Advice needed

Andersoncouncil

I’m 55 in less than 2 years. I had a small fright, a health scare two years ago which changed my outlook on retiral. A scare was all it was, I had tests after which, fortunately, showed me to be in good health.  Since then, I’m possibly fitter than any time in the 20 years before. I drink a lot less, maybe once every two months or so, I’m at the gym 4 or 5 times a week, run, my diet is healthy and I cook most nights. I don’t have much stress at work, can’t say I have none but it’s not nearly as bad as anything I’ve experienced in the past. 

My pensions are varied, even though I’ve only worked in 3 different places in my life. Takeovers, transfers and TUPE have all contributed here. I currently have 2 DB pensions, one just over the £30k transfer out balance, one just under. I have 4 others totaling around just over £130k. All of these are stagnant, as in I don’t add into them, growth is slow but there is still some that return. I don’t mess with the investments. I also had another small pension that I transferred into my current Alpha Pension, I’m a civil servant. On top of the Alpha pension I add AVC’s into L&G every month. I’ve enough years credit already for a full state pension, as does my wife. I also had around 10 years where I never paid into a work or private pension.

I was in the process of transferring all of my pensions into the Alpha one when I had my scare which stopped me. Ultimately, I decided then that I really wanted to see some of the money I’d been putting in, not with any great plans but definitely to do something that would give me a degree of happiness, while I was fit for it. Meaning, I’ll be taking the full 25% from the DC’s and whatever cash equivalent I have in the DB’s at 55. I’ve not decided when to actually retire and intend to keep working for as long as I’m enjoying it. That may change dependent on what’s happening in my life in the next few years though.

After all that, I’m hoping my questions probably have a simple answer. Can I take any money I start to receive from my DB’s, along with anything  I buy an annuity with, and put it all into my L&G, with tax relief, along with the AVC’s I’m currently adding? Or would I have to calculate what I receive from each, pre tax, and increase my AVC’s?  Or is any of this illegal, unethical or slightly stupid sounding? I’m aware you can’t have tax relief on money twice, but I’m unsure where the line is drawn. My intention is not to touch the L&G, or my Alpha pension until I really need to.

I don’t have any issue with the idea of consulting an independent financial advisor nearer the time to help and imagine I’ll spend a good amount of time looking for the right one. Before then, I just need to have an understanding if what I’m doing makes sense, or is a no go. Thanks.

NickPoole

Things to be aware of or research - recycling rules for tax free cash from pensions, and limit (Annual Allowance) that you can put into pensions (and limited by your paid income as well as current £60K)

Cobbler_tone

Oh no, you've crossed that line of mentioning transferring out of two DB pensions. 

The question I would have, assuming you are fully fighting fit and continue to work. Why take the pensions out if you are continuing to contribute? I could understand it if you wanted to spend it all and were happy to live on your state pension. Consolidate the DC's if anything to make it cleaner and then pile in over the next few years to mitigate your tax liability and retire early. Instead of seeing this golden number of 55, why not make it (as an example) 58 and aim for a hard stop. Chances are you are going to have the full capacity to fully enjoy life at that stage. It will soon come around.

I wouldn't belittle your mindset though. 55 is a biggy and it most definitely changes your thinking when you know pensions are going to be accessible. Throw in a health scare and I am sure that amplifies it.
I have one that I could access today with £170k TFLS and £20k a year from but it makes absolutely no sense for me to touch it at the moment. My number is 57.

Marcon

How much are your gross earnings? If those don't take you into a higher rate tax bracket, do you have any unearned income (interest, savings, dividends, pension income all fall into that category) which puts you into a higher tax bracket?

Andersoncouncil

Cobbler_tone said:

 Why take the pensions out if you are continuing to contribute?

I don't make any contributions to any of the pensions that I would be cashing in on. My ask is mainly if it would be ok to keep the two that I pay in to going, with added contributions from anything I receive after cashing them in. I know there's going to tax implications at some point, so just looking to try and figure that out

My two DB's aren't huge and I know they still provide something should anything happen but going on the calculations on their websites, the reward for waiting longer than 55 is minimal. Albeit, these are just projections and not set in stone. Thanks though.

Andersoncouncil

Marcon said:

How much are your gross earnings? If those don't take you into a higher rate tax bracket, do you have any unearned income (interest, savings, dividends, pension income all fall into that category) which puts you into a higher tax bracket?

I'm in the Higher tax bracket by around 8K over the limit

Marcon

Andersoncouncil said:

Marcon said:

How much are your gross earnings? If those don't take you into a higher rate tax bracket, do you have any unearned income (interest, savings, dividends, pension income all fall into that category) which puts you into a higher tax bracket?

I'm in the Higher tax bracket by around 8K over the limit

That doesn't answer what I asked. I asked because you've asked for 'advice' and your gross earnings have a significant impact on the answer.

Cobbler_tone

Andersoncouncil said:

Cobbler_tone said:

 Why take the pensions out if you are continuing to contribute?

I don't make any contributions to any of the pensions that I would be cashing in on. My ask is mainly if it would be ok to keep the two that I pay in to going, with added contributions from anything I receive after cashing them in. I know there's going to tax implications at some point, so just looking to try and figure that out

My two DB's aren't huge and I know they still provide something should anything happen but going on the calculations on their websites, the reward for waiting longer than 55 is minimal. Albeit, these are just projections and not set in stone. Thanks though.

Really struggling to get my head around what you are actually trying to achieve.
If you are over the 40% limit (gross taxable earnings) you could make that a priority to save a fair chunk of tax now. If cashing in and manipulating other pensions (whether TFLS or buying annuities) is required to afford this, then you are well into the murky world of recycling.

To me it sounds like the motivation is to 'enjoy life', so it might be better to consolidate, boost your contributions and get out ASAP with a healthy secured income!
It's not clear of the need/purpose of trying to have £x now, when it will only grow to fund an early retirement. If "to do something that would give me a degree of happiness", means a flash car or fancy holiday, I'd bankroll it now on a 0% credit card or finance as opposed to cashing your chips in.

MEM62

Andersoncouncil said:

Marcon said:

How much are your gross earnings? If those don't take you into a higher rate tax bracket, do you have any unearned income (interest, savings, dividends, pension income all fall into that category) which puts you into a higher tax bracket?

I'm in the Higher tax bracket by around 8K over the limit

Andersoncouncil said:

Meaning, I’ll be taking the full 25% from the DC’s and whatever cash equivalent I have in the DB’s at 55. I’ve not decided when to actually retire and intend to keep working for as long as I’m enjoying it. 

So despite having a relatively good income (which should give you a nice lifestyle), you are going to rob your future-self of retirement income just to have some additional fun now.  I don't think that there is much doubt that this would be a decision that you regret in later years. Your pensions are for when you retire - not for a more lavish lifestyle when you are working.     

Gaberdeen

I believe what you're referring to is "pension recycling" - where you're putting your tax-free lump sum back into a different pension.

There are rules governing this and although it's not "illegal" there are significant penalties if HMRC believe you're abusing the system for excessive gain by exploiting the tax relief.

HMRC use 30% of the "expected" contribution as a baseline to decide if you're in breach of the rules, i.e. if you normally contribute £10,000 a year - the most you could add from your TFLS would be £3000 to be within the rules.

On the other side of the rules, if you had been consistently putting £40k a year in AVC's and that suddenly increased to the full £60k, HMRC will deduce pretty quickly that you're over the 30% and moreover could easily tie where that extra money came from. They could then penalise you on up to 70% on your tax-free allowance.

That's not to say there isn't a work around of sorts; 

Reducing your hours or going part-time / job share would reduce your AVCs (and give you more time off!) but you could conversely also use your TFLS to make up the difference to whatever your "regular" amount was +30% - in HMRC's eyes, your contributions haven't exceeded the 30% rule and they don't take how many hours you worked into consideration.

By all means, I'm not an expert and you should run this by a financial planner if you intend on exploring it further.

I ended up sending this to you in a DM as the forum kept giving me a cloudflare fault when I tried to post it.

Cobbler_tone

Gaberdeen said:

I believe what you're referring to is "pension recycling" - where you're putting your tax-free lump sum back into a different pension.

There are rules governing this and although it's not "illegal" there are significant penalties if HMRC believe you're abusing the system for excessive gain by exploiting the tax relief.

HMRC use 30% of the "expected" contribution as a baseline to decide if you're in breach of the rules, i.e. if you normally contribute £10,000 a year - the most you could add from your TFLS would be £3000 to be within the rules.

On the other side of the rules, if you had been consistently putting £40k a year in AVC's and that suddenly increased to the full £60k, HMRC will deduce pretty quickly that you're over the 30% and moreover could easily tie where that extra money came from. They could then penalise you on up to 70% on your tax-free allowance.

That's not to say there isn't a work around of sorts; 

Reducing your hours or going part-time / job share would reduce your AVCs (and give you more time off!) but you could conversely also use your TFLS to make up the difference to whatever your "regular" amount was +30% - in HMRC's eyes, your contributions haven't exceeded the 30% rule and they don't take how many hours you worked into consideration.

By all means, I'm not an expert and you should run this by a financial planner if you intend on exploring it further.

I ended up sending this to you in a DM as the forum kept giving me a cloudflare fault when I tried to post it.

I always wondered how this would be monitored and captured in real terms. My contributions have ranged from 8%-50% across the previous 5 years, currently at 40%, I believe my max allowed is around 60% to keep above NMW. I'm assuming that if you could afford to run at your max for a couple of months (maybe using savings to live if needed, before accessing any other pension), then you would have demonstrated that you haven't used funds from a pension in any guise to 'recycle' if you began to access them and maintained max contributions.