Take 25% pension at 55 to pay school fees

[Justwanttobebythesea]

Hi, I am almost 52 and have 2 dc in private school. I'm wondering if I could pay in 100% of my salary (less than £40k) into my pension for a few years so that it is invested and then when I'm 55 I can take 25% out tax free to put towards school fees. in the meantime using my savings as my salary each month as they are currently in a bank account not keeping up with inflation.

Is this a tax efficient plan? I feel like I may be missing something. I'm aware my pension could could down as well as up.

That usually only happens with defined benefit pensions. I'm assuming op has a defined contribution or she wouldn't even be considering this.

The normal minimum age for access is rising to 57 from the start of the 2028/29 tax year. It sounds as if the OP will still have access at 55.

Sounds to me like you need to speak to a good Independent Financial Adviser.

It's not I have and ISA and discretionary managed fund investments earning compound interest which I would rather not touch if it's financially more efficient for me to take out of a pension pot

Agreed - it's a minefield trying to understand the implications of touching a pension pot versus using invested savings

Once you take money out of your pension pot then you are limited as to what you can invest into it after this time. I think it's limited to £4K contributions per annum.

I knew it wouldn't be that easy as lots of people would do it. That is the major fault in my plan, that's so low at 55 - aarggh!😫.

We're doing this but it's from an old pension as we have 2 running. We'll use it to pay off mortgage and DCs school fees as will get a huge reduction if we pay a lump sum covering the rest of their education. Not being taxed on it is the huge draw for us.

DH is in finance and has been advised to do so by our FA.

That's interesting -this is an old pension too - sadly not enough for the mortgage and school fees. I'm in finance too so have a good understanding of financial matters. Back to a FA then for me.

As others have mentioned, I think biggest disadvantage to accessing DC pension funds early is the Money Purchase Annual Allowance (MPAA) which means that once you've accessed your DC pension funds you can only contribute £4K per year.

However, the MPAA does not apply if you access a DB pension. Do you have any small old DB pensions that you could cash out instead? The 25% tax free applies to both DC and DB pensions. And if you took funds from a DB scheme, then you'd still be able to contribute more than £4K to a DC plan. If you have a DB plan, you'd probably want to think very carefully about whether it's worth giving up (some of) the guaranteed benefits it provides.

Well, it’s the law. Your individual pension pot might close, but you can save elsewhere.

Wrong.

Again, this is incorrect.

you CAN access pension PCLS, or 25% of the pot.

Reading with interest. Similarly, I'm shovelling cash into my DC pension and using it as a tax free savings vehicle. Idea is in 4 years at 57, I'll stop working, take the 25% tax free sum, use that to pay off the mortgage then use up the rest of the pension via income drawdown from 57-65. Ill be just under the tax threshold and rest of my income will be made up through other tax free means. After that I can take my DB pension with no actuarial reduction. Seems like a plan to me.

Its been said before - don’t need to put 100% of salary in. Make sure of your tax free allowance and reduce your income to £12.5k (if that’s yours) Not sure about NI these days, so check it and factor a bit of that in too if required. So you get £1k a month and pay no income tax at all after the HNRC reconciliation.

The balance into a SIPP, accessible in 2024 or 2025 at age 55 is fine. You will get the tax back on anything taken at source. Not the NI though.

The 25% lump sum, doesn’t trigger the money purchase annual allowance of 4k - it’s only when you take an income.

By taking the 25% - it’s a 100% benefit crystallisation event, so i don’t believe you will get any more tax free lump sum on future contributions or investment growth.

So yes it is a very tax efficient maneuvre at that level.

Other factors….
You may need to be wary of Lifetime allowance of £1.073m, either now or in the future. Punitive tax rates, which are going to screw pensioners in about a decade, but few people think that far in advance and think they wiling ever accrue that much lol. Dont forget any DB schemes, use a 20x multiplier of annual income to contribute to that.

There is a chance that labour will immediately in their first budget stabdardise the standard and higher rate tax reliefs on pension payments.

Im 53, i’m hoping they don’t change the minimum retirement ages before 2024! There is an issue about productivity of the UK right now and is regarded as a barrier to growth (the real problem we face in the uk right now - once you get past the immediate COL crisis) and if they can screw a few wealthy middle class people, with a ‘it’s fairer for all’ argument to increase their coffers and thus spending capacity, i see this as an easy win for them. They are going to have such a huge majority, they will be able to do anything.

25% Lump sums….. I’ve heard some horror stories of that being emergency tax coded at the point it’s taken…. You can get it back but as always, HMRC finds it easy to take moeny and is never keen to return it quickly, so be cautious with your timings.

Finally…. I’m not a FA or an IFA…. I suspect the big thing for you will be the MPAA, so please double/triple check that for your own benefit.

Bearing in mind the fred is some months old, you are not taxed on the 25% tax free cash, emergency or other. The emergency tax is usually only applied to your first withdrawal after all tax free cash - until HMRC can issue you a new tax code as your provider does not know your tax position until they get this.
Yes, to take the 25% lump sum the whole fund will need to be crystallised - you will get an additional (called something like: crystallised, drawdown or post-retirement) pension pot at this time. Any new contributions (tax free cash only does not trigger they money purchase annual allowance) will go into the uncrystallised fund and you will have 25% of this fund available as before.

Yes you can. It’s generally a good idea as you get tax relief for contributions and get 25% tax free

Is there a risk of exceeding the lifetime allowance? A friend of mine ended up with a £24k tax bill when he went over the allowance, despite having stopped paying into his pension already.

If you've worked in a job that allows you to accrue pension savings of £1m+ or an effective LTA of >£1m when your DB pension is assessed then the inability to manage £24k for tax purposes is bad planning rather than a risk

That’s a cock up. You shouldn’t crystallise the excess until 75 in a MP.

if it a DB, then you should use allocation, max out TFC, or commute ie no bill.

Bad planning