DC Pension Pot Drawdown, Recycling Rules, and a Very Particular Circumstance

SomeMadeUpName

So first of all I'd like to thank anyone who helped educate me on pensions a few years ago, I've taken what I learned then, run with it, and as a result myself and the missus are definitely a few grand better off.  I knew nothing about pensions really when I joined this forum, gained knowledge, and for a time tried to help others on the forum with the knowledge I'd gained.

Then I went away, now I'm back, as things have changed, and I need to revise what I do.

For several years my earned income has only been £600pa, as a result the highest pension contribution I could make was £3,600 gross, and so that's what I've been doing.

I now need to boost my earned income for two reasons, I need the income, and for very specific personal tax reasons I need the higher declared (to HMRC) income.  Those reasons aren't super secret/private or anything, but they would take a bit of explaining, so unless anyone is really curious I'll just leave it as a parameter of the question.

So my plan is this:  Increase my PAYE earned income to £12k across 2no salaries (£6k from each to minimise NI paid by both Myself and the Companies involved).  Then make a £9.6k (£12k gross) contribution to my pension.  That pretty much sorts my need to declare more income, but not my need to actually have more to spend, as I've only come away with £2.4k. 

So then (and here's the question really) I hoped I might be able to draw £12k from my pension.  However I might want to do this for a few years, so I want to stay on the right side of recycling.  I'd happily take the whole £12k as taxable, and leave £4k in the pension, crystalized as tax free.

So is that possible?  Plus, if it is, and the above all looks ok, how on earth do I do it, literally, what is the process?

My remembered (ie not reliable) knowledge from a few years ago is that if you draw tax free sums from a pension you are limited to future contributions into pension of £4k.  If you only draw taxed income you are not limited on future contributions.  Have I got that right?

Also, if I can do the above does the crystalized tax free £4k sit in the pension pot, still invested, still (hopefully) growing, with that growth tax free?

Once again, if you guys educate me, I'll do my best to share that knowledge.  Though tbh my circumstance here are so very particular I will struggle to find anyone who needs this specific help!

Thanks in anticipation.

QrizB

I see a couple of problems.

1. You've got to take the 25% tax-free before (or at the same time as) you take any taxable income from the pension. So you'd be taking £16k out of your pension, £12k taxable and $£4k tax-free. The £4k you can invest in eg. a SSISA where it will grow and remain tax-free.
2. Once you've taken any taxable money from a pension, you are subject to the Money Purchase Annual Allowance (MPAA) which nmeans you can only contribute £10k gross per year back into your pension.

In the very first year you could make the £12k contribution first, then take the £16k out. You'll only be subject to the MPAA after the withdrawal. But it's not going wo tork on an ongoing basis for the following year.

af1963

The rules on reducing the annual allowance are the opposite of what you remember. You can take tax free cash without triggering the reduced allowance (Money Purchase Annual Allowance, MPAA ) but as soon as you take any taxable income as flexible drawdown, MPAA takes effect. 

(You can also buy an annuity from the taxed portion without triggering MPAA, and/or you can take up to three "small-pots" withdrawals of up to £10K without triggering it, if you have any small pension funds, or if your provider allows your funds to be divided into separate "pension arrangements" to meet the conditions for these.)

The MPAA limit has also been increased to £10K.

Dazed_and_C0nfused

SomeMadeUpName said:

So first of all I'd like to thank anyone who helped educate me on pensions a few years ago, I've taken what I learned then, run with it, and as a result myself and the missus are definitely a few grand better off.  I knew nothing about pensions really when I joined this forum, gained knowledge, and for a time tried to help others on the forum with the knowledge I'd gained.

Then I went away, now I'm back, as things have changed, and I need to revise what I do.

For several years my earned income has only been £600pa, as a result the highest pension contribution I could make was £3,600 gross, and so that's what I've been doing.

I now need to boost my earned income for two reasons, I need the income, and for very specific personal tax reasons I need the higher declared (to HMRC) income.  Those reasons aren't super secret/private or anything, but they would take a bit of explaining, so unless anyone is really curious I'll just leave it as a parameter of the question.

So my plan is this:  Increase my PAYE earned income to £12k across 2no salaries (£6k from each to minimise NI paid by both Myself and the Companies involved).  Then make a £9.6k (£12k gross) contribution to my pension.  That pretty much sorts my need to declare more income, but not my need to actually have more to spend, as I've only come away with £2.4k. 

So then (and here's the question really) I hoped I might be able to draw £12k from my pension.  However I might want to do this for a few years, so I want to stay on the right side of recycling.  I'd happily take the whole £12k as taxable, and leave £4k in the pension, crystalized as tax free.

So is that possible?  Plus, if it is, and the above all looks ok, how on earth do I do it, literally, what is the process?

My remembered (ie not reliable) knowledge from a few years ago is that if you draw tax free sums from a pension you are limited to future contributions into pension of £4k.  If you only draw taxed income you are not limited on future contributions.  Have I got that right?

Also, if I can do the above does the crystalized tax free £4k sit in the pension pot, still invested, still (hopefully) growing, with that growth tax free?

Once again, if you guys educate me, I'll do my best to share that knowledge.  Though tbh my circumstance here are so very particular I will struggle to find anyone who needs this specific help!

Thanks in anticipation.

I presume you are aware of the NI threshold change coming into force from 6 April 2025?

Nothing you have posted suggests you have any reason to "declare" income to HMRC, your employers would be reporting the earnings to HMRC.

You can't take taxable income out and leave the TFLS in the pension.  You can either take a TFLS and leave all of the taxable element in the pension.  Or take a TFLS and take part of the taxable element out, leaving the remainder crystallised within the pension.

Taking taxable income (annuities being an exception) means you trigger MPAA and that limits your future contributions to £10k now.  The £10k encompasses your net contributions, any basic rate relief added to the pension and any employer contributions.

Crystallised funds do the exact opposite of what you have suggested.  Say you take crystallize £40k, taking £10k TFLS today and leaving £30k crystallised in the pension wrapper. 

Then you decide to take some of the cystallised funds out five years from now.  And that £30k has grown to £38k.  The whole £38k is taxable when taken out of the pension, you took your TFLS upfront, there is no more TFLS from that original crystallised pot.

If these two companies are ones you are a director of have you discussed this plan with your accountant, in particular if employer contributions might be a better option for getting money into your pension?

SomeMadeUpName

OK, thanks to all above, lots of good info there, not least that I've got the whole thing (tax free/taxable) reversed when it comes to MPAA!

I'll have to have a think about what I do now, but there does seem to be options.

The increase in MPAA to £10k would work in with the fact that for years after the current then salaries would sit at 2no at £5k (to get below new NI limits)

In which case I could draw (as noted above) £16k, £12k to declare as taxable and £4k untaxed (straight into a S&S ISA).

Thinking cap on, your helpful advice is a mix of good and bad (from my perspective) but it doesn't sink the plan, just requires revisions.

Thanks again.

SomeMadeUpName

Dazed_and_C0nfused said:

SomeMadeUpName said:

So first of all I'd like to thank anyone who helped educate me on pensions a few years ago, I've taken what I learned then, run with it, and as a result myself and the missus are definitely a few grand better off.  I knew nothing about pensions really when I joined this forum, gained knowledge, and for a time tried to help others on the forum with the knowledge I'd gained.

Then I went away, now I'm back, as things have changed, and I need to revise what I do.

For several years my earned income has only been £600pa, as a result the highest pension contribution I could make was £3,600 gross, and so that's what I've been doing.

I now need to boost my earned income for two reasons, I need the income, and for very specific personal tax reasons I need the higher declared (to HMRC) income.  Those reasons aren't super secret/private or anything, but they would take a bit of explaining, so unless anyone is really curious I'll just leave it as a parameter of the question.

So my plan is this:  Increase my PAYE earned income to £12k across 2no salaries (£6k from each to minimise NI paid by both Myself and the Companies involved).  Then make a £9.6k (£12k gross) contribution to my pension.  That pretty much sorts my need to declare more income, but not my need to actually have more to spend, as I've only come away with £2.4k. 

So then (and here's the question really) I hoped I might be able to draw £12k from my pension.  However I might want to do this for a few years, so I want to stay on the right side of recycling.  I'd happily take the whole £12k as taxable, and leave £4k in the pension, crystalized as tax free.

So is that possible?  Plus, if it is, and the above all looks ok, how on earth do I do it, literally, what is the process?

My remembered (ie not reliable) knowledge from a few years ago is that if you draw tax free sums from a pension you are limited to future contributions into pension of £4k.  If you only draw taxed income you are not limited on future contributions.  Have I got that right?

Also, if I can do the above does the crystalized tax free £4k sit in the pension pot, still invested, still (hopefully) growing, with that growth tax free?

Once again, if you guys educate me, I'll do my best to share that knowledge.  Though tbh my circumstance here are so very particular I will struggle to find anyone who needs this specific help!

Thanks in anticipation.

I presume you are aware of the NI threshold change coming into force from 6 April 2025?

Nothing you have posted suggests you have any reason to "declare" income to HMRC, your employers would be reporting the earnings to HMRC.

You can't take taxable income out and leave the TFLS in the pension.  You can either take a TFLS and leave all of the taxable element in the pension.  Or take a TFLS and take part of the taxable element out, leaving the remainder crystallised within the pension.

Taking taxable income (annuities being an exception) means you trigger MPAA and that limits your future contributions to £10k now.  The £10k encompasses your net contributions, any basic rate relief added to the pension and any employer contributions.

Crystallised funds do the exact opposite of what you have suggested.  Say you take crystallize £40k, taking £10k TFLS today and leaving £30k crystallised in the pension wrapper. 

Then you decide to take some of the cystallised funds out five years from now.  And that £30k has grown to £38k.  The whole £38k is taxable when taken out of the pension, you took your TFLS upfront, there is no more TFLS from that original crystallised pot.

If these two companies are ones you are a director of have you discussed this plan with your accountant, in particular if employer contributions might be a better option for getting money into your pension?

I've written a comprehensive reply to this, but when I try to post I just get a message saying 'the body is 10 characters too short", any ideas??

SomeMadeUpName

Dazed_and_C0nfused said:

I presume you are aware of the NI threshold change coming into force from 6 April 25?
Yes, thanks, I'm quickly pulling a 24/25 plan together, which I'll revise for coming years.  I might well take a higher salary from 1no company (just low enough to not trigger employee NI) as whilst that then costs the Co employer NI, it will be able to claim it back under the expanded Employment Allowance rebate.

Nothing you have posted suggests you have any reason to "declare" income to HMRC, your employers would be reporting the earnings to HMRC.
Agreed, it's not in the post, however it's true (at least in part):  1no employer has a PAYE scheme and so that salary would be RTI reported, the other employer does not have a PAYE scheme and is not subject to RTI as it only pays the company's directors and at a rate below the registration threshold.  Additionally I have to enter all my incomes on my tax return, which I have to fill in as I am a director of several companies, and a professional landlord, and receiving interest incomes well in excess of the interest tax free limit.

You can't take taxable income out and leave the TFLS in the pension.  You can either take a TFLS and leave all of the taxable element in the pension.  Or take a TFLS and take part of the taxable element out, leaving the remainder crystallised within the pension.
Shame that, a small dent in the plan, but liveable with.  Also seems illogical, sauce for the goose/gander and all that. 

Taking taxable income (annuities being an exception) means you trigger MPAA and that limits your future contributions to £10k now.  The £10k encompasses your net contributions, any basic rate relief added to the pension and any employer contributions.
Thanks, I'm a clot, I completely reversed this in my head.  I think I can live within those parameters though, given the info supplied by everyone.

Crystallised funds do the exact opposite of what you have suggested.  Say you take crystallize £40k, taking £10k TFLS today and leaving £30k crystallised in the pension wrapper. 

Then you decide to take some of the crystallised funds out five years from now.  And that £30k has grown to £38k.  The whole £38k is taxable when taken out of the pension, you took your TFLS upfront, there is no more TFLS from that original crystallised pot.
Understood, that's logical, now that I understand I had the taxed/untaxed piece reversed.

If these two companies are ones you are a director of have you discussed this plan with your accountant, in particular if employer contributions might be a better option for getting money into your pension?
I'm across considering employer pension contributions.  I may well use them to boost my wife's pot up to the level of mine.  The reason individual contribution is better (for me, at the moment, at least) is that I have a significant amount of accumulated unused rental financing tax credit.  I can use this to offset my earned income, any taxable pension income, and of course my (pitiful at the moment) rental profits, but annoyingly not my interest income.  This also explains why I want to earn £12k, put it in a pension, and in the same year draw taxable income from the pension, as whilst I'll pay tax in that year on my interest income I wouldn't on the earned or pension income, meaning the uplift on the £9.6k to £12k in the pension would be a real net gain to me, not simply getting back what I'd paid.

SomeMadeUpName

And, now it's worked (above).  So??  Must have been the twentieth time I'd tried.

Dazed_and_C0nfused

SomeMadeUpName said:

Dazed_and_C0nfused said:

SomeMadeUpName said:

So first of all I'd like to thank anyone who helped educate me on pensions a few years ago, I've taken what I learned then, run with it, and as a result myself and the missus are definitely a few grand better off.  I knew nothing about pensions really when I joined this forum, gained knowledge, and for a time tried to help others on the forum with the knowledge I'd gained.

Then I went away, now I'm back, as things have changed, and I need to revise what I do.

For several years my earned income has only been £600pa, as a result the highest pension contribution I could make was £3,600 gross, and so that's what I've been doing.

I now need to boost my earned income for two reasons, I need the income, and for very specific personal tax reasons I need the higher declared (to HMRC) income.  Those reasons aren't super secret/private or anything, but they would take a bit of explaining, so unless anyone is really curious I'll just leave it as a parameter of the question.

So my plan is this:  Increase my PAYE earned income to £12k across 2no salaries (£6k from each to minimise NI paid by both Myself and the Companies involved).  Then make a £9.6k (£12k gross) contribution to my pension.  That pretty much sorts my need to declare more income, but not my need to actually have more to spend, as I've only come away with £2.4k. 

So then (and here's the question really) I hoped I might be able to draw £12k from my pension.  However I might want to do this for a few years, so I want to stay on the right side of recycling.  I'd happily take the whole £12k as taxable, and leave £4k in the pension, crystalized as tax free.

So is that possible?  Plus, if it is, and the above all looks ok, how on earth do I do it, literally, what is the process?

My remembered (ie not reliable) knowledge from a few years ago is that if you draw tax free sums from a pension you are limited to future contributions into pension of £4k.  If you only draw taxed income you are not limited on future contributions.  Have I got that right?

Also, if I can do the above does the crystalized tax free £4k sit in the pension pot, still invested, still (hopefully) growing, with that growth tax free?

Once again, if you guys educate me, I'll do my best to share that knowledge.  Though tbh my circumstance here are so very particular I will struggle to find anyone who needs this specific help!

Thanks in anticipation.

I presume you are aware of the NI threshold change coming into force from 6 April 2025?

Nothing you have posted suggests you have any reason to "declare" income to HMRC, your employers would be reporting the earnings to HMRC.

You can't take taxable income out and leave the TFLS in the pension.  You can either take a TFLS and leave all of the taxable element in the pension.  Or take a TFLS and take part of the taxable element out, leaving the remainder crystallised within the pension.

Taking taxable income (annuities being an exception) means you trigger MPAA and that limits your future contributions to £10k now.  The £10k encompasses your net contributions, any basic rate relief added to the pension and any employer contributions.

Crystallised funds do the exact opposite of what you have suggested.  Say you take crystallize £40k, taking £10k TFLS today and leaving £30k crystallised in the pension wrapper. 

Then you decide to take some of the cystallised funds out five years from now.  And that £30k has grown to £38k.  The whole £38k is taxable when taken out of the pension, you took your TFLS upfront, there is no more TFLS from that original crystallised pot.

If these two companies are ones you are a director of have you discussed this plan with your accountant, in particular if employer contributions might be a better option for getting money into your pension?

I've written a comprehensive reply to this, but when I try to post I just get a message saying 'the body is 10 characters too short", any ideas??

If your reply is inside the quoted text box then you need to add something outside the box. 

Something like "See comments added above" would do the trick

Dazed_and_C0nfused

Nothing you have posted suggests you have any reason to "declare" income to HMRC, your employers would be reporting the earnings to HMRC.
Agreed, it's not in the post, however it's true (at least in part): 1no employer has a PAYE scheme and so that salary would be RTI reported, the other employer does not have a PAYE scheme and is not subject to RTI as it only pays the company's directors and at a rate below the registration threshold. Additionally I have to enter all my incomes on my tax return, which I have to fill in as I am a director of several companies, and a professional landlord, and receiving interest incomes well in excess of the interest tax free limit.

How on earth have you come to that conclusion 🤔

I suggest you check the criteria for a PAYE scheme before you go any further.

SomeMadeUpName

Dazed_and_C0nfused said:

Nothing you have posted suggests you have any reason to "declare" income to HMRC, your employers would be reporting the earnings to HMRC.
Agreed, it's not in the post, however it's true (at least in part): 1no employer has a PAYE scheme and so that salary would be RTI reported, the other employer does not have a PAYE scheme and is not subject to RTI as it only pays the company's directors and at a rate below the registration threshold. Additionally I have to enter all my incomes on my tax return, which I have to fill in as I am a director of several companies, and a professional landlord, and receiving interest incomes well in excess of the interest tax free limit.

How on earth have you come to that conclusion 🤔

I suggest you check the criteria for a PAYE scheme before you go any further.

OK, so it was HMRC themselves that told me to de-register a few years ago, as the registration for criteria is this:

"You must register for PAYE if any of the following applies to an employee in the current tax year (since 6 April):

• they’re paid £123 or more a week
• they get expenses and company benefits
• they’re getting a pension
• they’ve had another job
• they’ve received Jobseeker’s Allowance, Employment and Support Allowance or Incapacity Benefit

If you do not need to register, you’ll still need to keep payroll records."

Which criteria (for not registering) we met.

But, you're right again, as I will going forward have 2no salaries I will need to re-register that company.

Which is no issue, and doesn't materially change the plan.  In fact it opens up the opportunity to make both salaries circa £12k and claim back employer NI via the allowance (if we're no longer trying to stay under a registration threshold).

Thanks again.