Paying too much to get 40% relief?

J

JKetch

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I'm 60 and looking to maximise payments into my personal pension (RAC). When I pay 40% of my income into the pension it will be greater than the amount of wages taxed at 40%. So am I right to say that the effective relief will be less than 40%?

If that is the case, is it still best to maximise my pension or should I pay in a reduced amount that stays in the 40% relief range and put the surplus into another investment?
 
It would be best to maximimise pension contributions to bring your taxable salary down to the 20% bracket. This is what I do.
There is 20% less gain in contributing from the salary that is in the lower threshold.
Paying off debts should be the priority for the rest
 
AndroidMan said:
It would be best to maximimise pension contributions to bring your taxable salary down to the 20% bracket. This is what I do.
There is 20% less gain in contributing from the salary that is in the lower threshold.
Paying off debts should be the priority for the rest
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I'm fortunate in that my mortgage is cleared and I don't have any other debts.

Am I correct in saying that when I decide to draw down my pension, 25% of the contributions that got tax relief at 20% going in, will be available as a tax free lump sum? Also, I won't be paying the higher rate of tax when I retire so maybe I should just maximise my contributions for the next 6 years.

Are there other investments that are, on average, likely to beat the return of a pension fund over those 6 years?
 
You can take 25% of your pension as a lump sum when you retire. The first 200k of the lump sum is tax free and the next 300k is taxed at 20% and the rest is taxed at 40%. If your pension fund is worth less than 800k when you retire, all of your lump sum will be tax free.

So if you contribute €1000 to your pension now and get 20% tax relief on the way in, the net cost to you will be €800. When you go to withdraw that €1000 from your pension in future, you will take €250 tax free and pay 20% on the other €750 which is €150 in tax. So you will net €850 from your pension.

But the biggest advantage is that your €1000 will grow without any tax being deducted until you withdraw it from your fund. Depending on what fund you invest in, and over how long, this could be very significant.

After clearing any debts and your mortgage, I think that pension contributions with tax relief, even at 20%, are the next thing I would be considering.
 
3CC said:
...... After clearing any debts and your mortgage, I think that pension contributions with tax relief, even at 20%, are the next thing I would be considering.
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Thanks for the clear advice, I think I will take the route of maximising my payments.

And thanks to everyone who replied.
 
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