Age 55, Can I max pension contribution and immediately draw 25% tax free

Lowtrawler

I am a contractor and have been working through my own Limited Company. With the changes to IR35, I am closing my company and future contracts will be through an Umbrella. I am aged 55. 

The Umbrella companies I am looking at are able to pay into a personal pension using salary sacrifice which will save me the employers National Insurance, employees National Insurance and higher rate tax. I am considering paying in the maximum £40k each year and taking out the £10k tax free lump sum. My understanding is that so long as I don’t draw on the other £30k, it won’t effect my ability to keep paying in the full £40k each year. Is this correct and are there any pitfalls I should be aware of going down this route?

dunstonh

Yes it is correct.
The main consequence is that it will prevent you from using phased flexi-access drawdown later.   So, you should model what you want to do vs phased and see which comes out best. (i.e. you may save some tax now but it may cost you tax later)

Lowtrawler

dunstonh said:

Yes it is correct.
The main consequence is that it will prevent you from using phased flexi-access drawdown later.   So, you should model what you want to do vs phased and see which comes out best. (i.e. you may save some tax now but it may cost you tax later)

Thanks, I don't anticipate being a higher rate tax payer when living off my pension and so the significant savings I can make now are definitely going to be more beneficial than through phased flexi-access drawdown later.

Albermarle

One point is that you will probably be better to use a pension provider that keeps  crystallised and uncrystallised funds clearly separate . It will be easier to monitor what is going on, as you are contributing and withdrawing at the same time .If you take out one penny of crystallised/taxable income ( by accident even ) then you will be restricted to contributing in future .

Lowtrawler

Albermarle said:

One point is that you will probably be better to use a pension provider that keeps  crystallised and uncrystallised funds clearly separate . It will be easier to monitor what is going on, as you are contributing and withdrawing at the same time .If you take out one penny of crystallised/taxable income ( by accident even ) then you will be restricted to contributing in future .

I am with Interactive Investor. I will need to contact them and find out the process.

Albermarle

I am with Interactive Investor. I will need to contact them and find out the process.

This is one of the providers where they do not split your funds . There is just one pot and a % figure of how much is crystallised.

I have no direct experience but it as been mentioned as a negative point by other posters. No doubt you can manage with it if necessary.

Audaxer

Lowtrawler said:
I am considering paying in the maximum £40k each year and taking out the £10k tax free lump sum. My understanding is that so long as I don’t draw on the other £30k, it won’t effect my ability to keep paying in the full £40k each year. Is this correct and are there any pitfalls I should be aware of going down this route?

My understanding is that allowed assuming your annual earnings are at least £40k per annum.

Sailtheworld

I'd double check the tax free lump sum recycling rules especially of you haven't paid in £40k in the previous two tax years before you were 55. 

The recycling rule applies when all of the following conditions are met:

• the individual receives tax-free cash from their pension
• because of the lump sum, the amount of contributions paid into a pension scheme is “significantly” greater than it otherwise would be.
• the additional contributions are made by the individual or by someone else, such as an employer
• the recycling was “pre-planned”.
• the amount of the tax-free cash, taken together with any other such lump sums taken in the previous 12 month period, exceeds
  • £7,500 for events on or after 6 April 2015, or
  • 1% of the standard lifetime allowance for events before 6 April 2015
• and, the cumulative amount of the additional contributions exceeds 30% of the tax-free cash amount.