What happens when you take 25% tax free from your pension.

splodge2001

My husband is nearly 55 and I was wondering about moving £40k into his pension scheme for the 20% uplift. We could then take it as the 25% tax free amount, leaving the tax rebate invested but how does it affect his pension moving forward?

Steve182

I believe taking tax free lumps (over the small pot allowance)  would trigger MPAA, meaning that you would be limited to a maximum annual pension contribution of £4K/year afterwards.

dunstonh

My husband is nearly 55 and I was wondering about moving £40k into his pension scheme for the 20% uplift.

It is not a 20% uplift.  It is a 20% relief.  i.e. £40k into the pension will cost £32,000 (20% of £40k = 8k).

We could then take it as the 25% tax free amount, leaving the tax rebate invested but how does it affect his pension moving forward?

Its means 25% is not available to use later when it may be needed more or be more effectively used.

edit: corrected figures. Thanks garmeg.   (a bit of autopilot with tax free cash figures on the mind)

NedS

Steve182 said:

I believe taking tax free lumps (over the small pot allowance)  would trigger MPAA, meaning that you would be limited to a maximum annual pension contribution of £4K/year afterwards.

No, the MPAA is only triggered if you take any taxable income. So long as you only take the tax free lump sum you will not trigger the MPAA.

bigadaj

Does your husband have more than £40,000 spare earnings in the tax year as he can't contribute more than he earns.

garmeg

dunstonh said:

My husband is nearly 55 and I was wondering about moving £40k into his pension scheme for the 20% uplift.

It is not a 20% uplift.  It is a 20% relief.  i.e. £40k into the pension will cost £30,000 (20% of £40k = 10k).

We could then take it as the 25% tax free amount, leaving the tax rebate invested but how does it affect his pension moving forward?

Its means 25% is not available to use later when it may be needed more or be more effectively used.

Oops @dunstonh : £32,000 not £30,000 and £8,000 not £10,000  

zagfles

splodge2001 said:

My husband is nearly 55 and I was wondering about moving £40k into his pension scheme for the 20% uplift. We could then take it as the 25% tax free amount, leaving the tax rebate invested but how does it affect his pension moving forward?

This could be seen as recycling, google "hmrc recycling rules". And yes it can be recycling even if you make the contribution first and then take the tax free cash.

Also you need to consider the annual allowance, also that he has sufficient income to get tax relief on the contribution.

As to what happens, once the 25% is taken the pension is crystallised so no more tax free cash from it. If he wants to contribute more, that'll go into a separate "uncrystallised" pot from which more tax free cash can be taken. Or he could partially crystallise, ie split the pot and take 25% of part of the pension, leaving the rest uncrystallised which can then be added to.

splodge2001

He hasn't made a personal contribution for 10 years. We pay a regular contribution from our company. His PAYE earnings are minimal but I was under the impression we could backdate 6 years.

zagfles

You can't get tax relief on personal contributions of more than 100% of relevant earnings (or £3600 if earning less than £3600) gross so that's 80% net. There is NO carryforwards or backdating. Relevant earnings is basically earned income (not dividends etc). See https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

This doesn't apply to contributions direct from the company, but of course you can't get personal tax relief on contributions from the company, though you can offset against corp tax.

Don't confuse this with the annual allowance, which does allow carry forwards. The tax relief limit above is a separate limit, nothing to do with the annual allowance.

You also need to look at the recycling rules.

jamesd

Company contributions will reduce the company tax bill so can be worthwhile. No extra relief will be added to company contributions. The company contributions don't count towards his income and he gets e5% dded to those to give him 20% basic rte relief even on money within his income tax basic rate band.

Company and gross value of personal contributions are compared to the 40k annual allowance. Unused allowance from the previous three years is also available.

While there are restrictions on recycling of pension money they only apply to the Pension Commencement Lump Sum that you can take before a drawdown income (or various not relevant other things). You (he...) can:

1. take up to £7,500 of PCLS per rolling 12 month  period (not tax or calendar year) and place the 75% remainder (£22,500) into flexi-access drawdown taking nothing from this to avoid triggering the MPAA restriction to 4k of contributions per year.

2. take the whole of a pot worth up to 10k as a small pot, up to three times in your life. You're allowed to use transfers to create and adjust pot sizes. For convenience Hargreaves Lansdown will do this for you in the background so if you were 55 today you could transfer the 30k to them and ask for three 10k small pot payments. These don't count for the recycling rule even though 25% is tax free.

So a possible approach might be:

A. for three years
a. take a 10k small pot payment leaving 30k
b. take a 25% tax free PCLS of £7,500 from the 30k and place the remaining 22.5k into flexi-access drawdown

B. that used all 3 permitted small pots so now continue with just A.b.