Final salary pension

[Jafinkeesaurus]

I will be retiring next year, age 55, on a £25k per annum DB / final salary pension.
I am initially planning on putting the full amount, each year, back into a DC SIPP as I won't need to use it for living costs for a few more years yet.
I am very exposed to IHT, so see this as one way of reducing this exposure.
My query is, will I still qualify for 25% tax relief on this, seeing as it is already coming from a (different type) of pension. I pay tax on the final salary pension, although it is not technically earned income.
I'm also mindful that the maximum I can pay into a DC each year shouldn't exceed my annual income - again does this mean I can pay £25k pa, even though this figure is pension rather than salary?

[Kirkmoly]

Sadly, pension income does not count as relevant earnings for pension contributions. The most you’d be able to contribute to a SIPP is 2880 net / 3600 gross.

[mikef]

That sounds like recycling, which isn’t allowed. Once you start to draw down on your pensions*, you are limited in what you can pay into your DC pensions from that point. The annual MPAA limit was £4K pa and after the last budget that has been raised (at least for the moment) to £10K pa

• taking your 25% tax-free lump sum at age 55+ shouldn’t trigger the MPAA annual limit

[AdamV12V]

Kirkmoly said:

Sadly, pension income does not count as relevant earnings for pension contributions. The most you’d be able to contribute to a SIPP is 2880 net / 3600 gross.

This ^^ is the correct answer that limits how much you can pay in.

[Richonenope]

Paying in using pension income isn’t recycling - you could pay in 100% of salary in the year you retire depending on when you stop work. Recycling applies to tax free cash and using this to pay more in to your pension. If you have a spouse you could pay in to their pension. If you have no relevant earnings you could at in £3600 gross £2880 net of tax until age 75.

[Jafinkeesaurus]

Thanks all. It's not tax free cash, there is no lump sum involved and it is a final salary pension that is taxed, as if it were salaried earnings (but no NI on it).
I have looked at some IFA websites and, while it appears to be an unusual thing to do, the jury is out and there seems to be a 50/50 split on whether you can do it and still claim tax relief.
Legal and General (SIPP providers) say I can, but I'm not sure they fully grasped the question
I've booked a PensionWise appointment in May and I'll ask again there.
Thanks again for the input

[Kirkmoly]

Jafinkeesaurus said:

Thanks all. It's not tax free cash, there is no lump sum involved and it is a final salary pension that is taxed, as if it were salaried earnings (but no NI on it).
I have looked at some IFA websites and, while it appears to be an unusual thing to do, the jury is out and there seems to be a 50/50 split on whether you can do it and still claim tax relief.
Legal and General (SIPP providers) say I can, but I'm not sure they fully grasped the question
I've booked a PensionWise appointment in May and I'll ask again there.
Thanks again for the input

Then Legal and General are talking rubbish. From the actual source (HMRC):

Relevant UK earnings means any one or more of the following types of income:

employment income, such as: pay, wages, bonus, overtime, or commission - but only if taxable under Section 7(2) Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003) - so including:
the part of a redundancy payment above the £30,000 tax exempt threshold in section 403(1) ITEPA 2003. The first £30,000 of the redundancy payment is not classed as employment income so does not count here. But any amount on top of the £30,000 threshold is classed as employment income and so it is also relevant UK earnings. In making this analysis, care is required not to confuse usual wages or pay, pay in lieu of notice or holiday pay, with the redundancy payment when such elements are bundled into a final payment.
benefits in kind which are taxable (applies to employees earning over £8,500, and to directors)
profit related pay (including the part which is not taxable)
Statutory Sick Pay (SSP) and Statutory Maternity Pay (SMP) if paid by the employer and taxable under Section 7(2) ITEPA 2003
Permanent Health Insurance (PHI) payments paid by the employer whilst you are still in employment
pay paid by way of Government Securities
pay in the form of units in an authorised unit trust if taxed on the person receiving it
amounts taken off pay to buy partnership shares in a share incentive plan in line with paragraph 83 of Schedule 8 of Finance Act 2000
income from a trade, profession or vocation that is chargeable under Part 2 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)(applies if the activity is conducted individually or as a partner acting personally in a partnership)
income from a UK and/or EEA furnished holiday lettings business, which is chargeable under Part 3 ITTOIA 2005 (applies if the business is conducted individually, or as a partner acting personally in a partnership)
a UK furnished holiday lettings business means a UK property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005).
an EEA furnished holiday lettings business means an overseas property business so far as it consists of the commercial letting of furnished holiday accommodation (Chapter 6 Part 3 ITTOIA 2005) in one or more EEA states.
in either case if there is a letting of accommodation only part of which is holiday accommodation, a just and reasonable apportionment is to be made to determine the amount of the income from that business that is to be counted.
patent income, where the individual alone or jointly devised the invention for which the patent in question is granted, in the following categories:
royalties or other sums paid regarding patent use and charged to tax under section 579 ITTOIA 2005 (intellectual property)
amounts on which tax is payable under section 587 ITTOIA 2005 (sales of patent rights) or section 593 ITTOIA 2005 (death of seller of patent rights), or
amounts on which tax is payable under section 472(5) of the Capital Allowances Act 2001 (balancing charge) or paragraph 100 of schedule 3 to that Act (balancing charges)

[LeoSayer]

Maybe it would be best for you to defer your DB pension for a few years until you actually need it.

Are you maximising your contributions now while you are earning?

[Armitage.Shanks]

Are you sure you can't take a tax free lumps sum out of the pension at 55? First I've heard of it. I took the maximum TFLS out of mine as I worked out it would be approx 17yrs before I broke even had I not taken it and life's too short so saving more money at 55 to never enjoy was not on my radar.

[Jafinkeesaurus]

I'm already getting the DB pension, forced on me as part of a redundancy package.
I also found another job, but will be finishing work completely next year.
I'll live on savings for 4 or 5 years (to lower them in case I pop off early and my family are left with a large IHT bill - I'm quite exposed and can't really change the circumstances around that), but would also like to push as much of the final salary pension into a DC pension, to also give more protection from IHT.
Looks like I might need to rethink this.

[LeoSayer]

Are you paying your current salary into a pension?

[Jafinkeesaurus]

Yes, full amount allowed via salary sacrifice then putting the remaining salary in also (minus a bit as employer contributions would put me over the limit).

[PistonHead007]

mikef said:

That sounds like recycling, which isn’t allowed. Once you start to draw down on your pensions*, you are limited in what you can pay into your DC pensions from that point. The annual MPAA limit was £4K pa and after the last budget that has been raised (at least for the moment) to £10K pa

• taking your 25% tax-free lump sum at age 55+ shouldn’t trigger the MPAA annual limit

DB pensions don't trigger the MPAA either...

All you can pay in with tax relief is £3,600 gross as your pension isn't relevant UK earnings.

You could pay in more but you'd have to pay an annual allowance tax charge which is equivalent to paying back the tax relief on sums over £3,600 gross.

Stop worrying so much about IHT, you're relatively young.

[Zigster]

If you don’t need the income and inheritance tax is your concern, can’t you just give the money to your heirs now?

And are you sure there isn’t a tax-free cash option with your DB scheme? Not having a cash option is unusual to the extent that, in over 30 years of working with DB pensions, I don’t think I’ve ever seen a scheme which doesn’t offer it.

[PistonHead007]

Zigster said:

And are you sure there isn’t a tax-free cash option with your DB scheme? Not having a cash option is unusual to the extent that, in over 30 years of working with DB pensions, I don’t think I’ve ever seen a scheme which doesn’t offer it.

If it's all Guaranteed Minimum Pension then you cannot have any tax free cash.

The OP never said he couldn't take TFC, just that he's not. The commutation factors vary wildly between schemes and sometimes TFC is a poor deal. In most cases the long term value of the full annual pension is higher than the reduced annual pension with TFC.