- April 30, 2024
- Posted by: legaleseblogger
- Category: Related News
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## Meeting with Financial Planner: Maximizing Pension Contributions
I recently had a brief introductory meeting with a financial planner, and one of the key points of discussion was the idea of maximizing my pension contributions. The financial planner seemed to suggest a strategy where I would contribute my entire salary to my pension, relying on tax relief for living expenses. As a high-rate taxpayer, this could mean receiving back a substantial amount of tax relief for every £10,000 of salary contributed annually.
## Planning for Retirement: Increasing Pension Pot
Given my plans to retire in 8 years, this strategy could significantly boost my pension pot. The ability to withdraw 25% tax-free from the pension fund could also potentially help in clearing my mortgage and other financial obligations.
## Questions and Concerns: Managing Cashflow and Investments
However, implementing this plan would entail taking a substantial pay cut for the next 8 years. I am unsure about the logistics of receiving the tax relief – whether it would be paid out monthly or at the end of each tax year. Additionally, I have other investments such as ISAs, and I am mindful that the contribution to the pension fund may not necessarily be coming directly from my salary.
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if you’re close to retirement age and you have enough savings it’s not a bad idea…
If you’re higher rate taxpayer then if you pay in 8k then 2k gets added to the pension and 2k gets paid to you via tax refund.
If it’s salary sacrifice then you don’t get any relief back as you’ve never paid tax in the first place (and you can’t salary sacrifice to under minimum wage).
You can’t salary sacrifice below NLW
pretty sure the tax relief is directly into the pension?
assuming you’ll be at least 57 in 8 years time? Otherwise you won’t be able to access your pension. When you transfer the money, the provider will automatically claim 20% back, but it will be added to the pension pot. When you do your tax return or otherwise tell HMRC about the contribution, HMRC will refund you the remaining 20/25% via checque or bank transfer. So you need to have savings to live off to perform this strategy. You can transfer up to 60k a year in a pension.
Agreed if you have low enough to make this work and you’re only 8 years away from retirement, this may not be a bad call.
Assuming you put the full £60k in each year and possibly even use carry forward allowances, with tax relief you’d get back £15k in tax refunds each year and reduce your NI contributions in the process.
Over 8 years you could put an extra £480k+ into your pension, not including the gains on the portfolio itself. Also being just 8 years away from retirement, you could then take out 25% tax free when you finally retire.
That said, rough numbers would be helpful to help you figure out the calculations.
You should be aware of pension recycling rules. It doesn’t sound like this plan would directly fall foul but maybe if you change your plans over the next few years. See especially example 5.
https://www.hl.co.uk/__data/assets/pdf_file/0005/45428/Recycling_Factsheet.pdf
Hi /u/parkercp, based on your post the following pages from our wiki may be relevant:
* https://ukpersonal.finance/pensions/
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Interesting – were two years from clearing the mortgage and I have unused pension allowance. I was thinking to sacrifice down to 50k threshold (from 85k) but wondering if more might be possible for tax relief bonus if can make the numbers work but may not be practical
You’d get more useful advice if you gave us more details, e.g. “I’m age x, I earn £123,456 per year, and I have £yyy outstanding on the mortgage and £zzz in my pension pot.”
It sounds like your pension is inadequate, and you’ve been advised this because of a feeling you need to bump it as much as you can./
you need to consider this as a whole picture thing I guess? You’re eating into your tax free savings ahead of your planned retirement age to gain advantage of 42/40/28/20% tax relief depending how you’re contributing. So while you get a benefit you’re balancing that against the increased tax you’ll pay when drawing down your pension, and the potential for increased growth from increased contributions. Any online calculators to help with this?
Need to factor if PAYE: if salary sacrifice is possible. Would be same thing. But company will restrict to minimum wage for FT calcs. Other approaches will be mentioned. Assuming you can get whatever is over 40% tax. Is a sound approach. Rest is up to you if you can live off savings.
I did this. I am retired (early). Toward the end of my career I got a very significant salary increase. After paying off my mortgage I was able to funnel 80% of my salary into my mortgage using my carry over allowance from previous years. I suggest you familiarise yourself with the changing rules on draw down, (limiting the) tax free allowance and the proposed changes making transfers to overseas pension or after your death taxable. The current line appears to be encouraging us to put more in pensions (scrapping the life time allowance) while eating away at some (many) of the benefits a pension offers. BE CAREFUL.
It’s somewhat sound advice
But it’s not even driven by the 25% lump sum.
It’s that you can manage your pension pot so that you pay minimal tax on your pension (even the non tax free part)
Especially if you save your tax free part to draw down each year
Last few working years before retirement it should be everyone’s aim to max pension contributions and minimise tax (especially if they have a pension under 1 million) and can afford to do that
This is actually quite a common thing to do.
If you only need to wait a few years to get the money, and putting it into a pension vehicle saves you thousands of pounds more in tax than you would expect to pay on drawdown – then this makes enormous sense.
You can live off your savings and ISAs in the meantime.
If you don’t want to salary sacrifice down to minimum wage, you could consider salary sacrificing all of your earnings that are subject to higher rate tax. Especially if you think you’ll be a basic rate taxpayer in retirement. The 25% tax free lump sum *plus* the difference between higher rate and basic rate *plus* saved national insurance adds up.
I’m surprised by the number of people in the comments who haven’t heard of this before, yet are still sceptical about IFAs. All of those people should consider seeing an IFA. This is exactly the sort of thing where an IFA can give you good advice and save you thousands and thousands and thousands of pounds.
You can only get the tax back that you’ve paid … you don’t get a bonus payment on everything like a LISA.
You aren’t taxed on the first 12500 (or whatever you personal allowance is) so you would have that … then 20% on the next 35K (or something like that) … then 40% on the rest.
So it wouldn’t be 4K back for every 10K … only those 10Ks above the higher rate
But you can indeed pay it all into your pension if you want (if under the annual limits) … but don’t expect to get back 40% of it all.
Assuming you aren’t in the 45% band
Question, is the IFA managing your pension fund for you? I only ask as I’m very suspicious some times.
Others have covered the validity of the advice. I’m being cautiously, curious. If they are managing it, I wonder how much of this is suggested in your interest, over theirs.
How much do you earn? If, for example, you only earn 2k above higher rate then you’d only be able to get relief from higher rate on 2k.
But if you’re paying in your entire salary then I’m not sure what they’re expecting you to live off. Tax is deducted from salary. So if 100% salary is going into pot, that 100% is inclusive of tax relief/any tax that would’ve been paid had you not made the contribution (and therefore won’t be available for you to live off because it will be in your pension pot).
My daughter did that through today. Entitled her to Tax Credit and Child Tax Credit. But I told her to forget about Universal Credit. After the first year it’s needs-based. She rents out her flat and lives free with her son and me. In Chelsea. The value of her flat (not so much the rent) would disqualify her. She is studying for an MA working 20 hours at Living Wage. So £10k into her SIPP every year. And £3,600 into kiddo’s JSIPP. 50 year wait for that. Excel Future Value says if he keeps that up it will be worth £1.5mn @ 5%. £8mn @ 10%. But Labour will reinstate pension cap. What then?
I’ll be gone and never know.
Being pessimistic here.
They want you to pump the pension so they get more money.
Plus what’s the payout rate if you die before or halfway through?
It’s all to make them money 💰
Sounds dubious. Yes you get tax relief on your contributions (if you are a higher rate tax payer) that will reduce your tax bill – but you don’t get sent a repayment of 40% of your pension payments.
You declare your pension payments on your self assessment tax return and HMRC calculate a new tax bill with a reduced liability for higher rate tax.
You might end up better off in the long term by doing this but you would need something else to live on (savings?) in the meantime if you were to pay all your salary into pension payments.
Make sure that you really understand what is proposed before doing anything!
Also, consider that the financial advisor may make substantial commission from setting up and running the arrangement. Do you know what you will be paying?