Multiple pension pots, MPAA, drawdown etc

Username03725

It seems difficult to find a definitive answer to this. At least one of my pension providers has provided ambiguous information, as did the Pension Wise agent who did my review yesterday. Maybe it's the permutations...

I have 4 pension pots; 3 x DC each worth over £100k, and one small DB pot paying about £3500 p.a from next month. SInce redundancy in July I've effectively retired and will live on cash reserves for the next couple of years to give the DC pensions a bit more time to grow, and intend to deposit more cash into one of the pots before April 2022, when my taxable income for the year is clearer.

Here's the question. Looking forward a year or maybe two, when I take funds out of a pension pot how does that affect my drawdown position in the other pots? Specifically I might take either the 25% TFLS from one pot, or take cash in chunks from it probably near the end of the next tax year value around £16k, made up of my whole tax personal allowance + 25% of that as the tax free element. I can't find a definitive answer of how that affects the other pots in terms of how much I can then pay in on top. The reason is that I expect to recieve a reasonable inheritance in the next year or so (assets need to be sold but that may move it into the 22/23 tax year) but if that doesn't materialise in time I may withdraw pension funds but would like to be able to ferret some of the inheritance back into my pensions at a later date.

Option 1: Take the 25% TFLS from Pot 1, leaving Pots 2 & 3 untouched. Does Pot 1 then move into Drawdown and I have to then take an amount per year as income, or can I just have the 25% and leave the rest? And does the MPAA limit of £4000 then kick in for all pots, or just Pot 1?

Option 2: I take an ad-hoc amount from Pot 1 of approx £16500 (pers tax allow + 25%). Does the MPAA kick in at this point, and if so is that for Pot 1, or Pots 1-3?

Does taking the income from the DB pot (Pot 4) have any bearing on the MPAA in the DC pots?

Thanks

NoMore

If MPAA is triggered (by taking taxable income from a DC pot) then it applies to all your contributions from then on, whether to its the pot you drawdown form or others.

Taking your DB does not trigger the MPAA.

Taking only 25% tax free does not trigger the MPAA.

Username03725

Thanks NoMore. And does taking the 25% TFLS then force me to also begin taking income from that pot? That does seem to be the case from what I read in various places.

MX5huggy

Username03725 said:

Thanks NoMore. And does taking the 25% TFLS then force me to also begin taking income from that pot? That does seem to be the case from what I read in various places.

No, you can just take the TFLS, the pot is then crystalised. Take 1p over this then MPAA is triggered.

The other issue with your plan for the inheritance, if I understand, it is that you can’t pay in more than £2880 (£3600 gross) per year to a pension if you have no earned income. 

Username03725

Thanks. Concise, answered the question exactly. Have the rest of the morning off.

Was aware of the £3600 limit, although the agent couldn't explain where it came from. I believed it to be £4000 but it's irrelevant in the long term.

squirrelpie

The £3600 and the £4000 are different. The £4000 is the MPAA restricted limit and limits how much you can pay in however much you earn. The £3600 is a concession and is what you can pay in even if you don't earn anything.

dunstonh

Was aware of the £3600 limit, although the agent couldn't explain where it came from. I believed it to be £4000 but it's irrelevant in the long term.

The £3600 allowance for non or very low earners comes from the Welfare Reform and Pensions Act 1999 and was introduced in 2001.

The £4000 MPAA has nothing to do with the £3600 contribution allowance.  it is a restriction on the annual allowance of £40,000.  However, it's irrelevant to a non-earner that does not intend to work again.  Although it is an admin task if you have multiple pension providers as you need to notify each when you trigger the MPAA

Albermarle

I have 4 pension pots; 3 x DC each worth over £100k, and one small DB pot paying about £3500 p.a from next month. 

Do not underestimate the value of a DB pension . One paying £3.5K pa and probably inflation linked etc is worth in excess of £150K in reality .

Due to the complications of drawdown ( and hence your questions) it can make sense to combine the DC pots into one ( or two )larger ones  to make it easier to manage . Transferring DC pensions is straightforward, although ideally probably better to combine them before you start taking the tax free cash etc .

In any case you may find that if you have an older pension set up many years ago, it may well not support drawdown , so you would need to transfer it anyway,  if you ever wanted to drawdown from it.

jamesd

Do be sure to take sufficient taxable income to use your full income tax personal allowance. That's a use it or lose it allowance. May be none left this year since redundancy in July.

Triggering the MPAA probably does matter to you this tax year because of the July redundancy, which means your total pay for the year was probably more than 4k and you can make gross contributions up to your gross pay, or 40k plus annual allowance carry-forward if this combination is less. So take tax free lump sums or money outside a pension first to do that before you trigger the MPAA.

Other than for possible tax efficiency there's no reason to avoid taking money from pensions and take it outside a pension instead, since you're just substituting investments in one place, likely an ISA, for investments in the pension.