can I continue to contribute into workplace pension after taking 25% tax free?

Baldbrewer

Hi all,
Newbie here after some advice.
to quote Baldrick "I have a plan"

we have recently downsized and paid off our mortgage.
I am 55 next month and have a DB pension from 2001-2008 which has been bubbling away since I left the company.
I approached the administrator last year enquiring about transferring it across to my  DC pension(current value of DC £104K) but after much research decided against it.
the DB pension quoted last year at age 65 was £6.6K per annum.

we took a £20K loan out to cover the moving costs which along with a small CC debt >£1600 and the balance of a car loan (£6K) which I would like to pay all these off with a 25% tax free sum from my current DC pension.

this would free up £1008 per month.

I would like to use a portion of this to increase my contributions via salary sacrifice to bolster my DC pension with Aegon retireready.
then invest some in an ISA and rebuild my EF.

Can I stay in a company pension scheme after taking a TFLS?
I have a small EF of £1K as it took a hiding after purchases for new house.
I have no other debt other than the above.

I'm not planning on giving up work before 64ish as I don't think currently  have enough to live to our current standard.
why 64? my wife will draw her SP then.


any thoughts welcome.

Best regards, S,

Albermarle

Can I stay in a company pension scheme after taking a TFLS?

From a legal/pension rules point of view this would not be a problem. However your workplace provider may not be able to facilitate it in their system. You would need to check with them.

If it is not possible, then you can just start a new pension separately for new contributions.

There are some rules about recycling tax free cash from a pension, back into a pension, to restrict it being abused.

If you say how much the TFLS will be approx; what your current pension contributions are, and what you think they will be when they are increased, you will probably get some opinions on whether it could be deemed as recycling or not.

Linton

Legally you can continue to pay into a pension having taken the TFLS.  The contributions are treated effectively like you having another DC pot with its own TFLS.

However it is quite possible that your employer's scheme will not support this level of complexity.  So you will need to talk to your pension administrator.

INcidentally you would have found it difficult to move your DB pension to a DC scheme since you would have had to receive and pay for an IFA recommendation which is likely to be "no".  Your DC pension scheme would be unlikely to accept a transfer-in without IFA approval.

Baldbrewer

thank you for the quick replies, much appreciated!

Albermarle,
TFLS would be circa £26K dependent on performance in the next month.
my 6% is currently £233 which is matched by employer.
I "assume" a salary sacrifice would save me some tax & possibly NI?
I would like to increase to possibly £450 and then add yearly pay rises via this method if its allowed of course.

Linton,
thank you for your reply, yes when researching it became apparent I could have paid an amount of money just to be told no lol.


 

Albermarle

It does seem that you will increase your contributions enough to fall foul of the recycling rules.

Salary sacrifice does not mean you will get any more tax relief than by the other contributions methods used. In other words you always end up with the same amount of tax relief on contributions, whichever contribution method is used. However with SS you do save on some NI, so it is better this way.
However as already said you need to check with the pension provider about taking a TFLS whilst you are still contributing,  as it may not be possible.

Pat38493

See here for the HMRC pension recycling guidelines

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810

It appears to me that it's a bit of an edge case.  What you are doing could meet the technical amount limits to be considered as pension recycling.  However, the guidance says that what you are doing must have been pre-planned with the express intent of recycling your tax free cash.  If you are taking the tax free cash to pay off debts, and then you are paying your "spare" money each month into the pension, I would be arguing that recycling the tax free amount is not your motivation there.

In fact what you are doing is quite similar to one of the strategies I'm considering.

Unfortunately from what others have posted here, there has never been any legal test cases or published information about anyone being penalised for recycling - indeed one might get the impression that in practice HMRC doesn't enforce it at all.  However I guess it's at your own risk.

Downsizing to pay off your mortgage but then taking out a loan to pay the moving expenses seems like an interesting strategy by the way!

Albermarle

@Pat38493

You are right, I misread one of the conditions on a different webpage about recycling. ( I have edited my post) 

Like you say though the chance of the OP being penalised seems pretty small, especially as the numbers involved are not huge.

Baldbrewer

Good morning all and thank you for your replies,

Regarding downsizing, being able to pay the mortgage off was just an additional benefit of moving to a smaller property in a village location. 
Our historically low fix rate mortgage deal also came to an end so it made sense to get rid of our biggest outgoing as the monthly payment was going to increase substantially.
we hadn't moved for 22 years and it had certainly become more costly lol hence the loan.

I contacted Aegon and received the following reply:
In regard to withdrawing from your plan please see the available options below, please read over the below options and see what is best for you. Once you know which withdrawal option you would like to go for, please let us know and we'll be happy to help.

1) You can opt to do nothing with your Pension at all, whereby you leave it where it is and then decide at a later date what to do with it. Once you have a decided on how you want to access your benefits the below options are available:

2) You can take all your plan out at once as a full lump sum (known as an Uncrystallised Funds Pension Lump Sum, or UFPLS), closing the policy altogether. The lump sum has 25% tax free cash, and the rest of the lump sum (75% of it) is taxable as income. *

3) Similar to option 2, you can take a partial lump sum (or partial UFPLS as its known), where again, whatever amount you take out, 25% of it is tax free: 75% of the lump sum is taxable as income. You do not get your tax-free cash out as a lump sum at once, you get a little bit of tax-free cash every time you remove money in this way. (Example: you withdraw £10,000 as partial UFPLS/lump sum: 25% of £10,000 is tax free – in this case £2,500 – and 75% of £10,000 is taxable as income – in this case £7,500). The rest of the money you don’t take stays in the current plan, for you to decide what to do with it at a later stage. *

*Option 2 and 3 trigger something called the Money Purchase Annual Allowance, which limits the amount of money you can then pay back into all pensions, to £10,000 for this tax year. If you pay more than this amount, and you are subject to this limit, you will incur a tax charge. For more information on this we recommend speaking to an IFA.

4) If your pension pot is £10,000 or less you are eligible to access this through a process called small pots. You are entitled to 3 in your lifetime and with each cash lump sum payment you get 25% tax free, and the remaining 75% taxed as income. As the cash lump-sum payment is classed as income, taking this option may put you in a higher tax bracket.

5) You take part or all your tax-free cash as a lump sum, and then invest the rest of the money in a different product called a Flexi Access Drawdown. This is an income plan, where you have the flexibility to choose what income you need and when you take it. It’s a fully online plan that you need to manage yourself, which involves requesting income and managing or switching funds yourself. Any income you take is based on the plan value, and as it is still invested the value can go up and down. If you would like to go through Flexible Access Drawdown, you would be required to have a phone consultation with the Assist team.

6) You take tax free cash as a lump sum, and the rest of the plan goes into an Annuity, which is an income plan that provides a guaranteed or flexible income for life (depending on the contract). The remaining money in the Annuity disappears, so there is no longer a value, and then an income payment is calculated: this income is fixed so it cannot normally be changed, but it is guaranteed, so will pay you the same amount, either for the rest of your life or the rest of the contract time. Aegon do not offer annuities. If this is the withdrawal method, you wish to pursue you can transfer your policy to another pension provider who does offer this option.

I didn't think this clarified if I could stay in plan so I emailed them and their reply was "sure give us a call and let us know what option you want to take".

I have made a pensionwise appointment for next week.

regarding the pension recycling issue , to avoid any possible issues am I to understand that if I keep my monthly contribution the same this would be ok?

Maybe I could diversify my portfolio with the additional fund that I had earmarked for the pension increase, does anybody have suggestions on what makes a balanced cross platform portfolio?

sorry for yet more questions but I want to learn. 

Linton

Baldbrewer said:

Good morning all and thank you for your replies,

Regarding downsizing, being able to pay the mortgage off was just an additional benefit of moving to a smaller property in a village location. 
Our historically low fix rate mortgage deal also came to an end so it made sense to get rid of our biggest outgoing as the monthly payment was going to increase substantially.
we hadn't moved for 22 years and it had certainly become more costly lol hence the loan.

I contacted Aegon and received the following reply:
In regard to withdrawing from your plan please see the available options below, please read over the below options and see what is best for you. Once you know which withdrawal option you would like to go for, please let us know and we'll be happy to help.

1) You can opt to do nothing with your Pension at all, whereby you leave it where it is and then decide at a later date what to do with it. Once you have a decided on how you want to access your benefits the below options are available:

2) You can take all your plan out at once as a full lump sum (known as an Uncrystallised Funds Pension Lump Sum, or UFPLS), closing the policy altogether. The lump sum has 25% tax free cash, and the rest of the lump sum (75% of it) is taxable as income. *

3) Similar to option 2, you can take a partial lump sum (or partial UFPLS as its known), where again, whatever amount you take out, 25% of it is tax free: 75% of the lump sum is taxable as income. You do not get your tax-free cash out as a lump sum at once, you get a little bit of tax-free cash every time you remove money in this way. (Example: you withdraw £10,000 as partial UFPLS/lump sum: 25% of £10,000 is tax free – in this case £2,500 – and 75% of £10,000 is taxable as income – in this case £7,500). The rest of the money you don’t take stays in the current plan, for you to decide what to do with it at a later stage. *

*Option 2 and 3 trigger something called the Money Purchase Annual Allowance, which limits the amount of money you can then pay back into all pensions, to £10,000 for this tax year. If you pay more than this amount, and you are subject to this limit, you will incur a tax charge. For more information on this we recommend speaking to an IFA.

4) If your pension pot is £10,000 or less you are eligible to access this through a process called small pots. You are entitled to 3 in your lifetime and with each cash lump sum payment you get 25% tax free, and the remaining 75% taxed as income. As the cash lump-sum payment is classed as income, taking this option may put you in a higher tax bracket.

5) You take part or all your tax-free cash as a lump sum, and then invest the rest of the money in a different product called a Flexi Access Drawdown. This is an income plan, where you have the flexibility to choose what income you need and when you take it. It’s a fully online plan that you need to manage yourself, which involves requesting income and managing or switching funds yourself. Any income you take is based on the plan value, and as it is still invested the value can go up and down. If you would like to go through Flexible Access Drawdown, you would be required to have a phone consultation with the Assist team.

6) You take tax free cash as a lump sum, and the rest of the plan goes into an Annuity, which is an income plan that provides a guaranteed or flexible income for life (depending on the contract). The remaining money in the Annuity disappears, so there is no longer a value, and then an income payment is calculated: this income is fixed so it cannot normally be changed, but it is guaranteed, so will pay you the same amount, either for the rest of your life or the rest of the contract time. Aegon do not offer annuities. If this is the withdrawal method, you wish to pursue you can transfer your policy to another pension provider who does offer this option.

I didn't think this clarified if I could stay in plan so I emailed them and their reply was "sure give us a call and let us know what option you want to take".

I have made a pensionwise appointment for next week.

regarding the pension recycling issue , to avoid any possible issues am I to understand that if I keep my monthly contribution the same this would be ok?

Maybe I could diversify my portfolio with the additional fund that I had earmarked for the pension increase, does anybody have suggestions on what makes a balanced cross platform portfolio?

sorry for yet more questions but I want to learn. 

1) Aegon are saying that those are the 6 things you can do with your pension.  These appear to be standard for older pension schemes.  Taking the TFLS and leaving the rest invested is part of Flexi Access Drawdown, option (5), which Aegon seem to  regard as a separate product rather than a feature  of the current pension scheme.  So that sounds like a "no".

One option that has been suggested in the past is that you leave your company pension scheme, move the pension to FLexi Access Drawdown and then rejoin.  That would be a matter for your employer rather than Aegon.

2) On pension recycling have a read of https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm133810 and susequent pages.  There you will find the rules.  It is heavy going but the key aspect if you do want to increase your pension contributions is that there are conditions under which the recycling is not regarded as "significant" and will not be subject to penalties.  You should be able to get away with a reasonable increase in your contributions.

HMRCs objective seems to be to discourage industrial scale recycling schemes operated by advisors and "clever" accountants rather than prevent small investors taking normal wealth management actions.

3) On diversification across multiple platforms I see 3 main oiptions
a) Keep the same diversified allocations on each platform..
b) Have separate objectives and portfolio for each platform and allocate funds accordingly
c) Maintain a single overall portfolio in which the allocation of funds to platform is fairly arbitrary based on what funds are available where and convenience.

I personally use an extension of (3) with 3 very different top level portfolios spread across 4 different platforms (his and her's SIPPs and S&S ISAs).  However being retired my needs are much more complex than in accumulation.

Pat38493

Baldbrewer said:

Good morning all and thank you for your replies,

Regarding downsizing, being able to pay the mortgage off was just an additional benefit of moving to a smaller property in a village location. 
Our historically low fix rate mortgage deal also came to an end so it made sense to get rid of our biggest outgoing as the monthly payment was going to increase substantially.
we hadn't moved for 22 years and it had certainly become more costly lol hence the loan.

I contacted Aegon and received the following reply:
In regard to withdrawing from your plan please see the available options below, please read over the below options and see what is best for you. Once you know which withdrawal option you would like to go for, please let us know and we'll be happy to help.

1) You can opt to do nothing with your Pension at all, whereby you leave it where it is and then decide at a later date what to do with it. Once you have a decided on how you want to access your benefits the below options are available:

2) You can take all your plan out at once as a full lump sum (known as an Uncrystallised Funds Pension Lump Sum, or UFPLS), closing the policy altogether. The lump sum has 25% tax free cash, and the rest of the lump sum (75% of it) is taxable as income. *

3) Similar to option 2, you can take a partial lump sum (or partial UFPLS as its known), where again, whatever amount you take out, 25% of it is tax free: 75% of the lump sum is taxable as income. You do not get your tax-free cash out as a lump sum at once, you get a little bit of tax-free cash every time you remove money in this way. (Example: you withdraw £10,000 as partial UFPLS/lump sum: 25% of £10,000 is tax free – in this case £2,500 – and 75% of £10,000 is taxable as income – in this case £7,500). The rest of the money you don’t take stays in the current plan, for you to decide what to do with it at a later stage. *

*Option 2 and 3 trigger something called the Money Purchase Annual Allowance, which limits the amount of money you can then pay back into all pensions, to £10,000 for this tax year. If you pay more than this amount, and you are subject to this limit, you will incur a tax charge. For more information on this we recommend speaking to an IFA.

4) If your pension pot is £10,000 or less you are eligible to access this through a process called small pots. You are entitled to 3 in your lifetime and with each cash lump sum payment you get 25% tax free, and the remaining 75% taxed as income. As the cash lump-sum payment is classed as income, taking this option may put you in a higher tax bracket.

5) You take part or all your tax-free cash as a lump sum, and then invest the rest of the money in a different product called a Flexi Access Drawdown. This is an income plan, where you have the flexibility to choose what income you need and when you take it. It’s a fully online plan that you need to manage yourself, which involves requesting income and managing or switching funds yourself. Any income you take is based on the plan value, and as it is still invested the value can go up and down. If you would like to go through Flexible Access Drawdown, you would be required to have a phone consultation with the Assist team.

6) You take tax free cash as a lump sum, and the rest of the plan goes into an Annuity, which is an income plan that provides a guaranteed or flexible income for life (depending on the contract). The remaining money in the Annuity disappears, so there is no longer a value, and then an income payment is calculated: this income is fixed so it cannot normally be changed, but it is guaranteed, so will pay you the same amount, either for the rest of your life or the rest of the contract time. Aegon do not offer annuities. If this is the withdrawal method, you wish to pursue you can transfer your policy to another pension provider who does offer this option.

I didn't think this clarified if I could stay in plan so I emailed them and their reply was "sure give us a call and let us know what option you want to take".

I have made a pensionwise appointment for next week.

regarding the pension recycling issue , to avoid any possible issues am I to understand that if I keep my monthly contribution the same this would be ok?

Maybe I could diversify my portfolio with the additional fund that I had earmarked for the pension increase, does anybody have suggestions on what makes a balanced cross platform portfolio?

sorry for yet more questions but I want to learn. 

The text above is word for word the same reply I received from Aegon when I enquired about it so it's a cut'n'paste thing.  I also got a similar response when I asked the further clarification on the exact same point.

Only thing to add to what Linton said - personally if I was in your place I would just continue with the proposal.  I highly doubt that HMRC would take any action about it because you could simply say that you are putting all your spare money each month into your pension as is your normal practice, and we are not talking about "maxing out" in some kind of calculated fashion.  Not to mention, as far as I know, HMRC does not even routinely keep track of how much you personally put into your pension each year unless they actively decide to investigate it.  I'm sure they can get the information if they want it, but as said above there is no evidence of them ever doing this to anyone that's been on these boards.

Albermarle

regarding the pension recycling issue , to avoid any possible issues am I to understand that if I keep my monthly contribution the same this would be ok?

AIUI, you could increase your contribution by up to 30% with no issues. As others have said it seems pretty unlikely that the  HMRC flying squad would be paying you a visit, if they increased a bit more.