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More tax really...
Say you have a DC pot and want to top it up. Current limit is £40k p/a tax free or £4k if you're already drawing?
Say you then want to buy an Annuity and draw 25% tax free effectively 'tax washing' some of the £40k contributions.
Can you do that? Are there any gotchas or minimum time periods etc? Or have I just got it all arse over bolleaux?
Experts assemble please.
I think youve sort of answered your own question, if I understand it right....
Yes you can stick £40k in plus the difference between what you paid last coupla years and £80k into your pension.
And indeed realise it, assuming you're over 55, and get 1/4 of it tax free.
But then you drop down to the £4k limit precisely to stop you doing the same thing over and over again and creaming loads of tax benefits each cycle.
( my info is of course a tad out of date as they have recentlychanged/abolished the £40k limit to help impoverished medics and politicians)
So I could pop £120k in (assuming zero additional contributions in the past 3 years), get tax relief on that then take 25% out of the new total tax free?
Seems too good to be true 😊
I think this is what you are talking about -
You can do it once I think, although as I understand, you if you take 25% tax free lump sum, but no income, I don’t think@ you lose the total annual allowance. If you do, then your annual tax free allowance will fall to the new limit for contributions of £10k.
@IANAFA and have been meaning to look into this.
Sorry I think I misunderstood the question.
To get the tax relief don’t your earnings have to be at least equal to the contribution? So you need to have earnings of £40k in each of those years in order to get the tax relief?
That's correct, you can only get tax relief for any year up to the amount you earned (and £40k max). But if you earn less than £3600, you can get effective tax relief on that, ie, you pay in £3600 and Government add £720 to that.
It's now £60,000 per annum tax free. From HMRC:
Limits to your tax-free contributions:
You usually pay tax if savings in your pension pots go above:
100% of your earnings in a year - this is the limit on tax relief you get
£60,000 a year - check your ‘annual allowance’
You also pay tax on contributions if your pension provider:
https://www.gov.uk/tax-on-your-private-pension
Aahhh OK, that's the gotcha.
So AIUI, you can make contributions for the past 3 tax years if you haven't already made them up to £60k in the current tax year (and whatever was in force in the preceding 2 years, say £40k) or up to your earnings limit for each of those years if less than £60k/£40k. Is that right?
Assuming yes, you can then immediately withdraw 25% tax free (not to reinvest in a pension, just to fritter away on nonsense...). Is that right?
@footflaps This is the sort of thing you're usually all over. Anything to add pls?