Paying into DC Pension in the same year as receiving benefits

nivag

Hi all,

I have taken 25% tax free amount from my DC pension (but no taxable amounts). I will start receiving my DB pension in January next year. I still work, and think I can pay 80% of my earnings into my SIPP from this year (prior to receiving my DB pension), but wanted to check I wasnt constrained by the £4k limit or anything like that.

Thank you

AlanP_2

You aren't constrained by the MPAA (the £4k limit) as that only kicks in if any taxable income is withdrawn from the DC.

You do need to be aware of, and consider whether the rules that aim to minimise recycling of TFLS cash might apply, see https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/recycling-of-tax-free-cash/ for an explanation / flow chart.

Albermarle

You can continue to pay into the SIPP after you start getting your DB pension . Even if you have stopped working , you can still add £2880 pa - more obviously if you are still working.

jamesd

There are two independent limits:

1. the annual allowance of 40k plus carry-forward of unused allowance from the previous three tax years. All contributions to pensions in your name, DC and DB, from anyone including you and an employer count towards this.
2. your gross pay, after any salary sacrifice. Only personal contributions by you count towards this, not salary sacrifice (counts as employer) or employer matching/3%.

You must stay within both limits. If uncertain about gross pay you can go over without trouble and once the tax year is over tell the pension firm your actual gross and ask them to pay you a "refund of excess contributions lump sum" within six years, but do it sooner if you can.

So, 80% of earnings will be grossed up to 100% and that'll be OK if your personal contribution to any work pension is nil. But you're probably in some work pension and it'll count unless it's salary sacrifice.

You can continue to make pension contributions as normal when receiving a DB pension and there are no limits on recycling DB income into new pension contributions, other than the usual annual limits.

Taking a tax free lump sum and taking income from a DB pension don't trigger the MPAA reduction to 4k a year for DC pensions. Taking money from a flexi-access drawdown pot or a lump sum using UFPLS is what does trigger it.

nivag

Thanks for this. Say my tax free amount was £100k, but my total pension contributions are less than £30k, I read it as that it is less than 30%, it would not be considered recycling?

Also, AlanP_2 said 'only kicks in if any taxable income is withdrawn from the DC.', does this mean that the income I get from a DB does not trigger the MPAA.

Again, many thanks for your help

Albermarle

does this mean that the income I get from a DB does not trigger the MPAA.
That is correct 

nivag

Thanks Albermarle, and JamesD looks like we had a cross post where you answered my question too.

Thanks guys

AlanP_2

nivag said:

Thanks for this. Say my tax free amount was £100k, but my total pension contributions are less than £30k, I read it as that it is less than 30%, it would not be considered recycling?

Also, AlanP_2 said 'only kicks in if any taxable income is withdrawn from the DC.', does this mean that the income I get from a DB does not trigger the MPAA.

Again, many thanks for your help

That is true but have they / would they increase by 30% compared to what was being contributed pre-TFLS (Test 3 in the flowchart)?

You are probably fine but worth checking.

An alternative, that doesn't raise recycling issues is to to funnel some of the TFLS through a spouse / partner's pension.

nivag

So if the contribution is more than 30% than pre-TFLS, but still less than (more than 10% less) than 30% of the tax free cash, I read the flow chart as saying  no recycling has happened. I note you say I am probably fine, but really dont want to take any chances here, as the penalties seem punitive, sorry if I am labouring the point.

Unfortunately I cant use my wifes pension as she doesnt work, and we already put £2,880 every year into her SIPP.

Funkyfreddy

jamesd said:

There are two independent limits:

1. the annual allowance of 40k plus carry-forward of unused allowance from the previous three tax years. All contributions to pensions in your name, DC and DB, from anyone including you and an employer count towards this...

DB contributions (employer or employee) are not part of your AA usage. You need the Pension Input Amount as the increase in benefits over the year from the administrators. This won't necessarily be known until after the end of the year.

jamesd

Funkyfreddy said:

jamesd said:

There are two independent limits:

1. the annual allowance of 40k plus carry-forward of unused allowance from the previous three tax years. All contributions to pensions in your name, DC and DB, from anyone including you and an employer count towards this...

DB contributions (employer or employee) are not part of your AA usage. You need the Pension Input Amount as the increase in benefits over the year from the administrators. This won't necessarily be known until after the end of the year.

Yes, the figure to use for DB is the PIA.