DB Pension - Tax Question

DuxassTight

Hi

Bear with me if the terminology is incorrect, I'm only just now getting to grips with this pensions malarkey!

I have reached pensionable age in a DB scheme and I intend to start drawing this pension whilst still working. The DB pension is £200 per month (£160 after 20% tax).

I was recently informed (not "advised") that I could increase my contributions to my current employer's DC scheme by this £160 per month and these contributions would qualify for tax relief the same as my regular contribution (5% employer, 17.5% employee).

So if my understanding is correct, although I would initally pay £40 per month tax on the pension, I could "claw back" £32 in tax relief by paying it back into my DC scheme by way of increasing my monthly contribution by £160?

Sounds too good to be true - but is it?

MallyGirl

yes you can do that. There are various limits on contributions plus rules about recycling but this small amount falls below any of them

zagfles

No you can't pay pension income into another pension*, but you can pay earnings. So you could increase your contribution from your earnings by the amount of the DB pension, as long as you have sufficient earnings. So you could probably effectively do what you mentioned but think about it as paying from your earnings. But you don't really claw back most of the tax as when you come to draw the DC pension it'll mostly be subject to tax then.

If you get a tax free lump sum from the DB pension check the recycling rules (google HMRC pension recycling rules).

*Except if you earn under £3600 when you can put £3600 gross in.

DRS1

So if my understanding is correct, although I would initally pay £40 per month tax on the pension, I could "claw back" £32 in tax relief by paying it back into my DC scheme by way of increasing my monthly contribution by £160?

Just so you know it isn't £32 tax relief on a net £160 pension contribution it is £40. And the basic rate relief is not paid to you it goes into the DC pension scheme direct from HMRC. So you end up with £200 gross in the DC pension scheme.

Sorry I am assuming your DC pension contributions are relief at source contributions not salary sacrifice. Salary sacrifice would be better as it saves on NICs as well.

DuxassTight

https://forums.moneysavingexpert.com/discussion/comment/82028840#Comment_82028840

Thanks for the reply, my intention was to increase contributions via payroll rather than recycle any element of the pension (including the lump sum). I've edited my post to clarify my thoughts.

I've never heard of pension recycling anyway, and as such, I had no intention of doing so. The lump sum is already earmarked for home improvements by order of the "peaky blinder" 😂

DuxassTight

https://forums.moneysavingexpert.com/discussion/comment/82028874#Comment_82028874

Thanks for the reply. I was working on the assumption that if I contribute the monthly equivalent of my DB pension (after tax) to the DC scheme by increasing my employee contribution (i.e. £160), 20% of that is £32, and the total contribution including tax relief would be worth £192.

I don't have any element of salary sacrifice in my DC scheme so you are correct in your assumption - it's not something I've explored for myself. But with less than a year until I go full retirement with some healthy finances behind me I'm not overly concerned (unless the Florida Orange one decides to have another hissyfit 😂)

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/82028892#Comment_82028892

Regarding pension recycling. It does not matter how you spend your tax free lump sum, or where the contributions come from

If you get a tax free lump sum and around the same time your pension contributions increase, then it is potentially recycling of the tax free cash. However if the amounts involved are not great, you are probably not affected.

Recycling of tax-free cash & pension recycling rules - Royal London for advisers

af1963

For tax relief when paying individual contributions to a relief-at-source pension: you pay the 80p that you earned after tax, and the scheme claims the 20p tax relief on top.

The tax relief works out as 20% of the total, but it's 25% of your original net contribution.

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82028916#Comment_82028916

@af1963 explained how it works. Don't ask me why they do it that way but they do. It confuses a lot of people.

I should mention that if you are a higher rate taxpayer then any higher rate relief does go to you and not into the DC pension scheme. That requires you to report the contribution in your tax return if you do one or via an online form if you don't. However I am guessing you are not a higher rate taxpayer.

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82028987#Comment_82028987

becuase its 20% tax relief. I.e its putting back the tax that was taken off. So if you had £200 gross and paid 20% tax you get £160 net. Putting that 20% back means a 25% increase effectively - 200/160=-1.25

DRS1

https://forums.moneysavingexpert.com/discussion/comment/82029192#Comment_82029192

Yes and I believe it has worked that way since they introduced personal pension schemes back in the 80s. But before then we had retirement annuity contracts and the tax relief for them worked differently. You contributed to the RAC and got a tax rebate in your hand (not in the RAC). Why they changed it and why it is only basic rate relief which goes into the pension not all of it is a mystery to me.