Maximum pension contribution once drawing pension

k6chris

Quick question. I have a deferred company pension that was DB but then switched to DC. I can request to take that pension at any time from 50 (protected rights) subject to a neutral discount factor which I believe is 4% cumulative, from the age of 63. If I take the pension, I have to take both the DB and DC parts at the same time. I think I have managed to get enough in the DC to cover a 25% TFLS, but in anycase would not eat into the DB to take cash out. I plan to use the TFLS to top manually top up the DB payments;

1) Once I invoke the above, what is the maximum I can then contribute to another pension (as I may wish to take on another, lower paid job which will also have a pension)?

2) Does the answer to Q1 include the employer contribution or just mine?

3) Can I add any of the TFLS into a SIPP or is that recycling?

4) Can I add any of the TFLS into an ISA as an alternative?

Thanks!

atush

If you take a penny more of a DC pension than the 25% TFLS, then your annual allowance drops to 10K per annum.

If you take a DB pension, I dont beleive it affects your annual allowance.

k6chris

atush wrote: »

If you take a penny more of a DC pension than the 25% TFLS, then your annual allowance drops to 10K per annum.

If you take a DB pension, I dont beleive it affects your annual allowance.

This is where I get confused as the DB and DC are part of the same employer pesnion package. I will be taking 100% of the DC, which (I think) will be tax free as it less than 25% of the combined DB/DC pacakge. Does that make sense??

HappyHarry

k6chris wrote: »

Quick question. I have a deferred company pension that was DB but then switched to DC. I can request to take that pension at any time from 50 (protected rights) subject to a neutral discount factor which I believe is 4% cumulative, from the age of 63. If I take the pension, I have to take both the DB and DC parts at the same time. I think I have managed to get enough in the DC to cover a 25% TFLS, but in anycase would not eat into the DB to take cash out. I plan to use the TFLS to top manually top up the DB payments;

1) Once I invoke the above, what is the maximum I can then contribute to another pension (as I may wish to take on another, lower paid job which will also have a pension)?

2) Does the answer to Q1 include the employer contribution or just mine?

3) Can I add any of the TFLS into a SIPP or is that recycling?

4) Can I add any of the TFLS into an ISA as an alternative?

Thanks!

1.

k6chris wrote: »

This is where I get confused as the DB and DC are part of the same employer pesnion package. I will be taking 100% of the DC, which (I think) will be tax free as it less than 25% of the combined DB/DC pacakge. Does that make sense??

I would need to check further if I were providing advice on this area, however, my current understanding is that taking the full DC pension in this case would not trigger the Money Purchase Annual Allowance. Therefore you could still have your normal Annual Allowance available.

If any other posters know different then I am prepared to be corrected.

However, my reasoning is that the lump sum taken is a pension commencement lump sum (PCLS). This document clarifies that taking a PCLS is not a trigger event:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm056530

and this document clarifies that taking the full lull sum from a DC scheme in this situation is classed as a PCLS:

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm063210

2. Your employer's contributions and your own gross contributions both count towards the Annual Allowance limit. However, The contribution payments to the DB scheme are based in on increase of the value of your pension and not the contributions made.

3. Adding too much of the PCLS back into a pension counts as recycling. See here for a good working flowchart, and read TFLS as PCLS.

http://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/

4. Adding the PCLS to an ISA is fine, providing you stay within the annual ISA limits.

I'm confused as to why you are thinking of adding TFLS funds to your DB pension. Are you sure you are able to re-start contributions to your DB scheme if you take the DB pension?

k6chris

HappyHarry wrote: »

1.

I'm confused as to why you are thinking of adding TFLS funds to your DB pension. Are you sure you are able to re-start contributions to your DB scheme if you take the DB pension?

Thanks for the reply. I'm not thinking of using the TFLS to fund a DB pension, but I do have both a SIPP and an AVC as part of my current emplyment (not linked to the pension mentioned). My primary motivation is being able to switch 'careers' into something that pays a lot less, but which is enjoyable. Drawing my (refered to) DB/DC pension would allow this to happen whilst bringing in an additional revenue stream.

Does anyone do the 100% work --> 100% retire model anymore??

Thanks

jamesd

k6chris wrote: »

1) Once I invoke the above, what is the maximum I can then contribute to another pension (as I may wish to take on another, lower paid job which will also have a pension)?

As long as you stick to taking only tax free lump sum money from a DC pension there is no effect on your annual allowance for pension contributions. This includes the case where you get 100% of the DC pot as a tax free lump sum from a combined DB/DC pension pair.

If you take even a penny of taxable DC money via drawdown you become subject to the money purchase annual allowance and contributions into any DC pension for you by anyone are limited to £10k a year this tax year then an announced £4k a year from the 2017/18 tax year onwards.

DB income and annuity income do not count for this, nor do DB contributions.

The MPAA charge just recovers the tax relief you got so it's not terribly onerous to go over that level.

So assuming no taxable DC withdrawing your annual allowance remains at 40k.

k6chris wrote: »

2) Does the answer to Q1 include the employer contribution or just mine?

You, employer and anyone else.

k6chris wrote: »

3) Can I add any of the TFLS into a SIPP or is that recycling?

It's recycling but it's not prohibited recycling. This is because the tax free lump sum came as a side effect of taking the DB pension not as a decision to take a TFLS for the purpose of recycling. So you lack the pre-planned purpose of taking the lump sum for recycling that is required for it to be limited. HMRC has the burden of proof, not you. And you have ample circumstances to show that it was incidental to the DB taking.

If there is enough in the DC pot to cover more than the lump sum from the DB/DC combination then taking and recycling the tax free lump sum from that extra bit of DC might be restricted. Depends on how much it is and how much pension contributions in our name have been. That's in part because another aspect of the recycling limitations means they only apply if the amount above your previous pattern of contributions has exceeded a certain level.

If you're been paying in 40k a year for the last many years beyond just the two most recent ones, you just aren't going to be able to go over the limit because HMRC won't be able to show any increase in contributions at all. This limit is measured for the tax year of receiving the lump sum and the two previous and following tax years. So it also follows that if there is a big reduction in the later two years, that can over-ride any increase in the previous two and keep the average at no increase or an increase less than 30% of the lump sum value, so within the limit.

k6chris wrote: »

4) Can I add any of the TFLS into an ISA as an alternative?

As much as the ISA limit allows.

mgdavid

k6chris wrote: »

.........

Does anyone do the 100% work --> 100% retire model anymore??

Thanks

Certainly - work is highly over-rated.
(said he with the wisdom of hindsight)

k6chris

So my thinking, to allow a phased approach to retirement is;

1) Take my DB/DC pension, from the company I left. This would invoke a reduced payment due to 'neutral' ERDF, which is a compounded reduction 4% (I believe) back from 63, per year (I am 53). This would only affect the DB part and not the DC part. The DC plus a small amount of DB reduction part would cover the TFLS. Reason for this is partly to be ready to downsize job and partly a lack of trust in the government changing rules or indeed the company changing them. I figure you have more protection once you have started taking a pension??

2) 25% TFLS goes into ISA / Savings for use as drawdown at some point. This is a nice balance between DB->SIPP transfer, as it gives me 25% of that (potential) benefit with 75% still being much lower risk DB.

3) At same time, raise my LGPS AVC payments, funded out of taxable income from current job. This would be less than 30% PA of TFLS so should not trigger a cycling event. One question, as I would have pension and employment income, more of my total annual income would be in the 40% bracket, but can I use all of that to get tax relief against or only the earned bit? My plan is based increasing AVC payments and getting 40% tax relief against a big chunk of that??

4) Once I have downsized jobs, probably 1-2 years, move LGPS AVC into current SIPP. At this stage I am likely to be 55 so can trigger DD of SIPP if I wish, or simply top up DB income from ISA pot.

5) Any new job, continue to make pension contributions to maximise tax relief.

6) Take LGPS / state pension at 67.

Thoughts please? What am I missing / not thought of?

Thanks

kidmugsy

k6chris wrote: »

I figure you have more protection once you have started taking a pension??

Hard to say. In terms of the Pension Protection Fund, you're not fully protected until you reach Normal Retirement Age for the scheme.

In terms of being protected from the whims of government - probably you would have more protection; there are still substantial inhibitions about trying to pass retroactive legislation.

In terms of being protected from changes in the pension scheme, I'd think you would, in practice, be likely to be better protected.

jamesd

k6chris wrote: »

1) Take my DB/DC pension, from the company I left. This would invoke a reduced payment due to 'neutral' ERDF, which is a compounded reduction 4% (I believe) back from 63, per year (I am 53).

4% total for ten years would be very low. 4% for each year and a total of 40% seems more likely. Check carefully, a mistake would be very expensive.

k6chris wrote: »

I figure you have more protection once you have started taking a pension??

Usually yes but not guaranteed.

k6chris wrote: »

3) At same time, raise my LGPS AVC payments, funded out of taxable income from current job. This would be less than 30% PA of TFLS so should not trigger a cycling event.

There is no 30% per year rule in the recycling rules. You appear to be referring to the cumulative rule, which is:

a. work out your average pension contributions from three tax years before you took the lump sum and earlier, allowing for any routine increases.
b. add up the pension contributions from teh two tax years before you took the lump sum, the tax year you took it and the two following tax years. Subtract five times the number from this to get the total increase over the five tax years.
c. if the number from b is not more than 30% of the tax free lump sum amount taken, it's within the no penalty part of the recycling rules. If it's above 30% the portion above is subject to the penalty.

k6chris wrote: »

One question, as I would have pension and employment income, more of my total annual income would be in the 40% bracket, but can I use all of that to get tax relief against or only the earned bit? My plan is based increasing AVC payments and getting 40% tax relief against a big chunk of that??

Money from the pension is normal PAYE income just without NI deductions. It's part of your taxable income and that plus your pay and other taxable income is all added together to get the amount on which you get 50% relief.