Recycling and annual allowance queries

fifeken

I'm planning to take out £7,500 TFLS from a pension pot and using it for day to day expenses for a few months, whilst increasing my salary contributions into a Salary Sacrifice pension. I'm limiting it to £7,500 as this appears to be the max amount to ensure I won't fall foul of that particular recycling rule.

Will drawing down from a pension later in the financial year affect the wisdom or otherwise of this plan?


I understand going into drawdown reduces the annual allowance to £4,000. Does this take effect from the year you go into drawdown, as I imagine many people will already have paid more than £4,000 depending on when in the year they enter drawdown? Hopefully the restriction only kicks in for the next financial year.

Brynsam

Not quite sure what exactly you're hoping to achieve so rather hard to comment on 'the wisdom or otherwise' ?

In the first tax year that the MPAA applies, contributions paid to money purchase arrangements after the date of the first trigger event are measured against the MPAA (so no - it doesn't only kick in for the next financial year). For subsequent tax years, all contributions made to money purchase arrangements in a tax year will count towards the MPAA.

fifeken

Brynsam wrote: »

Not quite sure what exactly you're hoping to achieve so rather hard to comment on 'the wisdom or otherwise' ?

I'm hoping to put an extra £10,000 into my current pension at a cost to me of roughly £7,500 thanks to the Salary Sacrifice benefits. The £7,500 deducted from my pay will be replaced by the £7,500 TFLS for day to day spending. I would also get the subsequent gain of 25% tax free of £7,500 on which tax hasn't been paid (that recycling rules are supposed to deter on a larger scale I think). I want to make sure there is no disadvantage to this that I haven't picked up on.

Brynsam wrote: »

In the first tax year that the MPAA applies, contributions paid to money purchase arrangements after the date of the first trigger event are measured against the MPAA (so no - it doesn't only kick in for the next financial year). For subsequent tax years, all contributions made to money purchase arrangements in a tax year will count towards the MPAA.

Thanks, that makes sense (to me anyway) so it's good to hear it from someone else.

kidmugsy

The MPAA applies (I have learnt here) only when you take flexible benefits. If you take your TFLSs and not a penny more, or take more by annuities not by drawdown, or draw a DB pension, you'll be all right. It's using ordinary drawdown beyond the TFLS that can get you in the soup.

If I understand Brynsam aright, you will avoid the soup by means of timing.

Brynsam

fifeken wrote: »

I'm hoping to put an extra £10,000 into my current pension at a cost to me of roughly £7,500 thanks to the Salary Sacrifice benefits.

Just checking....if £7,500 is paid to your pension using salary sacrifice, it is classed as an employer contribution so the amount actually paid in is the amount of 'extra' you will see in your pension pot. Employer contributions don't get tax reclaimed and added to the pot the same way an employee contribution would be topped up.

If you want to get an extra £10,000 in your pot via salary sacrifice, the contribution paid in by your employer needs to be £10,000.

NoMore

Brynsam wrote: »

Just checking....if £7,500 is paid to your pension using salary sacrifice, it is classed as an employer contribution so the amount actually paid in is the amount of 'extra' you will see in your pension pot. Employer contributions don't get tax reclaimed and added to the pot the same way an employee contribution would be topped up.

If you want to get an extra £10,000 in your pot via salary sacrifice, the contribution paid in by your employer needs to be £10,000.

This ^^^. I don't understand what the OP is trying to achieve by withdrawing 7.5k from pension and then replacing it with 7.5k from salary ? Just don't drawdown yet!

fifeken

kidmugsy wrote: »

If I understand Brynsam aright, you will avoid the soup by means of timing.

Exactly what I had hoped for, thanks.

Brynsam wrote: »

Just checking....if £7,500 is paid to your pension using salary sacrifice, it is classed as an employer contribution so the amount actually paid in is the amount of 'extra' you will see in your pension pot. Employer contributions don't get tax reclaimed and added to the pot the same way an employee contribution would be topped up.

If you want to get an extra £10,000 in your pot via salary sacrifice, the contribution paid in by your employer needs to be £10,000.

Yes, I'll increase my %age sacrificed so that £10,000 extra is taken from my salary and paid by my employer into my pot. It'll only reduce my take home pay by around £7,000 due to paying less tax and NI, and the TFLS will make up the difference so I have the same as now for everyday spending. That's if I've understood it all correctly.

fifeken

NoMore wrote: »

This ^^^. I don't understand what the OP is trying to achieve by withdrawing 7.5k from pension and then replacing it with 7.5k from salary ? Just don't drawdown yet!

Salary sacrifice benefits.

NoMore

I don't think your going to make as much as you think you are.


The 7.5k withdrawn from your pension will be subject to income tax, unless you are using your 25% tax free amount to cover this ? Or using UFLPS so 25% of the 7.5k is tax free.


Presuming you are not salary sacrificing enough such that your salary from your work ends up less than £4350 (11850-7500)


EDIT: Never mind re-read the OP and its coming from TFLS

Paul_Herring

NoMore wrote: »

This ^^^. I don't understand what the OP is trying to achieve by withdrawing 7.5k from pension and then replacing it with 7.5k from salary ? Just don't drawdown yet!

£7.5K from TFLS is tax free.

To get £7.5K net from salary (presuming 20% tax payer) would require £11K since tax and national insurance would have to be deducted.

Or, to put it another way, £7.5K from gross would end up being £5,100 net.

NoMore

Ok re read the OP and yes he says 7.5k will be TFLS. That's makes a little more sense