Contribution limit - year of retirement

James_H

Please can someone clarify my confusion on the tax relief available in the year of retirement. I am aware that, subject to lifetime limits, the entire earnings in the year of retirement can be added to a pension. I presume that is the final tax year.

If retiring early in the tax year and taking benefits from a DB scheme, much of the taxable income in the year will be from the pension. But could payments be made into what used to be an AVC before retirement to reduce the tax payable due to the pension income after retirement.

With some example figures, suppose the current pre-retirement employment earnings were £10k and post-retirement pension £30k (amounts in the tax year, not pro-rated). Would, say, a £20k contribution be allowed (which would push up the £30k if vested that year)?

Chrismaths

You can only get tax relief on your Net Relevant Earnings (NRE) in the tax year. NREs are basically your earnings from 'pensionable employment', so you can't use your annuity/pension income for contributions. This also applies to savings and investment income. So in your example you can only contribute £10k.

HTH

James_H

Chrismaths, thanks for that. It makes sense as otherwise there would be some form of tax relief recycling.

Chrismaths

Talking of recycling, with personal pensions (ie not occupational), GB has left us a little loophole in the budget. You can take t-f cash from a pension and pay up to £15k of it into a pension and get tax relief on it (assuming prerequisite NREs).

For example. Mr A has a £100,000 SIPP. He partially vests £60,000, and gets £15,000 tax free cash. He pays the tax-free cash back into the (unvested portion of the) pension, which gets grossed up to £19230. Therefore he has £45,000 in payment, and £59230 unvested - a total of £104230.

So he can now draw 59230*.25=£14,807 tax free cash, and have a pension in payment of £89,422.

Probably not worth it actually...