Paying into a private pension while taking a pension

PaddyLondon · 9 July 2014 at 9:42AM

Apologies if this is a bit of a repeat question, but I've searched and not found what I need

I'm 54 and expect to continue working full time for the next few years.

I have two deferred pensions, one of which is BT and three private pension pots, one of which is a SIPP, and to which I make contributions to two.

Could I take say the £5k pa from my BT pension and use it directly or indirectly to increase my funding of my private pension pots, and benefit from tax relief? The rationale is (a) to benefit from tax relief and (b) invest in equity trackers for 5-10 years to grow value.

If so, how is there a risk of this approach being treated as re-cycling the pension commencement lump sum?

mgdavid · 9 July 2014 at 10:08AM

If the BT pension is a DB (final salary) scheme then taking it early to fund an alternative pension would probably be financially disadvantageous. At what age can you take the BT pension without any actuarial reduction?

CLAPTON · 9 July 2014 at 10:20AM

PaddyLondon wrote: »

Apologies if this is a bit of a repeat question, but I've searched and not found what I need

I'm 54 and expect to continue working full time for the next few years.

I have two deferred pensions, one of which is BT and three private pension pots, one of which is a SIPP, and to which I make contributions to two.

Could I take say the £5k pa from my BT pension and use it directly or indirectly to increase my funding of my private pension pots, and benefit from tax relief? The rationale is (a) to benefit from tax relief and (b) invest in equity trackers for 5-10 years to grow value.

If so, how is there a risk of this approach being treated as re-cycling the pension commencement lump sum?

assuming a DB scheme you usually either take it all or none

and there is usually an reduction 4-5% for each year you take it early so if the normal retirement age is 60 you may lose say 24-30% of the pension by taking it early

Your_Hero · 9 July 2014 at 10:21AM

As mgdavid points out, if your BT pension is a DB scheme then it is unlikely you will be able to take it before the normal retirement age (NRA) without suffering early retirement penalties. This is usually not financial worthwhile.

In addition to this, if it is indeed a DB scheme, your benefits are guaranteed and index-linked, why would you want to trade this?

If you are still working, can you afford to pay more of your income into your private pensions to benefit from your points (a) and (b)?

PaddyLondon · 9 July 2014 at 10:53AM

Thanks all.

I recognize that my starting pension will be 25% lower but it is paid six years earlier, so that is a head start of c, £30k gross relative to the later, higher pension option at 60. That head start gets eroded overtime and I think it is 65/66 before I'm worse off by taking it early.

The bet that I am considering taking - if it is allowed - it that (1) investing the annual pension taken at 54 and while I am still employed full time, (2) obtaining a tax boost by investing it in in my existing private pensions and (3) taking risk on equity markets through trackers, will create more value for me than waiting till 60 to take my pension. There is a lot of complex modelling for me to do to determine if that is the case.

My key question is this bet allowed? (rather than is it a mad bet....)

I see lots of material on the limits on Recycling tax free Pension Commencement Lump sums, but nothing on using receipt of a regular pension income, alongside a current income, to fund payments into a private pension pot.

PaddyLondon · 9 July 2014 at 10:55AM

mgdavid wrote: »

If the BT pension is a DB (final salary) scheme then taking it early to fund an alternative pension would probably be financially disadvantageous. At what age can you take the BT pension without any actuarial reduction?

For me, sixty

Your_Hero · 9 July 2014 at 11:06AM

PaddyLondon wrote: »

Thanks all.

I recognize that my starting pension will be 25% lower but it is paid six years earlier, so that is a head start of c, £30k gross relative to the later, higher pension option at 60. That head start gets eroded overtime and I think it is 65/66 before I'm worse off by taking it early.

The bet that I am considering taking - if it is allowed - it that (1) investing the annual pension taken at 54 and while I am still employed full time, (2) obtaining a tax boost by investing it in in my existing private pensions and (3) taking risk on equity markets through trackers, will create more value for me than waiting till 60 to take my pension. There is a lot of complex modelling for me to do to determine if that is the case.

My key question is it allowed?

I see lots of material on the limits on Recycling tax free Pension Commencement Lump sums, but nothing on using receipt of a regular pension income, alongside a current income, to fund payments into a private pension pot.

If it's a 25% reduction then you won't be getting £30k over 6 years. It will be £3,750 x 6 = £22,500. This is of course subject to the usual PAYE income tax, so you will receive less income overall. You will need to compare on a like for like basis, and you will probably find that you are no better off. Also this is subject to the usual investment risks, and annuity rates etc.

Your key question depends how much in total you are putting into your pension surely? If you are putting equal or below your relevant income then how can this be classed as recycling a PCLS? If you are looking to put a lot more than this in, then it is possible to be looked upon as just that. It's all relative and needs to be reasonable.

PaddyLondon · 9 July 2014 at 11:48AM

Your_Hero wrote: »

If it's a 25% reduction then you won't be getting £30k over 6 years. It will be £3,750 x 6 = £22,500. This is of course subject to the usual PAYE income tax, so you will receive less income overall. You will need to compare on a like for like basis, and you will probably find that you are no better off. Also this is subject to the usual investment risks, and annuity rates etc.

Your key question depends how much in total you are putting into your pension surely? If you are putting equal or below your relevant income then how can this be classed as recycling a PCLS? If you are looking to put a lot more than this in, then it is possible to be looked upon as just that. It's all relative and needs to be reasonable.

Can I try a couple of scenarios?
1 Employment income £60,000 pa, pension income, £5,000pa. Pension contribution moves up from £20,000 to £25, 000. Sounds line no issues?

2 Employment income £60,000 pa, pension income, £5,000pa. Tax free lump sum of £10,000, Pension contribution moves up from £20,000 to £38,000. Under the relevant income and pension contribution constraint, so no issues?

Your_Hero · 9 July 2014 at 12:18PM

PaddyLondon wrote: »

Can I try a couple of scenarios?

1 Employment income £60,000 pa, pension income, £5,000pa. Pension contribution moves up from £20,000 to £25, 000. Sounds line no issues?

2 Employment income £60,000 pa, pension income, £5,000pa. Tax free lump sum of £10,000, Pension contribution moves up from £20,000 to £38,000. Under the relevant income and pension contribution constraint, so no issues?

It's more complicated than this and the HMRC has certain criteria to meet before they can deem it to be recycling of PCLS. In your example 1, it appears fine as this is recycling of pension income, which generally is not an issue (as your pension income is taxed).

In example 2, it would appear that you have recycled the PCLS as it is a significant increase in contributions and probably only a temporary increase too I suspect. But as I said earlier, it's more complicated than this (see my links below). In practice, however, for small PCLS such as £10,000 it unlikely to cause big problems and could be allowed.

You may find these articles (intended for professional advisers only) useful: http://www.scottishwidows.co.uk/extranet/literature/doc/fp0289
http://www.aviva-for-advisers.co.uk/site/public/tech-centre/tech-article-detail/recycling-tax-free-cash

jamesd · 9 July 2014 at 1:26PM

There is no restriction on recycling pension income other than the usual £40,000 or earned income if lower annual contribution limit.

You're recycling the income and it is obvious that you're recycling the income. So there should be no reason to worry about the lump sum recycling rule.

As long as the lump sum and all other pension commencement lump sums taken in the previous twelve months is less than 1% then it's not possible for it to trigger the recycling penalties. £10,000 is less than £12,500 so this part of the recycling rule conditions is not met and you will not be affected.

Even if you were to be caught by that rule, you can arrange for the increase in contributions to be less than 30% of the lump sum value counting the two years before, year of taking and two years following.

If you're asking far enough in advance you could increase pension contributions in the third previous year so that there is no increase in contributions.

PaddyLondon · 9 July 2014 at 2:21PM

Thanks all.

Much appreciated, much to think of and try to model.....

Paying into a private pension while taking a pension

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