first post - advice on lump sum into pension

[jimboger1]

hi all

first post, so be gentle - lol
I'm about to get my annual bonus, which is paid into my account on December 20th 2023
I am due a nice bonus of £65k, and would like to get this paid into my company pension
I'm not an expert at these things but I'd like to know if there are any downsides to this
My std annual salary is £75k
thanks
Jim

[someone]

One obvious downside: You're tying up this money until you can take your pension. There are both legislative and company pension rules to think about and potentially both could change between now and then.

You do need to make sure you have enough pension annual allowance. If your pensions are all defined contribution then this is pretty simple to work out: For each of the previous three years add up the total amount paid in (including any company contributions and tax relief) and subtract that from the annual allowance (40K I think for all previous years that matter). Do the same for the current year (which I think has a 60K annual allowance) to see how much excess you'll be paying in this year. Finally check that you have enough from previous years to cover the excess (note that you do have to have had a pension in the previous years to qualify for the annual allowance but you don't have to have paid in at all)

If any of your pensions are DB then it's much more complicated and you should ask your pension provider how much you paid in each year for tax purposes. (You can ask them even for DC but it's probably quicker to do it yourself and they might just send you a copy of your pension statement that you can probably download yourself anyway)

Also, depending on whether this is being done via salary sacrifice (Net Pay) or post tax (Relief at source) might affect your cashflow. Relief at source will result in you paying an extra 20% tax on top of the pension contribution that you will only get back once either your tax code is adjusted or you do your tax return. Salary Sacrifice is much better in this respect.

[jimboger1]

hi someone
I do have a final salary pension but that is frozen from a company I used to work for
however, the pension in question is a standard company pension where I currently pay in 5.5% and my employer matches this
below is what I have pain in over the last few years from myself & my employer

Tax Year
2023 - 2024 Total Received £4,927.84
2022 - 2023 Total Received £8,753.60
2021 - 2022 Total Received £74,045.79 this was a transfer from another pension
2020 - 2021 Total Received £7,590.00
total for last 3 years = £87,725

so if my calculations are correct, then my allowance should be 2023 - 2024 Total Received £4,927.84
2022 - 2023 £60,000
2021 - 2022 £40,000
2020 - 2021 £40,000
total = £140,000
less amount paid from above at £87,725
gives £52,275

so is this what I can put into my pot ?

[jimboger1]

made an error, so reposted below
hi someone
I do have a final salary pension but that is frozen from a company I used to work for
however, the pension in question is a standard company pension where I currently pay in 5.5% and my employer matches this
below is what I have pain in over the last few years from myself & my employer

Tax Year
2023 - 2024 Total Received £4,927.84
2022 - 2023 Total Received £8,753.60
2021 - 2022 Total Received £74,045.79 this was a transfer from another pension
2020 - 2021 Total Received £7,590.00
total for last 3 years = £87,725

so if my calculations are correct, then my allowance should be
2023 - 2024 £60,000
2022 - 2023 £40,000
2021 - 2022 £40,000
2020 - 2021 £40,000
total = £180,000
less amount paid from above at £87,725
gives £92,275 that I can still contribute In this tax year

do I have this right?


also, unsure what you mean by this
Also, depending on whether this is being done via salary sacrifice (Net Pay) or post tax (Relief at source) might affect your cashflow. Relief at source will result in you paying an extra 20% tax on top of the pension contribution that you will only get back once either your tax code is adjusted or you do your tax return. Salary Sacrifice is much better in this respect.

[someone]

You don't need to include the transfer - that's not new money going into the pension, but you do need to include any contributions into that pension during the tax years in question. I assume the final salary pension was frozen before 2020-21 otherwise you need the number for that as well for the years where you were still accruing benefits.

(based on your numbers there's no way you'll have a problem this year - you only need to start thinking about this if you're planning to do this every year. Note that after the current year allowance, you'll be using up the oldest (2020-21) left over allowance first)

Also, depending on whether this is being done via salary sacrifice (Net Pay) or post tax (Relief at source) might affect your cashflow. Relief at source will result in you paying an extra 20% tax on top of the pension contribution that you will only get back once either your tax code is adjusted or you do your tax return. Salary Sacrifice is much better in this respect.

There is two ways of getting money into your pension, one is before tax is deducted (this is called Net Pay) and another is after tax is deducted (called relief at source).

If you go the Net Pay route (or salary sacrifice route which achieves the same thing but technically you don't pay into your pension at all, your company does) then it's all very simple and nothing to worry about. Magic happens and there's nothing to do on your tax return at all (unless you exceed the pension annual allowance including carry forward) But if you go via the RAS route (approximately) this is what will happen:

(Let's assume that everything else stays identical to previous months and you receive 5000 pay each month after tax)

You'll get your regular pay (which after all the deductions is 5K)
You'll get paid 65K bonus before tax on your payslip
You'll get extra 26K tax deducted (probably - that's 40%)

So your pay will be 5+65-26 = 44K (I'm ignoring NI for simplicity)

But, to pay the entire 65K into your pension you need to pay in 52K. The pension company will then claim 13K from HMRC to make it up to the 65K.

But 52K is greater than 44K! So you have a problem - you'll need to find this extra 8K of money. (plus you won't have any money to live on that month either!)

Eventually you'll get 13K tax refunded from HMRC - so you'll be able to "repay" that 8K and the 5K normal salary. But in the short term you'll need to finance it.


Chances are, if this is a company pension, that it will be Net Pay (or salary sacrifice). But just in case it's not you need to think about this.

[jimboger1]

thank you again
would it be OK if I send you a PM?
Jim

[jimboger1]

thanks again someone
so just so that I have this right -

Tax Year Pension contribution
2023 - 2024 £4,927
2022 - 2023 £8,753
2021 - 2022 £8,500
2020 - 2021 £7,590
total for last 3 years = £29,770

my allowance are
2023 - 2024. £60,000 less £4,927 = £55,073 unused
2022 - 2023. £40,000 less- £8,753 = £31,247 unused
2021 - 2022. £40,000 less £8,500 = £31,500 unused
2020 - 2021 £40,000 less £7,590 = £32,410 unused
totals £180k less £29,770 = £150,230 unused

So £150,230 UNUSED less £65k contribution to be paid next month = £85,230 TOTAL allowance still to be used

What I'm unsure about is how the allowance works as the Gov HMRC site gives me the following -

FROM HMRC (ive rounded my contributions)
How we worked out your results
These results are based on the answers you have provided at the time of this calculation.
Any unused allowances are carried over for up to 3 years.

6 April 2023 to 5 April 2024

Available annual allowance £156,650
Available money purchase annual allowance £0
Pension savings £5,000
Amount on which tax is due £0
Unused annual allowance £119,250


6 April 2022 to 5 April 2023

Available annual allowance £136,000
Available money purchase annual allowance £0
Pension savings £8,750
Amount on which tax is due £0
Unused annual allowance £96,650


6 April 2021 to 5 April 2022

Available annual allowance £136,000
Available money purchase annual allowance £0
Pension savings £7,000
Amount on which tax is due £0
Unused annual allowance £96,000


6 April 2020 to 5 April 2021

Available annual allowance £136,900
Available money purchase annual allowance £0
Pension savings £7,600
Amount on which tax is due £0
Unused annual allowance £96,000

[someone]

Yes, you can send me a PM but asking on the forum: a) will (hopefully) have someone else jump in if I make a glaring mistake, b) helps others in the future with the same question, c) will get answers even if I don't logon for a week or two or am too busy to reply.

I would tend to ignore the HMRC calculation - I'm not going to try and reverse engineer it but what you have to remember is that in 2020 (for example) your allowance was 40K for the 2020-21 tax year plus the amounts left over from 2017-18 to 2019-20. Once it rolled forwards to 2021-22 anything unused from 2017-18 "dropped off" and the unused from 2020-21 got added on.

If you're planning to keep making contributions bigger than the annual allowance (remembering to include employer contributions too which are easy to forget about) then it's worth keeping an account of what you paid in each year and how much is left over as it can get complicated to keep track of. But if this is a one off which you won't repeat then it's probably more hassle than it's worth as it's completely obvious that there's loads of carry forwards available.

Last year:
2022-23 40K less 9K contributions = 31K remaining (carry forwards)
2021-22 32K remaining (carry forwards)
2020-19 33K remaining (carry forwards)
2019-18 40K remaining (assumed; expires if not used in 2022-23 tax year anyway)

This year:
2023-24 - total contribution 70000. 0 left over (10K excess) (carry forwards 0)
2022-23 - 31K remaining (carry forwards)
2021-20 - 32K remaining (carry forwards)
2020-19 - 33K - 10K (excess from above) = 23K remaining (expires if not used in 2023-24 tax year)

Next year:
2024-25 - 60K (less whatever is contributed) remaining (carry forwards)
2023-24 - 0K remaining (carry forwards 0)
2022-23 - 31K remaining (carry forwards)
2021-20 - 32K remaining (expires if not used in 2024-25 tax year)


For example, that 2020-19 carry forwards that you're taking advantage of in the 2023-24 tax year could have been reduced in each of the 2020-19, 2021-22 and 2022-23 tax years potentially (in your case clearly not as you would have had to exceed 40K contributions in the 2021-22 and 2022-23 years to have been using it up but you can hopefully see why it gets complicated once you do these large contributions more than once in a blue moon and in the 2026-27 tax year you will not have "expiring" carry forwards to use up as by then the zero from this year will be at the bottom of the list.

(Also, while it won't affect you, remember that it's the "end of year" contributions that matter, not the "contributions up until now" so when projecting out how much carry forwards you will have you need to include any contributions that will be made in the whole tax year - and if you ever get a bonus taking you into the pension annual allowance taper regime it gets even worse[1] - I got bitten by this one year when I got made redundant with a big payout and then walked straight into an even better paying job where I'd planned my contributions assuming I'd have 40K annual allowance and actually I only got 10K. At the point I got made redundant I'd already paid more than 10K into my pension and had no carry forwards left so it was impossible for me to avoid the tax charge that year - and, sadly, not possible to ask the pension company to pay the tax charge for me because that only applies if you exceed the 40K, not the tapered allowance.)

[1] Now this is way up somewhere around 250K - I don't remember the exact number, but it used to be 150K.

(And do keep the pension lifetime allowance in mind too if you're paying a lot into your pension - your frozen final salary pension could be worth a bob or two. Since the rule changes I don't really understand how this works but at the moment you can assume that if your total pot will be less than about 1 million when you retire then there's no problem. If you think it will be over that then it's probably worth taking time to understand how it might work - particularly as the next government is likely to reverse the recent rule changes removing (most of) the lifetime allowance rules)

[jimboger1]

hi someone, very sorry I have not responded, had to take some time off due to some family stuff
I will send you a PM
Jim