Finance question

[StJulian2023]

I’m sure I’m being slow here, but why is it better to put a lump sum in my pension vs in savings? I understand 75% of the pension money will be taxed when I take it out, whereas if I have the money in a savings account just the interest will be taxed? I don’t get it. Even if pension does well that feels like there would be less? Obviously I’ll get more advice from a financial advisor but thoughts from people who understand this sort of thing very welcome (situation is I have some life insurance money due to very premature death of my lovely husband and my salary plus his pension plus savings interest is taking me into higher tax band)

I assume you're talking about a pension scheme at work? If so, that money is going into your pension before your tax and NI is calculated, so you make a saving.

Eg,
Salary 40k gross, taxed on the 40k (less personal allowance).
Salary 40k gross but pays 5k into a pension scheme, you're only taxed on the remaining 35k (less personal allowance). You're effectively putting in the cash tax free and saving tax and NI.

If you put this into savings (I assume your current set up would be..) this is coming from income already taxed.

You get tax relief on payments in to pensions which you don't on savings.
so if you are a basic rate taxpayer you'd effectively get an additional 20% free

Yes 75% will be taxed if you take it all out but if you just take out 25% it is tax free and then the with the remaining you can buy an annuity which will give you a guaranteed income for life.

And sorry for your loss OP. You obviously have a lot of questions and things running round in your mind.

So your income and your husband's pension (now paid to you) have put you into the higher tax band so to reduce this you can put more into your pension. (May need to do a separate one from your work pension) this will reduce your taxable income so you may fall back into the lower tax band. My previous comment applies to when you access your pension at retirement.

Thank you, I am starting to get it!

And more if you're a higher rate taxpayer (that's still the case isn't t?)

Making sure you've used your ISA allowance for this year and maybe retain enough for subsequent year(s) may be a sensible part of the mix too.

Non ISA savings will have their interest taxed not just once but every year.

If it is a DB pension then some/all of your income in retirement will be index linked so any increase now will pay in the long term.
If DC then you hope the fund is invested wisely (you can check and change this) and will grow over the years.

When you take the pension you can take a 25% tax free lump sum and depending on your income, then pay tax (or not) on the annual pension (or annuity / draw-down).

Thanks so much.

Yes ISA allowance used each year, that I’m getting right!!

I work for a university, I’m in the USS pension