Drawing DB Pension and Contributing to a Workplace Pension.

lisboa84

Hi folks,

My old man (late 50's) decided to retire last year with a DB pension paying him around 13,000 a year. This has been his only source of income so he was paying almost nothing in tax.

A couple of weeks ago he made a U turn and decided to return to work (different employer, same salary).  

From what I've read, the DB pension has not triggered the MPAA, so the maximum workplace pension contributions allowed for tax relief are 40k a year, or 100% of earnings. 

But are there any obstacles to him simultaneously drawing a DB pension whilst also contributing to the new employer's pension scheme for tax relief? Or any other rules or regulations to be aware of?

Thanks in advance.

zagfles

Did he get a tax free lump sum when the DB pension got put into payment? If so the possibility of recycling, unlikely as it doesn't sound pre-planned, but google "HMRC recycling rules"

lisboa84

Thanks for the reply and for the heads-up about the HMRC recycling rules. He did receive a lump sum from the DB but his contributions towards a new employer pension would be entirely funded from the new salary. The lump sum will play no part. 

He would ideally contribute any amount over the 40% tax threshold into the pension to gain tax relief on this - and thus bringing him back into the 20% bracket.

So the obstacle I see is that - whilst he won't fund a new pension with money from the existing DB pension - the DB pension is a contributing factor towards pushing him slightly into that 40% bracket. 

Would this be a breach of the HMRC recycling rules?

Albermarle

There is no need to prove a direct link between the TFLS and the increased pension contributions .
Very basically if you take a TFLS and then your pension contributions increase significantly, it can be seen as recycling.
You should check the six tests.
Recycling of tax-free cash - Royal London for advisers

On the other hand it seems HMRC do not see pursuing  individuals for recycling as a priority and it has been said ( maybe not true ) that in fact nobody has ever been 'caught' . The rules were apparently designed to avoid organised fraud.

jamesd

New job is one of the exceptions that allows a change in contributions without tax free lump sum recycling restrictions. So is "ordinary retirement planning" and he genuinely did intend to retire so that should cover him.

There are no restrictions on recycling income into pension contributions, only the tax free lump sum is limited.

If he can afford it the optimal strategy is to contribute 100% of pay since this makes at least 25% free of income tax when drawn. Subject to the annual allowance and carry forward limit as well.

When using salary sacrifice for higher rate pay, concentrate the sacrifice into as few months as possible at minimum wage. This saves you extra employee NI because NI is calculated for each individual pay period while the income tax saving is annual.

lisboa84

Thanks so much folks.

jamesd said:

If he can afford it the optimal strategy is to contribute 100% of pay since this makes at least 25% free of income tax when drawn. Subject to the annual allowance and carry forward limit as well.

When using salary sacrifice for higher rate pay, concentrate the sacrifice into as few months as possible at minimum wage. This saves you extra employee NI because NI is calculated for each individual pay period while the income tax saving is annual.

Thanks James, I'll certainly look into this for him.