Pension question - contributions after 25% tax free lump sum

[coetzeeh]

I took a 25% tax free lump sum from a pension pot but not drawing down as I continue to work.
I continue to make contributions into this pot.

Question is - will the additional contributions be eligible for the 25% tax free cash in future, or do I need to pay the new contributions into a new pension fund?

Thanks.

[WayOutWest]

coetzeeh said:

I took a 25% tax free lump sum from a pension pot but not drawing down as I continue to work.
I continue to make contributions into this pot.

Question is - will the additional contributions be eligible for the 25% tax free cash in future, or do I need to pay the new contributions into a new pension fund?

Thanks.

"I continue to make contributions into this pot." - what you will find is it is actually a different "pot". Typically what happens is by crystallising everything in your current pension to get the 25% tax free lump sum, everything else left will have been moved into what is designated a drawdown or decumulation pot. From which you can draw a taxable income whenever suits.
Any new contributions you make will go into the old (or maybe even a new designated) accumulation pot - which will be empty at present.

As you have only taken the 25% tax free lump sum you should be free to make pension contributions up to £60k pa, or whatever your annual income is.
Once you take anything over that 25% amount, eg anything from the drawdown/decum pot as taxable income, it then triggers something called the MPAA (Money Purchase Annual Allowance) which restricts your annual contributions to £10k. Which it sounds like you might already know about.

As for "will the additional contributions be eligible for the 25% tax free cash in future" the answer is yes. The only issue I can see is if this is some work pension scheme and HR/payroll have to arrange to set up a new pension account number because the pension provider don't allow you to keep paying into the old accumulation pot after full crystallisation.

Edited by WayOutWest on Monday 8th January 17:30

[coetzeeh]

Thank you very much for taking the time to answer. Much appreciated.

[ferret50]

Tax paid on your pension will also depend on your other income.....you are allowed to earn/receive £12570 before paying tax, so if your earnings are £10,000 pa, you can draw £2570 from your pension tax free.

[GT03ROB]

Well this seems to have taught me something new!

I wasn't aware that you could take the 25% tax free LS & still be contributing into a pension with tax relief.

Or have I misunderstood something?

[FriedMarsBar]

GT03ROB said:

I wasn't aware that you could take the 25% tax free LS & still be contributing into a pension with tax relief.

Or have I misunderstood something?

That's what I understand as the TFLS isn't considered as taking your pension.

EDIT: I should I hope this is correct as I'm about to take my 25% TFLS sum and will be working for quite a while to come and continuing to pay into my pension.

Edited by FriedMarsBar on Tuesday 9th January 15:53

[Sir Bagalot]

Silly Question

What is stopping you taking 25% as a lump sum, and then paying that money back in later?

For example (keeping the maths easy). You have a £100K pot.

You take out £25K tax free.

A month later you make a pension contribution of £25K of which you get a 20% top up, so £30K

I know it can't be that simple, but someone please explain

[thekingisdead]

There’s a good series on YouTube from a guy called Chris Bourne financial”

One of his vids covers exactly this topic.

[Sir Bagalot]

Thanks for the pointers.

My finger in the air plan could be take 25% tax free and pay a lump sum off a mortgage. I would then continue to pay down the mortgage and only when it was clear would I look at starting contributions into a pension. The contributions would equal the amount taken out over perhaps a 2 year window, but that would be 3-4 years away.

Would that fall fowl of HMRC rules?

[Michael_B]

Sir Bagalot said:

Would that fall fowl of HMRC rules?

That would depend on whether they think your excuses are a bit poultry.

[GT03ROB]

Jasey_ said:

It's called pension recycling and you are not allowed to do it.

Google it

Now that was my original assumption also.

So can you or can't you?

The reason I was interested in this is several fold.

• I come off a 5 year mortgage fix in June. Taking the 25% would clear the balance.
• I would still be working for an indeterminate period with pension contributions through my employment
• the potential for Labour when they get in to dick around with pensions & in particular the TFLS

In this situation it may be attractive for me to take the TFLS, while continuing with the contributions through my employers scheme

[Zigster]

You can recycle lump sums back into your pension, but you do have to be a little careful not to breach some limits. Good summary here
https://www.unbiased.co.uk/discover/pensions-retir...

[coetzeeh]

coetzeeh said:

I took a 25% tax free lump sum from a pension pot but not drawing down as I continue to work.
I continue to make contributions into this pot.

Question is - will the additional contributions be eligible for the 25% tax free cash in future, or do I need to pay the new contributions into a new pension fund?

Thanks.

thought i'd update on my own question having spoken to pension provider.

The 75% remaining after the lump sum was taken is crystalised and ring fenced within the fund.
Further contributions into the fund will also qualify for the 25% tax free element even though it is being paid into the same fund.

[gt4rs.wp]

That’s assuming you haven’t exceeded the LTA?

[Mr Pointy]

gt4rs.wp said:

That’s assuming you haven’t exceeded the LTA?

That's gone though, hasn't it?

[alscar]

Mr Pointy said:

That's gone though, hasn't it?

For now - then will depend on what Labour decide to do.

[gt4rs.wp]

Post-6 April 2024, a PCLS will continue to be paid tax-free but also continue to be restricted by a permitted maximum, this being the lowest of: (1) an amount calculated by reference to the level of pension; (2) the available LSA; and (3) the available LSDBA. Essentially, this means the standard PCLS will still be capped at £268,275. It will continue to be the case that a lump sum exceeding the permitted maximum will not constitute a PCLS.

[coetzeeh]

gt4rs.wp said:

That’s assuming you haven’t exceeded the LTA?

Correct

[Pit Pony]

Sir Bagalot said:

Silly Question

What is stopping you taking 25% as a lump sum, and then paying that money back in later?

For example (keeping the maths easy). You have a £100K pot.

You take out £25K tax free.

A month later you make a pension contribution of £25K of which you get a 20% top up, so £30K

I know it can't be that simple, but someone please explain

Brilliant.

[Sevenon]

What about if you don't take the 25% in a lump sum. Say you just take 5%. Do I still have 20% of the pension pot to take out tax free at a later stage? Can that be in multiple drawdowns or it must be in one lump sum?