Invest spare funds in pension?

[Glasgow]

Hi

I earn my income through my own limited company providing IT services. I’ve had a few lean years. I take a low salary and the balance of my income through dividends. My wife is also an employee and shareholder.

I was a victim of the Equitable Life scandal and became very cynical about pensions in general. I transferred what remained of my Equitable Funds to an Aviva Stakeholder pension in 2000 or thereabouts and I have not made any contributions since. The fund now stands at about £180k. I am 58 years old and am currently a basic rate taxpayer.

I have had the best year for a while business-wise and I can afford to “draw” a 5 figure sum in some way or another and I was wondering whether this would be a good time to boost my pension fund. As I understand it I can start drawing on the pension fund whenever I want as I am now over 55. It seems to make sense at a layman level to push money towards the pension and avoid becoming a 40% taxpayer – i.e. effectively delay the payment by directing it to the pension fund then draw it at a later date when it will still be basic rate (rather than draw now and pay extra tax).

Is my reasoning sound or should I be thinking about other options? I also assume that it will be more efficient to make the payment as an employer’s contribution. Any advice would be appreciated. Thank you.

[LozaACCS]

I would check with the scheme provider first,although the rules are written in law, they are subject to the providers scheme rules so make sure they are offering the full range of options allowed by the new regime.
Subject to the above, I would agree, you can make contributions up to the annual allowance of 40K per pension input period, this allowance can be increased by unused allowances in the previous 3 years, so a further 140K is potentially available.
The company can make the contribution and receive tax relief on the amount, subject to the contribution being wholly and exclusively for the companies trade, a 40K contribution should be ok , I think 180K would probably be challenged.
You can then take benefits, the first 25K is tax free, you are taxed at your marginal rate on the income draw down after the 25K.
If you intend to make regular contributions to mitigate CT, then I would not rush into draw down to quickly since the recycling rules may kick in.
If you die before 75 the fund can be paid out to dependents tax free, if post 75, any dependent can continue the draw down.

[Glasgow]

Thank you very much for that. Very helpful. One thing I'm a bit confused on is the tax free element. Is it the first 25% of each withdrawal that is tax free - so, if I were to draw £25k from a £100k fund, would I pay tax on 75% of £100k or would I get the full £25k tax free as that is 25% of the whole fund then pay tax at applicable rate on all future drawings?

[LozaACCS]

The 25% applies to withdrawals.
So if you draw down your entire fund (100K), 25K is tax free (remember you have had CT relief on this) and the balance is taxed at your marginal rate.
If you withdraw say 20K, then 5K would be tax free and the balance taxed at your marginal rate

[Glasgow]

OK understood and thanks once again.

[strawn]

With a 25% TFLS you have a choice. For £100k fund, either
(i) Choose to take up to £25k as TFLS and leave the rest alone until later,
or (ii) drawdown amounts as required, with 25% of each drawdown being tax-free.

All you have to do is check whether your provider can offer this flexibility on the pension you have with them. If not, consider transferring.

[Glasgow]

Thank you - that does make a difference!