Tax relief on pension contributions while drawing from a pension

Tony_J

Hello
I have a defined benefit pension from a previous employer that is due to start paying around 5k per annum in under a year (I think there is no provision to delay the start in the scheme).  I am currently contributing a large percentage of my salary (£1800 per month) to my employers defined contribution scheme as a way of saving tax free.  My intention is to continue working for several years.  Once I start drawing from the defined benefit scheme, will that reduce the tax relief I get on my current contributions?

While seeking advice, if I could ask another question.  I have 3 different defined contribution schemes.  My intention is to use these funds for drawdown.  Should I be planning on amalgamating these 3 schemes at some time to make things simpler

Dazed_and_C0nfused

Starting a defined benefit pension won't reduce the tax relief available or limit the amount you can contribute.

If anything it could increase the tax relief.

If you want to make things simpler or can save on charges whilst keeping your preferred investment portfolio then amalgamation would be the logical thing to do.  But you don't need to do that. 

The small pots rule may be a valid reason for keeping them as 2 or 3 separate pensions.

Tony_J

Thanks that's a relief. 
I had read somewhere about the tax relief limit dropping from around 40k to about 4k after taking funds and was worried drawing a pension may do the same.  From you advice I looked up MPAA.  So I think this means it wont affect my tax relief because its a defined benefit pension I'll be getting money from.

"If anything it could increase the tax relief."  Is this because 25% of the pension should be tax free.

The small pots rule I just looked up isn't relevant to me as the smallest fund is 20k (I had just realised that fund is charging the maximum fee it can (0.75%).  So I'm considering moving it to vanguard, who I have my ISA with.  My current fund is with Scottish widows charging 0.48%.  I don't feel impressed with them as a company, but my employee chose them.

Dazed_and_C0nfused

Tony_J said:

Thanks that's a relief. 
I had read somewhere about the tax relief limit dropping from around 40k to about 4k after taking funds and was worried drawing a pension may do the same.  From you advice I looked up MPAA.  So I think this means it wont affect my tax relief because its a defined benefit pension I'll be getting money from.

"If anything it could increase the tax relief."  Is this because 25% of the pension should be tax free.

The small pots rule I just looked up isn't relevant to me as the smallest fund is 20k (I had just realised that fund is charging the maximum fee it can (0.75%).  So I'm considering moving it to vanguard, who I have my ISA with.  My current fund is with Scottish widows charging 0.48%.  I don't feel impressed with them as a company, but my employee chose them.

There are no "funds" with a DB scheme.

You will now have more taxable income so could be paying higher rates of tax (21% or 40% instead of 20% for example) or be liable to the High Income Child Benefit Charge and the pension contributions could benefit from increased tax relief as a result.

Also, defined benefit pensions do not have a 25% tax free element, that's just defined contribution schemes.

Defined benefit schemes have a (tax free) pension commencement lump sum, the amount of which is determined by the scheme rules.  Often a multiple of the DB pension.

Albermarle

"If anything it could increase the tax relief."  Is this because 25% of the pension should be tax free.

I think it meant that if the DB scheme pushed you into paying 40% tax on your combined income ( or more 40% tax than you pay now) then you could maybe get more tax relief at 40% rather than 20%.

The small pots rule I just looked up isn't relevant to me as the smallest fund is 20k (I had just realised that fund is charging the maximum fee it can (0.75%).  So I'm considering moving it to vanguard, who I have my ISA with.  My current fund is with Scottish widows charging 0.48%.  I don't feel impressed with them as a company, but my employee chose them.

0.75% is not high for a small pension = £150 pa. Although typical Vanguard cost would be around £80 pa.

Anyway the main point is not minor differences in fees, but how the pensions are invested, whether as three separate ones or just one. Probably for drawdown, you will find it easier with just one pension, less potential issues with HMRC for one thing. Although if the SW one is your current works pension, you will have to hang on to that whilst you are still with that employer.

Linton

Tony_J said:

Thanks that's a relief. 
I had read somewhere about the tax relief limit dropping from around 40k to about 4k after taking funds and was worried drawing a pension may do the same.  From you advice I looked up MPAA.  So I think this means it wont affect my tax relief because its a defined benefit pension I'll be getting money from.

"If anything it could increase the tax relief."  Is this because 25% of the pension should be tax free.

The small pots rule I just looked up isn't relevant to me as the smallest fund is 20k (I had just realised that fund is charging the maximum fee it can (0.75%).  So I'm considering moving it to vanguard, who I have my ISA with.  My current fund is with Scottish widows charging 0.48%.  I don't feel impressed with them as a company, but my employee chose them.

The £4K MPAA limit only applies if you take taxable money from a DC pension.

Tony_J

Thanks Dazed_and_C0nfused
That's news to me about the tax status on my DB scheme.  I had intended to take the higher income and forego the lump sum as I'm still working and don't need the capitol.  But guess I need to rethink that in light of the tax implications

Dazed_and_C0nfused

Tony_J said:

Thanks Dazed_and_C0nfused
That's news to me about the tax status on my DB scheme.  I had intended to take the higher income and forego the lump sum as I'm still working and don't need the capitol.  But guess I need to rethink that in light of the tax implications

Tax is unlikely to be the most important factor with that choice.

You need to look at what the commutation factor is.

Tony_J

I guess your right about that, though of course how long I'm likely to live is relevant and that's an unknown. My gut feeling would be to maximise this portion to be a guaranteed income no matter how long I live and use my DC as drawdown (which would eventually run out if I live long enough).  Although an option could be to take the lump sum and reinvest it in my current pension (by increasing my contribution through salary sacrifice).  I'll need to calculate how long it would take to get the lump sum back in higher payments and consider how likely I am to reach that age.

OldBeanz

Tony_J said:

I guess your right about that, though of course how long I'm likely to live is relevant and that's an unknown. My gut feeling would be to maximise this portion to be a guaranteed income no matter how long I live and use my DC as drawdown (which would eventually run out if I live long enough).  Although an option could be to take the lump sum and reinvest it in my current pension (by increasing my contribution through salary sacrifice).  I'll need to calculate how long it would take to get the lump sum back in higher payments and consider how likely I am to reach that age.

If you live to retiral age your life expectancy will be about 86+ - if you are relatively healthy then you can expect to Iive to nearer 90.
Minimising your lump sum and salary sacrificing your pension through your DC would be the choice of many on here.
Have you any plans for the lump sum.

Tony_J

Have you any plans for the lump sum.

Not really.  My have no debt.  About 4 years worth of salary in savings and investments.  My wife has no private pension.  So a big factor is to ensure if I pop my clogs first, She has income.  Which (among other considerations) makes me think drawdown is the better option for my pension funds.  But the little diversity of the DB income seems preferable to having all my eggs in one basket.