Semi retire but continue paying into pension

pinkforfloyd

I'm wondering if you can help me clarify a point contained within the governments finalised pension reforms.

My understanding is as follows; I wish to semi retire at 60 in 2016, take my 25% TFLS along with a flexible drawdown arrangement. Can I still contribute to my pension from my reduced earnings but with a limit of £10,000?
The idea being to live off the TFLS till 65, put £10,000 per year back into my pension from my earnings until 65 but also drawdown to the tax free threshold limit (£10,500) each year till 65.

I believe this arrangement would see my yearly pension contribution turn into £12,000 whilst taking tax free income via drawdown, in other words, my remaining pot would hopefully continue to grow until I finish at 65.

Your thoughts would be appreciated.

kidmugsy

pinkforfloyd wrote: »

Can I still contribute to my pension from my reduced earnings but with a limit of £10,000?
...
I believe this arrangement would see my yearly pension contribution turn into £12,000.

I assume the £10k limit is for the gross amount you can contribute. So you write your cheque for £8k and your provider claims £2k from HMG to add to your pension fund. This requires your reduced earnings to be £10k p.a. or more. Otherwise your max contribution is a gross sum equal to your earnings, or £3600 p.a. if that is more.

Your_Hero

If you are in a flexible drawdown, you will have £10,000 annual allowance. As long as you have relevant income (not pension income) then you can contribute to this limit and receive tax relief. It's not clear whether or not PCLS recycling will be allowed since it is not currently (See http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm09208020.htm).

jamesd

If you're not already in the product type called flexible drawdown you won't need to use that to do what you want because the new rules allow flexible drawing.

You can take the pension commencement lump sum and as long as you do that and don't take any income from the remaining capital the amount you can pay in to a pension doesn't reduce from the lower of £40,000 or your earned income.

There are limits on pension lump sum recycling and one of the key ones is that it is only an increase in the amount of pension contributions that matters. If the amount stays the same or decreases the rule doesn't affect you. This change is measured over the two years before taking the lump sum, the year of the lump sum and the two years after taking it.

It's probably not necessary for you to use the PCLS at all to achieve your objective anyway, in spite of HMRC concerns that that may happen. There is no restriction at all on using other money to live off while you make pension contributions. You could simply use ISA money or an increased mortgage or other borrowing to live off while you continue to make your usual pension contributions. For maximum protection against HMRC wrongly believing that you're using the PCLS for this you could delay taking that. Alternatively you could use the PCLS for one purpose while draining other savings and investments so it's obvious that the PCLS isn't in any way facilitating the contributions.

If you have a mortgage you could do something like extending the term to reduce the monthly payments and reduce expenditure to cut living costs and facilitate higher pension contributions. If you were planning to overpay on the mortgage you could cancel that plan and use the money for pension contributions instead.

A little care needs to be taken if you do use borrowing rather than other money since it's possible to trigger the PCLS recycling rule if it wrongly appears that you're planning to repay the borrowing with the PCLS. Timing of taking the money and repaying can be used to demonstrate that this is not the case, though in practice it's more likely that you would avoid any need to consider this just by not increasing your pension contribution amounts significantly.

In general to avoid the reduction to £10,000 a year just find some way to fund your living costs that doesn't involve drawing more than the lump sum or, better still, also defers taking the lump sum. Alternatively, just the reality that your pension contributions will probably reduce rather than increasing would mean that the lump sum recycling rule won't be a factor and you can take the lump sum without worrying that HMRC will get the wrong idea.

DesG

If you have no earned income between 60-65 you will probably be restricted to re-cycling £2880 + 20% from Hector per year.

(As you said you want to drawdown to the tax free limit each year, I assume you have no other income)