Anyone understand tax & pensions ?

[Erimus74]

I want to take a lump sum next year at age 55 from PPF (Pension protection Fund) BUT under the scheme rules I then also have to take the monthly pension assigned to me. I'll still be working though and therefore the pension is taxable.

Question; Can I divert this monthly pension payment direct into a private pension fund I contribute to in order to avoid being taxed on something I dont need at present ?

If you dont need it why are you thinking of taking out any of your pension which will be reduced due to your age

 

[alanmoodysdog]

I have no intention of buying an anuity (pension) with my funds , income release all he way for me ....

 

[Massimo's Header]

I don't disagree with speaking to an IFA but this is likely to be relatively straightforward.

Teeste and Billy Horner are right there are rules about re-cycling pension payments which can restrict using received pension payments as pension contributions to a separate pension scheme.

However these do not stop a person drawing a pension and earning a salary from contributing to a pension scheme. The person will need to demonstrate that the pension contributions are coming from the earnings and not the pensions.

As an example if the pension is 50k a year and earning of 5k a year then you'd struggle to justify significant new pension contributions above 5k. But if the pension is 10k and earning of 20k then you could pay 10k in pension contributions.

"Re-cycling" can be very complicated if someone is pushing the figures to the limit, but for many people not a problem.

 

[Ex Footy Legs]

As far as recycling rules go, assuming the annual increase in contributions is less than 30% of his tax free cash then HMRC won't be interested. (to be fair this should have been mentioned for clarity in my earlier post)

Teesste - thanks ; and correct ; the annual increase in contributions will be less than 30% of the tax free lump sum payment from PPF.

 

[Billy Horner]

You clearly know more about this than me but if he's being taxed as it comes out, puts it in another and then it gets taxed coming out again, that seems a bit unfair?

Can he not just port that over from one pension to another, without ever seeing it? Or is that "just the way it is", with that particular pension, and you're getting it out and taxed on it at 55 whether you like it or not?

Could he salary sacrifice his wages into a pension, to the same amount his pension is paying out?

It's the case with any pension that you're already receiving. You can't pay that directly into another pension scheme and receive tax relief on the contributions as they're not classed as earnings. If you think about it, that's fair enough, as you've already received tax relief on those contributions once, so you would be receiving it again if that was allowed.

Obviously, if you're still working you can increase the pension contributions from your earnings by an equivalent amount. However, that's where the rules about recycling come into play, as you might be using money which has already received tax relief (i.e. the tax free lump sum) to fund those contributions.

It sounds like Teesste and Massimo's Header know more about the detail of how HMRC considers recycling than I do, but I thought I should point out that this is one of those areas where it's really advisable to speak to someone who actually knows what they're talking about.

 

[Redwurzel]

I don't disagree with speaking to an IFA but this is likely to be relatively straightforward.

Teeste and Billy Horner are right there are rules about re-cycling pension payments which can restrict using received pension payments as pension contributions to a separate pension scheme.

However these do not stop a person drawing a pension and earning a salary from contributing to a pension scheme. The person will need to demonstrate that the pension contributions are coming from the earnings and not the pensions.

As an example if the pension is 50k a year and earning of 5k a year then you'd struggle to justify significant new pension contributions above 5k. But if the pension is 10k and earning of 20k then you could pay 10k in pension contributions.

"Re-cycling" can be very complicated if someone is pushing the figures to the limit, but for many people not a problem.

Remember you can only claim tax relief on a sum that represents the income tax paid on earnings - £20k earnings would be around £1200 in income tax paid (after personal allowance and NI contributions) which about £4800 net into a SIPP.

The £4000 I quoted earlier is for people still working but you have started drawing from their private pension which is what Ex Footy Legs is thinking of doing. This is differrent fro the £3600 limit which is for non income tax payers.

 

[Andy_W]

It's the case with any pension that you're already receiving. You can't pay that directly into another pension scheme and receive tax relief on the contributions as they're not classed as earnings. If you think about it, that's fair enough, as you've already received tax relief on those contributions once, so you would be receiving it again if that was allowed.

Obviously, if you're still working you can increase the pension contributions from your earnings by an equivalent amount. However, that's where the rules about recycling come into play, as you might be using money which has already received tax relief (i.e. the tax free lump sum) to fund those contributions.

It sounds like Teesste and Massimo's Header know more about the detail of how HMRC considers recycling than I do, but I thought I should point out that this is one of those areas where it's really advisable to speak to someone who actually knows what they're talking about.

Just seems a bit silly to be forced to take a pension, when you don't need it, so end up paying more tax when you don't need it, rather than just being able to transfer it to another, for when you do. I can understand if you're forced to take it or got the money from elsewhere, but when you don't have to take it, you should be able to port it, without ever seeing it.

HMRC are basically putting a tax block on people protecting themselves (yet they say they want people to prepare better for later life?), so people will get it, spend it and then have less for later in life, so they'll end up taking more from the state.

Personally I'd just increase pension contributions from work, to the same amount. It's being earned, so can go straight in the pension pot, and the pension is paying out which enables the contributions. It's silly, to have to do it, but I would, plead ignorance, and then fight them if they ever kicked off about it. I'd speak to my FA first mind.

Putting money into a pension is meant to get relief, this is meant to be a guarantee/ benefit, not a hinderance, and should not need to be taxed when it comes out the first time and then second (once is enough), as it completely does away with the actual benefit of it being tax deductible. Yes, they could argue that you benefit of compound interest, but pensions still carry risk, like any investment, and could argue against that anyway with opportunity cost. The government also benefits from the compound interest too mind, why would they want to take 20% of 100k, when they can take 20% of 150k, and then 20% again for the second time.

 

[Billy Horner]

Remember you can only claim tax relief on a sum that represents the income tax paid on earnings - £20k earnings would be around £1200 in income tax paid (after personal allowance and NI contributions) which about £4800 net into a SIPP.

If you’re paying contributions into a ‘relief at source’ scheme, such as a SIPP, then you can actually contribute up to 100% of your relevant earnings each tax year (subject to the £40k annual allowance) and receive tax relief on the full amount. This is one of their advantages, as you can receive tax relief on money that hasn’t actually been taxed.

The £4000 I quoted earlier is for people still working but you have started drawing from their private pension which is what Ex Footy Legs is thinking of doing. This is differrent fro the £3600 limit which is for non income tax payers.

The £4k limit only applies to people who are drawing down a defined contributions (e.g. SIPP) pension. I think Ex Footy Legs said that he would be receiving it from the Pension Protection Fund, which only covers defined benefits schemes (e.g. final salary). Taking a defined benefits pension doesn’t trigger the £4k annual allowance.

 

[NorthumberlandBoro]

I feel sorry for those who are not particularly numerate trying to navigate their way through money purchase pensions.
I guess by that's where a decent financial advisor comes in ( at a price).

 

[Redwurzel]

If you’re paying contributions into a ‘relief at source’ scheme, such as a SIPP, then you can actually contribute up to 100% of your relevant earnings each tax year (subject to the £40k annual allowance) and receive tax relief on the full amount. This is one of their advantages, as you can receive tax relief on money that hasn’t actually been taxed.


The £4k limit only applies to people who are drawing down a defined contributions (e.g. SIPP) pension. I think Ex Footy Legs said that he would be receiving it from the Pension Protection Fund, which only covers defined benefits schemes (e.g. final salary). Taking a defined benefits pension doesn’t trigger the £4k annual allowance.

OK - illustrates the complexities and variations of pensions and tax.