If I can afford it, should I be putting the majority of your salary into my pension to avoid paying the tax on it?

[HeardleFan]

I'm 55, planning to retire at 65ish.
At the moment I'm putting 30% into my pension but I'm thinking of increasing that to maybe 50%.
Our mortgage is paid off and I have enough savings to cover any building work we want to do (ie loft conversion).
My salary at the moment is 66k.
If we do need to get a lump sum, eg to pay kids uni fees, I can do a once off lump sum withdrawal from my pension pot (up to 25%).
Anyone see any major flaw in this logic?
TIA

TitIe should be - If I can afford it, should I be putting the majority of my salary into my pension to avoid paying the tax on it?

ISA?

ISA rates are pretty paltry, 1-2%.
Any money I take out of my pension in a lump sum will be tax free.

Not a cash ISA. I always recommend taking independent financial advice as they can really look in depth at your circumstances and what your goals are to find the best option for you.

Yes. Why pay tax if you can avoid it. So long as you don't need the money until you can get it out.

I'm not in any way qualified to offer financial advice, but yes this is what I'm doing. Not just to avoid the tax, but as a tax efficient way to hopefully get to decent return.

If it's a defined contributions scheme you do need to be aware the value can go down as well as up though..

What level of income is your pension currently predicted to give you? If it's close to one of the thresholds, you might want to consider an ISA as income from an ISA is tax free.

So:
Pension = tax relief on the money you put in but income is taxed (note, income, not the 25% lump sum)
ISA = you pay in from taxed income but growth and income are tax free

Ideally you'd do some of each!

Just bear in mind that you are limited to £40k gross into your pension.

I put approx 95%+ of my employment income into mine.

There is a carry back rule you may be able to take advantage of if you look set to exceed £40k pension contrbutions in a year but do seek financial advice

Are you anywhere near your lifetime allowance?

Take a careful look at your wriggle room with annual and lifetime allowances.

I do OP.

I have a defined benefit pension to 2018 when the company stopped it. Any new contributions go into a defined contribution pension, I put 50% of my salary in which is deducted prior to tax and employer puts 13% in. It’s coming along grand.

I’d put it all in but my employer won’t let me put more than 50% in, something to do with it putting me below minimum wage if I did.

I think if you do a transfer of money from the pot for your children's expenses, then you are very restricted for any contributions after this.

I suggest you speak to Pension Wise (it's free) to confirm your actions before you do this.

I am doing this, salary sacrificing everything that would tip me into 40% tax bracket. I will be putting it into a SIPP global index fund.
This is to complement a small amount in a defined benefit scheme.
I’m quite a way from retirement though.
I would seek IFA advice in your circumstances.

@Chasingsquirrels

Just bear in mind that you are limited to £40k gross into your pension.

I put approx 95%+ of my employment income into mine.

Sorry for being thick is that 40k including the tax relief?

The 40k is total of all money so yes, includes the 20% tax relief (but not the other 20 if you're a 40% tax rate payer - you just get that part back from your tax return, it doesn't go into the pension).

But the 40k isn't a limit - you can put more in, you just don't get tax relief on the extra. (unless you take advantage of the carry back rules a pp mentioned).

@Smidge001

The 40k is total of all money so yes, includes the 20% tax relief (but not the other 20 if you're a 40% tax rate payer - you just get that part back from your tax return, it doesn't go into the pension).

But the 40k isn't a limit - you can put more in, you just don't get tax relief on the extra. (unless you take advantage of the carry back rules a pp mentioned).

Thank you. My dh is self employed and wants to put as much into his pension as he can before he can't claim tax relief (so £40k). He doesn't pay 40% tax so l am better off just putting about £32k in there and then the tax relief will make it up to about £40k - have l got that right?? He started late so puts as much as he can in..

@ItsReallyOnlyMe
"I think if you do a transfer of money from the pot for your children's expenses, then you are very restricted for any contributions after this."
Do you mind expanding on this?
I will take IFA.

@MoneyMoneyMoneyMustBefunny

From retirement.fidelity.co.uk/access-your-pension/taking-lump-sums/

"If you think you might want to top up your pension pot in the future, for instance because you want to keep working part time, then you need to be aware that taking money out in lump sums could affect the amount you can pay in and receive tax relief on.
If you take money out in this way, you may only be able to receive tax relief on up to £4,000 a year. If you exceed this figure, you may need to pay tax to HMRC. This is known as the money purchase annual allowance (MPAA).
If you think you’ll want to continue topping up your money purchase pension pot with more than £4,000 a year after you retire, then you may want to consider other options."

Important point from @ItsReallyOnlyMe above

As soon as you withdraw funds frim your pension you will not be able to keep topping it up afterwards at more than £4k pa without penal tax charges

I plan to do this as soon as my mortgage is paid off in four and a bit years. Hoping to work another few years after that.

In the scenario above it wouldn’t it make more sense to be adding spare income to a stocks and shares ISA rather than pension then? Or up to £4k in pension and the rest in S&S ISA? Think the annual allowance for that is £20k