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Where Taxpayers and Advisers Meet

Lump Sum Payment to DC pension pot -tax implications

anjo56
Posts:30
Joined:Wed Nov 29, 2017 8:27 pm
Lump Sum Payment to DC pension pot -tax implications

Postby anjo56 » Wed Jan 06, 2021 1:46 pm

Earlier in the year, I took early retirement and was offered a payment by my employer which took my annual earnings over £100k and had a knock-on effect on NI as well as tax. I have not triggered my pension benefits yet and plan to do so in the new tax year. If I were to make a lump sum payment of £45k (from an Offset Mortgage savings pot), before the end of the tax year, what would be the rough implication on tax and NI? I guess I claim the 40% tax relief via next year's tax return?
Thanks

ben_power
Posts:69
Joined:Tue Feb 27, 2018 8:34 pm

Re: Lump Sum Payment to DC pension pot -tax implications

Postby ben_power » Mon Jan 11, 2021 11:21 pm

This is a complex question I'm afraid.

It would have been prudent to have taken financial advice prior to leaving, you could have saved both income tax and national insurance.

In theory, making an additional lump sum contribution to a personal pension in this tax year could help mitigate some of the tax but it'll have no impact to NI. The rules are complex and depend on your total 'relevant earnings' and any carry forward available from the previous 3 tax years. In addition to this the payment is subject to annual allowance and lifetime allowance rules. The suitability of this is also something that can only be determined by knowing your wider financial picture including risk, the investment time horizon, costs and how/when you intend to draw from the pension.

Assuming a payment is appropriate/suitable then the pension provider should claim basic rate tax relief at source for you, you would then claim the other 20% (higher rate relief) on the 2020/21 tax return. You can not claim NI back.

I can't stress this enough, please see an independent financial adviser. The advice will/should be free, only the implementation and/or management of the pension will cost and again, I strongly advise you take that path. You've already lost money by not taking advice earlier. Sorry, I know that's a little brutal, bordering on a cheap shot but don't underestimate the value good advice can offer you.

I like the path you're exploring in theory, it's just complicated and unfortunately it's very easy to trip up on.

anjo56
Posts:30
Joined:Wed Nov 29, 2017 8:27 pm

Re: Lump Sum Payment to DC pension pot -tax implications

Postby anjo56 » Wed Jan 27, 2021 4:30 pm

Apologies for late reply and thanks for the advice. I have now been recommended a financial advisor so will follow up as best I can.


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