Funding pension pot while sick

Victorwelldue

I understand there are rules around what counts as valid income when it comes to contributing towards pensions but I cant seem to find a definitive answer to the following hypothetical scenario:

I have a DC workplace pension. I also have a private income protection policy that pays out until age 65 should I ever be unable to work through ill health (PHI).

Lets say I become long term sick and my PHI policy pays an income of £2,000 per month and I want to use £500 per month from that pay-out to fund my retirement (not necessarily my workplace pension, could also be starting a SIPP). What are the pension rules in such a scenario?

• Not allowed?
• Allowed with limited contributions?
• Allowed but the payments in would attract no tax relief?
• Allowed but payments in would be penalised from a tax point of view?
• Something else?

From what I have found so far I can see that income from a workplace/group PHI scheme would count as valid income to fund pension but I cant seem to find anything about income from private PHI. I'm hoping that similar rules will apply otherwise would seem rather unfair.

xylophone

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100

The maximum amount of contributions on which a member can have relief in any tax year is potentially the greater of:

• the ‘basic amount’ - currently £3,600, or
• the amount of the individual’s relevant UK earnings that are chargeable to income tax for the tax year.

Where a member’s relevant UK earnings chargeable to tax are less than £3,600, tax relief on the amount of any contribution over the level of their earnings up to the £3,600 limit can only be given if the contribution is paid to a pension scheme that operates the relief at source (RAS) system.

Section 189(2)-(7) Finance Act 2004

For most people the amount of tax relief they can have on their pension contributions is limited to 100% of their relevant UK earnings that are chargeable to income tax for the tax year (there is another low limit for some - see Annual limits above). If relief is sought within the 100% limit an individual may want to establish how the various payments received as part of earnings have been taxed, to see what counts for this limit. The following earnings are examples of relevant UK earnings.

..............

• Permanent Health Insurance (PHI) payments paid by the employer whilst you are still in employment
• 
  

If you were to receive payments from your private PHI, they would not be paid by your employer and apart from that, it seems  (below) that such payments are tax free?

https://helpandadvice.co.uk/permanent-health-insurance/

You might ring HMRC to check?

Marcon

Or rather than trying HMRC,  it might be quicker to get through to TPAS: https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/income-protection

TVAS

The answer is to invest in an ISA. If you had were a member of the works' group PHI plan you could continue being a member of the works scheme. If you take a personal pension plan and you are not sick and add waiver of premium, the plan would pay your pension on your behalf during incapacity. This option is likely to be with an insurance company rather than a SIPP provider.