes his tax return ...a further £6,000.

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My way is not spin. It is the way every financial document on the subject presents it.
You NEVER uplift on the gross amount - ALWAYS the net amount. The net amount is the actual money YOU put in and on which the uplift (or top up) is calculated.
The gross amount that you end up with is the UPLIFTED amount.

In your example - "your" contribution is 24000 (from your earned money). The governments contribution is 6000. the TOTAL contribution is 30000.

With a higher tax payer, technically you dont claim anything. What actually happens when. you complete your self assessment is that this is added to your zero band allowance. It has the effect that it looks like "claiming" tax back but is very subtly different as it in effect allows you to get tax back when you never paid tax.

For example, most of us have a tax free allowance of £12500.
Lets say a person earns exactly £12000 (and pays no tax).
That person can pay £12000 into a pension and the government will add £3000 (25% uplift/topup). You can only pay a maximum of your salary into a pension in a year (ignoring the £40K limit).
But even with zero earnings you can put this £2880 and get that grossed up as was being discussed above.

Money for nothing no matter what way you look at it. I have spend years trying to use this to my advantage and it allowed me to retire early. To get the best out of this, tax planning is the most important aspect.
I have done as much as I can do as I have stopped work (earning) other than the £2880 which I will start next financial year.
Now working on my OH's pension. She is planning to work for this and two more tax years and putting as much into pension as possible. Then spend three years drawing down on that. I have done the calculations that ensure she can get nearly every penny out tax free (25% TFLS plus annual allowances). All before taking her work pension.

[disney332]

Originally Posted by tspill

My way is not spin. It is the way every financial document on the subject presents it.
You NEVER uplift on the gross amount - ALWAYS the net amount. The net amount is the actual money YOU put in and on which the uplift (or top up) is calculated.
The gross amount that you end up with is the UPLIFTED amount.

With a higher tax payer, technically you dont claim anything. What actually happens when. you complete your self assessment is that this is added to your zero band allowance. It has the effect that it looks like "claiming" tax back but is very subtly different as it in effect allows you to get tax back when you never paid tax.

For example, most of us have a tax free allowance of £12500.
Lets say a person earns exactly £12000 (and pays no tax).
That person can pay £12000 into a pension and the government will add £3000 (25% uplift/topup). You can only pay a maximum of your salary into a pension in a year (ignoring the £40K limit).
But even with zero earnings you can put this £2880 and get that grossed up as was being discussed above.

Money for nothing no matter what way you look at it. I have spend years trying to use this to my advantage and it allowed me to retire early. To get the best out of this, tax planning is the most important aspect.
I have done as much as I can do as I have stopped work (earning) other than the £2880 which I will start next financial year.
Now working on my OH's pension. She is planning to work for this and two more tax years and putting as much into pension as possible. Then spend three years drawing down on that. I have done the calculations that ensure she can get nearly every penny out tax free (25% TFLS plus annual allowances). All before taking her work pension.

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Never looked at it this way...

If we ever meet on Main Street, lets have a coffee at Starbucks with calculators in hand !

Disney332

[tspill]

Originally Posted by disney332

Never looked at it this way...

If we ever meet on Main Street, lets have a coffee at Starbucks with calculators in hand !

Disney332

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Indeed. But please - Costa!
I have my BiL coming round later this week to do exactly this. And he is a CFO for a local company. But with all that accountancy experience, doenst really understand pensions. Have to say, I was surprised.

For me, the big thing is encouraging people to understand there is money for free here (regardless of how you interpret it).

The other big hobby horse of mine is State Pension. Many people dont understand the changes made a few years and the opportunity it now offers for very cheap additional pension. Again - while not free money, it is easy money. Well it does work out as free money in the end.

[disney332]

Originally Posted by tspill

Indeed. But please - Costa!
I have my BiL coming round later this week to do exactly this. And he is a CFO for a local company. But with all that accountancy experience, doenst really understand pensions. Have to say, I was surprised.

For me, the big thing is encouraging people to understand there is money for free here (regardless of how you interpret it).

The other big hobby horse of mine is State Pension. Many people dont understand the changes made a few years and the opportunity it now offers for very cheap additional pension.

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Totally agree, was it Dire Straits - Money for nothing

Also the savings for the really high earners isceye watering.

At retirement opportunities now are mega. Always liked RL as a provider solution. How bout you?

Disney332

[Loftus]

Excuse me butting in with what should be an obvious question (but it's money so it's not to me).

I'm planning on retiring in two years and living off my DC pension until I maximise my DB pension in 2024. I have some savings, not a lot but enough to be able to dump a couple of thousand into my DC pension not long before I retire. It sounds like it would be worth doing this to attract the 25% tax relief as although I'd pay tax when withdrawing, barring a collapse in my fund - always a possibility obviously, I'd be 5% up when taking it back.

Is that correct?