Tax on big pension pots?
Discussion
I don’t have a big pension pot but I might have one in the future, can someone explain how the tax works on say a 3m or 5m pension pot?
It’s all out of curiosity, but google has become useless these days and doesn’t give me any answers, it’s only sponsored pages asking me to input my theoretical amount to see how much it would pay out, but you can’t enter over 1m it say I exceed the limit of something? But there must be plenty of people out there with big pensions surely?
Can anyone shed any light on this for me!
It’s all out of curiosity, but google has become useless these days and doesn’t give me any answers, it’s only sponsored pages asking me to input my theoretical amount to see how much it would pay out, but you can’t enter over 1m it say I exceed the limit of something? But there must be plenty of people out there with big pensions surely?
Can anyone shed any light on this for me!
You can only drop in £60k per year of your gross Salary (current rules), so you are unlikely to get to those numbers on a SIPP (DC) type of pension.
If you’ve think you are going to accumulate that sort of wealth then you will need to think about how you extract the money (tax on the way out).
Jim
If you’ve think you are going to accumulate that sort of wealth then you will need to think about how you extract the money (tax on the way out).
Jim
I assume you are asking about tax on the way out and also that it's not related to inheritance tax. I'm no IFA but in simple terms:
You can take 25% tax free up to around £268K
Then you can draw down the rest at marginal tax rates, exactly the same rates as income tax.
In very simple terms
You can take 25% tax free up to around £268K
Then you can draw down the rest at marginal tax rates, exactly the same rates as income tax.
In very simple terms
Happy Jim said:
You can only drop in £60k per year of your gross Salary (current rules), so you are unlikely to get to those numbers on a SIPP (DC) type of pension.
If you’ve think you are going to accumulate that sort of wealth then you will need to think about how you extract the money (tax on the way out).
Jim
I guess if you were brave and basically gambled with your money in a SIPP you could get lucky and hit the next Apple and Nvidia, no? Then those figures could be doable with ‘just’ the annual £60k contribution. If you’ve think you are going to accumulate that sort of wealth then you will need to think about how you extract the money (tax on the way out).
Jim
Crumpet said:
Happy Jim said:
You can only drop in £60k per year of your gross Salary (current rules), so you are unlikely to get to those numbers on a SIPP (DC) type of pension.
If you’ve think you are going to accumulate that sort of wealth then you will need to think about how you extract the money (tax on the way out).
Jim
I guess if you were brave and basically gambled with your money in a SIPP you could get lucky and hit the next Apple and Nvidia, no? Then those figures could be doable with ‘just’ the annual £60k contribution. If you’ve think you are going to accumulate that sort of wealth then you will need to think about how you extract the money (tax on the way out).
Jim
So then it’s 250k and take the rest pay tax like a normal job? I thought pensions were tax efficient? Is this just a wild scenario that pensions aren’t actually very good here?
Gooose said:
Yeah, if you hit a wild stock with say 100k of your own money and 20x it you would have 2m with no government help at all really.
So then it’s 250k and take the rest pay tax like a normal job? I thought pensions were tax efficient? Is this just a wild scenario that pensions aren’t actually very good here?
The average pension pot is about 80 grand. These numbers are just not going to be an issue for almost everyone. So then it’s 250k and take the rest pay tax like a normal job? I thought pensions were tax efficient? Is this just a wild scenario that pensions aren’t actually very good here?
Anyone earning a high salary also gets their £60k allowance reduced, another reason that those who theoretically could generate very large pots, don’t.
Gooose said:
So then it’s 250k and take the rest pay tax like a normal job? I thought pensions were tax efficient? Is this just a wild scenario that pensions aren’t actually very good here?
Pensions are tax efficient because they grow without you having paid tax & NI on the money you put in.Say you earn £100,000 and pay about 50% in tax and NI. If you invest this in a pension you don't pay the tax or NI so you can invest the full £100,000. If you were to invest in, say, an ISA, you would pay tax and NI on the £100,000, which leaves £50,000 for you to invest.
Assume then that your pension or ISA increases by a factor of ten over the years. That gives you £500,000 from the ISA to withdraw tax free, or £1,000,000 from the pension. You could withdraw £250,000 tax-free, leaving you with £750,000 to withdraw over time. This would be taxed, but, because you probably wouldn't be earning much else, a lot would be taken filling the lower tax bands, rather than the 50% you lost in the ISA. You also wouldn't pay NI.
This is why pensions are considered tax efficient.
With the sums you are talking about, you will find that the maximum tax free lump sum is less significant than for smaller pots and you also might have to invest so much to achieve those numbers that you lose the tax relief on your contributions. It might be worth a call to an IFA as a wrong decision could be costly...
One of the pension guys I follow is James Shack and coincidentally he’s just released this latest video which goes some way to answering your question.
https://youtu.be/9YIw_WDNbzQ?si=aS-llyYOwtzP3LSw
https://youtu.be/9YIw_WDNbzQ?si=aS-llyYOwtzP3LSw
mike_knott said:
Gooose said:
So then it’s 250k and take the rest pay tax like a normal job? I thought pensions were tax efficient? Is this just a wild scenario that pensions aren’t actually very good here?
Pensions are tax efficient because they grow without you having paid tax & NI on the money you put in.Say you earn £100,000 and pay about 50% in tax and NI. If you invest this in a pension you don't pay the tax or NI so you can invest the full £100,000. If you were to invest in, say, an ISA, you would pay tax and NI on the £100,000, which leaves £50,000 for you to invest.
Assume then that your pension or ISA increases by a factor of ten over the years. That gives you £500,000 from the ISA to withdraw tax free, or £1,000,000 from the pension. You could withdraw £250,000 tax-free, leaving you with £750,000 to withdraw over time. This would be taxed, but, because you probably wouldn't be earning much else, a lot would be taken filling the lower tax bands, rather than the 50% you lost in the ISA. You also wouldn't pay NI.
This is why pensions are considered tax efficient.
With the sums you are talking about, you will find that the maximum tax free lump sum is less significant than for smaller pots and you also might have to invest so much to achieve those numbers that you lose the tax relief on your contributions. It might be worth a call to an IFA as a wrong decision could be costly...
I tend to think that funds over £1m to £2m need to be considered, it is then worth exploring other areas. Amazing how many men have huge pensions and pay higher rate income tax in retirement and their wives have little or no income and don’t utilise their generous tax allowances.
macron said:
Gooose said:
So then it’s 250k and take the rest pay tax like a normal job? I thought pensions were tax efficient? Is this just a wild scenario that pensions aren’t actually very good here?
Out of interest, what exactly were you expecting??!?So, in theory, a share could be held in an ISA, an individual name or a pension (amongst many other things) and all that changes is that wrapper, the wrapper dictates the rules, limits and tax etc.
The income you get is taxed as income but it is possible to time and set the income to suit your tax position.
They can also be tax efficient at death and you also can get 25%tax free out the other end.
The tax efficiency is that you are buying pound coins for 60pence, how many would you like to buy? Then, once your pound coins are invested they grow in a tax efficient place.
It is even possible to put money in, get the tax back then start to get money back out.
If you then go on to look at things like a SSAS they can get quite interesting. SIPPs also allow greater degrees of control.
Louis Balfour said:
Gooose said:
I don’t have a big pension pot but I might have one in the future, can someone explain how the tax works on say a 3m or 5m pension pot?
Any answer you receive today will probably be incorrect by the time you have amassed the sums you are talking about.No word of a lie, a homeless man once said to me "don’t do what I did and save nothing for when I stopped working". I suspect there was a lot more to it as he was very drunk at about 11 a.m.
Caddyshack said:
And very few people say "I wish I hadn’t saved as much for my retirement" unless they die young, I suppose.
No word of a lie, a homeless man once said to me "don’t do what I did and save nothing for when I stopped working". I suspect there was a lot more to it as he was very drunk at about 11 a.m.
About a year after I set up our pension scheme, the age at which I could draw from it increased from 50 to 55.No word of a lie, a homeless man once said to me "don’t do what I did and save nothing for when I stopped working". I suspect there was a lot more to it as he was very drunk at about 11 a.m.
The government has just announced that pensions go in the IHT pot.
Whilst saving for retirement is undoubtedly a good idea, and I have a pension, it's a juicy fat pot of money that I know the government is just itching to get its hands on, before I spend it and it is to a greater or lesser extent trapped.
I consider a pension part of a diversified portfolio.
Louis Balfour said:
Caddyshack said:
And very few people say "I wish I hadn’t saved as much for my retirement" unless they die young, I suppose.
No word of a lie, a homeless man once said to me "don’t do what I did and save nothing for when I stopped working". I suspect there was a lot more to it as he was very drunk at about 11 a.m.
About a year after I set up our pension scheme, the age at which I could draw from it increased from 50 to 55.No word of a lie, a homeless man once said to me "don’t do what I did and save nothing for when I stopped working". I suspect there was a lot more to it as he was very drunk at about 11 a.m.
The government has just announced that pensions go in the IHT pot.
Whilst saving for retirement is undoubtedly a good idea, and I have a pension, it's a juicy fat pot of money that I know the government is just itching to get its hands on, before I spend it and it is to a greater or lesser extent trapped.
I consider a pension part of a diversified portfolio.
I suspect there will be ways to avoid the pension fund becoming part of the iht pot, they just haven’t been worked out yet. The govt will change and the rules may change.
The tax relief on the way in makes the pension a big bang for the buck, I actually think that £250k - £400k each for husband and wife is a good pension pot for a couple and then diversify in other ways to try and produce money in other ways.
Nick Forest said:
One of the pension guys I follow is James Shack and coincidentally he’s just released this latest video which goes some way to answering your question.
https://youtu.be/9YIw_WDNbzQ?si=aS-llyYOwtzP3LSw
Great link mate! Very informative, more complex than I thought!https://youtu.be/9YIw_WDNbzQ?si=aS-llyYOwtzP3LSw
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