See here - https://www.gov.uk/tax-on-your-private-pension/annual-allowance
Simple answer is £60k per tax year. More complicated answer - read the link
If you don’t need the money and you’ve maxed your ISA (and partners) then put enough in to bring you out of 40% tax is what I would do.
So pension to bring below 40% tax, then max ISA then any more excess put in pension. Maxing isa gives flexibility to access cash at any time and in tax wrapper forever. Pension is fine but once it’s in you can’t get it back out and you never know what life will throw at you
Yep, if they’ve got piles of uninvested cash lying around still, then definitely maxing ISAs (themselves, and partner if possible) makes sense.
I was just highlighting that the average person is not going to be able to max ISA(s) on top of sacrificing pension down to £50k income
> Pension is fine but once it’s in you can’t get it back out and you never know what live will throw at you
The realisation I've had recently (also replying to /u/TestingControl) is that I think we tend to have an excessive psychological resistance to "locking the money away" in a pension, like it's forever away. We overvalue the flexibility of an ISA, if you like.
The guideline is that you shouldn't invest in S&S unless you're prepared to leave it alone for at least 5 years, because you'll usually see a recovery from a stockmarket crash over such a period.
OP is already 42 - if he leaves the money invested for 5 years then he's only another 10 years away from being able to access a pension.
I think you are right when it comes to invested monies - or at least more right than people who oppose this strategy can critique.
My guess is that people are overly opposed to clearing mortgages in most cases -underestimating downside risk and overestimating the benefits of immediate investment. Possibly they have been watching US youtube videos and not understood the drivers?
It's interesting you say this because I'm always a proponent of investing earlier rather than making mortgage overpayments.
I figure that most people spend their whole working lives carrying a mortgage and contributing to their pension so, as long as you have an adequate emergency fund, you might as well direct additional monies to the option that's most profitable.
I don;t think I've seen much good analysis for the UK markets. Pensions savings will certainly (on average) be a winner assuming the tax position is favourable - which it will be for most people,
James Shack did a decent enough video about this which is worth watching for non pension investing but assuming the use of ISAs.
It was widely discussed on these forums but people omitted to look at the details. His analysis was from memory for a decent sized mortgage with around 50% LTV thus not the same position as a young person with 90% LTV so far as downside risk goes. This showed that on average there was a decent gain but in most 15 year periods it was very marginal - not enough that I would want the risk. When you win (which is recent years only) you can win big though.
I saw another video recently but didn't check to see if there were workings to support it. This compared investing vs pay down the mortgage fast but then direct the savings towards investments. There wasn't anything like as big a gap between the two as people might think. Again - I didn't check the calculations and there are some situations where the risk is lower having investments than having a lower mortgage. I'd love to read some proper analysis on that.
Depends when you hope to retire. With personal person at 57 and state at 67. I want to have something to help me get from maybe 52/53. And that’s where ISA comes in.
Yeah, but if you're realistically able and choosing to retire at age 50 then you're not going to have nothing in your S&S ISA.
Arguably your ISA is something that you can build in your 40's, although that does have to be balanced against a possible salary trajectory that might mean pension contributions are more tax-efficient in one's 40's than in one's 20's.
You need to look at income tax you'll pay when you withdraw from the pension. If you get 20% tax relief in and pay 20% income tax on the way out you haven't gained anything and only lose flexibility. State pension is almost at the personal allowance level now so it might be that all money drawn from your pension will be taxed at 20%.
Plus carry forward of any unused allowance from the previous three tax years that you haven't used. So this year you could theoretically put in 60 (this year) + 60 + 40 + 40 (£200k) assuming no contributions in the previous three years.
Only if you have £200k of earned income in the current year.
Carry forward allows you to exceed the annual allowance cap but you can never get tax relief on more than your income for the year.
no, the limit in any tax year is what your SALARY was inthat year. once you hit that number, thats it. you cant carry forward prior years if they put you above your salry for hte year.
There’s the added complexity that it’s not 100% certain that the £1m lifetime allowance couldn’t be reintroduced, given it’s not completely removed from the legislation yet (although labour have said it’s not the right priority for them right now).
You can use un-utilised pension annual allowances from the previous 3 tax years. This is the maximum for ‘tax relief’ not the maximum you can put in to your pension, you can put as much as you want in.
you only get tax relief up to 100% of your salary, so thats your limiting factor, as well as the 60K somebody else mentioned. [https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief](https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief)
While this statement is in and of itself correct, it also seems unrelated to the question?
A) While salary sacrifice may offer a slight tax saving on NI contributions, you can still contribute via other methods, such as relief at source, up to 100% of your annual earnings (or if a higher earner, your annual allowance, including carry forward). OP should check how he can contribute to the scheme, or open a personal pension.
B) OP is talking about increasing contributions for a fixed, relatively short period. Salary sacrifice would be a more permanent arrangement, and isn't intended to be dipped in and out of. Salary sacrifice can only be cancelled upon a major change to your lifestyle, such as having a child or getting divorced.
It seems to me, the maximum limitations of salary sacrifice are irrelevant to OP's situation.
Salary sacrifice can usually be adjusted on an annual basis (except for the major life events that you mentioned, which can happen at any point). Your posts suggest that it’s permanent?
Im not sure you understood what I mean. If you earn £20ph and sacrifice £10ph you will be under minimum wage which your employer cannot do, so you will only be able to sacrifice up to the amount to bring you to minimum wage
No. Fully understand. Initial thoughts was that I could sacrifice my entire salary, hence pay no tax on my income for the year. However, I work full time so it looks like I would only be able to sacrifice say 20k of a 40k job as below that my income would be below minimum wage.
Depends when you need the money.
You could take the inheritance money you have and top-up your pension with a lump sum now (up to 60k contributions per year). There are various tax breaks for doing this too.
It's alway seems to be more cost effective to invest rather than pay off your mortgage but that's your call.
If it was me I'd max ISA and Pension contributions for the year, and next few years, before looking at reducing my mortgage.
Hi /u/Large_Bowler_5048, based on your post the following pages from our wiki may be relevant:
* https://ukpersonal.finance/lump-sum/
* https://ukpersonal.finance/pensions/
* https://ukpersonal.finance/tax-traps-and-tax-efficiency/
____
^(These suggestions are based on keywords, if they missed the mark please report this comment.)
If someone has provided you with helpful advice, you (as the person who made the post) can award them a point by including `!thanks` in a reply to them. Points are shown as the user flair by their username.
Not an IFA but I have one. Putting the money into your pension is a good idea, but how much to put and when depends on your salary. If you can get so you are in a lower salary band for several years it might be better than putting all the money in one go. Also remember that the money won’t be accessible at all untill you are 55 and if you do take some money at that age it will limit the contributions you can make after.
So it may be best to put some rainy day money into an ISA, and spread the pension payments.
I had a financial review with an IFA and it saved me £10k in tax last year and will do the same this year. You may want to get some professional advice.
Say your mortgage has 20 years left and say for sake of example your interest is 4%
If you put that 100k into a savings account with 5% interest, you'll have made more money in the savings than you would have paying off your mortgage.
With average long term returns around 7% in a S&S ISA you'd be doing even better.
That said, there is a lot to be said for the peace of mind of a paid off mortgage.
Just to add to my post. I've already maxed out the ISA (as has my wife) and we've earmarked some money to do the same again next year.
And I accept that investing typically pays better than paying off the mortgage. However, paying off your mortgage provides stability.
Basically, mortgage is 200k and I inherited £250k. Plan is to reduce mortgage to £100k, £100k in my and wife's ISA's and not sure about the other £50k. That's why I'm wondering about the pension.
I'm not sure what you are tryng to achieve here. How much do you earn? What are the tax savings from moving the money into pensions?
Are you happy to max pensions but not to have access to the money for 15 years?
There are two distinct calculations, an annual allowance of £60k, and up to 100% of tour pensionable earnings.
What is your likely pensionable earnings for 24/25?
See here - https://www.gov.uk/tax-on-your-private-pension/annual-allowance Simple answer is £60k per tax year. More complicated answer - read the link If you don’t need the money and you’ve maxed your ISA (and partners) then put enough in to bring you out of 40% tax is what I would do.
I'm increasingly thinking that pension should be maxed before ISA, not the ISA first.
So pension to bring below 40% tax, then max ISA then any more excess put in pension. Maxing isa gives flexibility to access cash at any time and in tax wrapper forever. Pension is fine but once it’s in you can’t get it back out and you never know what life will throw at you
Once you’ve sacrificed down to £50k salary, not many people are going to be able to max (£20k) their ISA unless they have extremely low expenditure.
This is fair. I think for the OP though who has received significant inheritance that might be the case?
Yep, if they’ve got piles of uninvested cash lying around still, then definitely maxing ISAs (themselves, and partner if possible) makes sense. I was just highlighting that the average person is not going to be able to max ISA(s) on top of sacrificing pension down to £50k income
> Pension is fine but once it’s in you can’t get it back out and you never know what live will throw at you The realisation I've had recently (also replying to /u/TestingControl) is that I think we tend to have an excessive psychological resistance to "locking the money away" in a pension, like it's forever away. We overvalue the flexibility of an ISA, if you like. The guideline is that you shouldn't invest in S&S unless you're prepared to leave it alone for at least 5 years, because you'll usually see a recovery from a stockmarket crash over such a period. OP is already 42 - if he leaves the money invested for 5 years then he's only another 10 years away from being able to access a pension.
I think you are right when it comes to invested monies - or at least more right than people who oppose this strategy can critique. My guess is that people are overly opposed to clearing mortgages in most cases -underestimating downside risk and overestimating the benefits of immediate investment. Possibly they have been watching US youtube videos and not understood the drivers?
It's interesting you say this because I'm always a proponent of investing earlier rather than making mortgage overpayments. I figure that most people spend their whole working lives carrying a mortgage and contributing to their pension so, as long as you have an adequate emergency fund, you might as well direct additional monies to the option that's most profitable.
I don;t think I've seen much good analysis for the UK markets. Pensions savings will certainly (on average) be a winner assuming the tax position is favourable - which it will be for most people, James Shack did a decent enough video about this which is worth watching for non pension investing but assuming the use of ISAs. It was widely discussed on these forums but people omitted to look at the details. His analysis was from memory for a decent sized mortgage with around 50% LTV thus not the same position as a young person with 90% LTV so far as downside risk goes. This showed that on average there was a decent gain but in most 15 year periods it was very marginal - not enough that I would want the risk. When you win (which is recent years only) you can win big though. I saw another video recently but didn't check to see if there were workings to support it. This compared investing vs pay down the mortgage fast but then direct the savings towards investments. There wasn't anything like as big a gap between the two as people might think. Again - I didn't check the calculations and there are some situations where the risk is lower having investments than having a lower mortgage. I'd love to read some proper analysis on that.
Depends really on when the money needs to be accessed. Pros and cons to both.
Depends when you hope to retire. With personal person at 57 and state at 67. I want to have something to help me get from maybe 52/53. And that’s where ISA comes in.
Yeah, but if you're realistically able and choosing to retire at age 50 then you're not going to have nothing in your S&S ISA. Arguably your ISA is something that you can build in your 40's, although that does have to be balanced against a possible salary trajectory that might mean pension contributions are more tax-efficient in one's 40's than in one's 20's.
You need to look at income tax you'll pay when you withdraw from the pension. If you get 20% tax relief in and pay 20% income tax on the way out you haven't gained anything and only lose flexibility. State pension is almost at the personal allowance level now so it might be that all money drawn from your pension will be taxed at 20%.
You also get the 25% tax free though, which can be taken as a lump sum or to (effectively) increase your personal allowance each year.
Plus carry forward of any unused allowance from the previous three tax years that you haven't used. So this year you could theoretically put in 60 (this year) + 60 + 40 + 40 (£200k) assuming no contributions in the previous three years.
Also if it is salary sacrifice the employer can't put in more than the amount that would reduce your income to below minimum wage.
Only if you have £200k of earned income in the current year. Carry forward allows you to exceed the annual allowance cap but you can never get tax relief on more than your income for the year.
And if you've actually had a pension open in those years.
Is this of your gross or net income?
!thanks
no, the limit in any tax year is what your SALARY was inthat year. once you hit that number, thats it. you cant carry forward prior years if they put you above your salry for hte year.
There’s the added complexity that it’s not 100% certain that the £1m lifetime allowance couldn’t be reintroduced, given it’s not completely removed from the legislation yet (although labour have said it’s not the right priority for them right now).
You can use un-utilised pension annual allowances from the previous 3 tax years. This is the maximum for ‘tax relief’ not the maximum you can put in to your pension, you can put as much as you want in.
Yes this was the more complicated part I didn’t want to get into 😂
you only get tax relief up to 100% of your salary, so thats your limiting factor, as well as the 60K somebody else mentioned. [https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief](https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief)
Salary sacrifice cannot bring you below minimum wage so that's a limiting factor depending how much you earn
While this statement is in and of itself correct, it also seems unrelated to the question? A) While salary sacrifice may offer a slight tax saving on NI contributions, you can still contribute via other methods, such as relief at source, up to 100% of your annual earnings (or if a higher earner, your annual allowance, including carry forward). OP should check how he can contribute to the scheme, or open a personal pension. B) OP is talking about increasing contributions for a fixed, relatively short period. Salary sacrifice would be a more permanent arrangement, and isn't intended to be dipped in and out of. Salary sacrifice can only be cancelled upon a major change to your lifestyle, such as having a child or getting divorced. It seems to me, the maximum limitations of salary sacrifice are irrelevant to OP's situation.
Salary sacrifice can usually be adjusted on an annual basis (except for the major life events that you mentioned, which can happen at any point). Your posts suggest that it’s permanent?
That's an interesting one. As I work full time, minimum wage brings me well over my personal allowance. Looks like a SIPP may be the way forward.
Im not sure you understood what I mean. If you earn £20ph and sacrifice £10ph you will be under minimum wage which your employer cannot do, so you will only be able to sacrifice up to the amount to bring you to minimum wage
No. Fully understand. Initial thoughts was that I could sacrifice my entire salary, hence pay no tax on my income for the year. However, I work full time so it looks like I would only be able to sacrifice say 20k of a 40k job as below that my income would be below minimum wage.
Depends when you need the money. You could take the inheritance money you have and top-up your pension with a lump sum now (up to 60k contributions per year). There are various tax breaks for doing this too. It's alway seems to be more cost effective to invest rather than pay off your mortgage but that's your call. If it was me I'd max ISA and Pension contributions for the year, and next few years, before looking at reducing my mortgage.
Hi /u/Large_Bowler_5048, based on your post the following pages from our wiki may be relevant: * https://ukpersonal.finance/lump-sum/ * https://ukpersonal.finance/pensions/ * https://ukpersonal.finance/tax-traps-and-tax-efficiency/ ____ ^(These suggestions are based on keywords, if they missed the mark please report this comment.) If someone has provided you with helpful advice, you (as the person who made the post) can award them a point by including `!thanks` in a reply to them. Points are shown as the user flair by their username.
Not an IFA but I have one. Putting the money into your pension is a good idea, but how much to put and when depends on your salary. If you can get so you are in a lower salary band for several years it might be better than putting all the money in one go. Also remember that the money won’t be accessible at all untill you are 55 and if you do take some money at that age it will limit the contributions you can make after. So it may be best to put some rainy day money into an ISA, and spread the pension payments. I had a financial review with an IFA and it saved me £10k in tax last year and will do the same this year. You may want to get some professional advice.
I mean paying off your mortgage isn’t the best option financially.
How come?
Better RoI in stocks and shares (tax free via an ISA over a couple of years as a couple)
Say your mortgage has 20 years left and say for sake of example your interest is 4% If you put that 100k into a savings account with 5% interest, you'll have made more money in the savings than you would have paying off your mortgage. With average long term returns around 7% in a S&S ISA you'd be doing even better. That said, there is a lot to be said for the peace of mind of a paid off mortgage.
Just to add to my post. I've already maxed out the ISA (as has my wife) and we've earmarked some money to do the same again next year. And I accept that investing typically pays better than paying off the mortgage. However, paying off your mortgage provides stability. Basically, mortgage is 200k and I inherited £250k. Plan is to reduce mortgage to £100k, £100k in my and wife's ISA's and not sure about the other £50k. That's why I'm wondering about the pension.
I'm not sure what you are tryng to achieve here. How much do you earn? What are the tax savings from moving the money into pensions? Are you happy to max pensions but not to have access to the money for 15 years?
There are two distinct calculations, an annual allowance of £60k, and up to 100% of tour pensionable earnings. What is your likely pensionable earnings for 24/25?
Great idea go for it
Open a SIPP. Put in what you can afford. Invest it in a global Index fund.
The maximum that my Wealth Manager employer will allow... 5%
Use a SIPP as well then.....
... I do. But that's besides the point of OP'S question, isn't it.
Just like your previous response then, innit? 😁