Loss of Pensions tax relief for withdrawals of 25% after 55

[wax lyrical]

I understand that after the age of 55, if one withdraws more than the 25% tax-free lump sum, then the maximum pension contribution cap per year falls to £10,000.

What are the mechanics of this? I'll still be working and paying pension contributions, so at the end of the tax year, (if I pay more than the £10k), would this loss of tax relief be effected through the submitted tax return? Or will HMRC be notified of the changes immediately and change my tax code for my employer's monthly payroll?

Thanks in advance for all input!

[Mr Pointy]

It's not just tax relief that is affected - you cannot make contributions over £10k so you'll need to find a way to stop paying.

[OddCat]

If you are earning so much tgat your workplace contributions are in excess of £10,000, why would you want to take taxable money from a pension ?

[wax lyrical]

I ideally need the money now, not when I retire - assuming I live that long.

A colleague of mine had lovely retirement plans and then died of cancer a few years ago at 62.

OddCat said:

If you are earning so much tgat your workplace contributions are in excess of £10,000, why would you want to take taxable money from a pension ?

[Zigster]

It’s a terrible idea to blow your pension now because you know someone who died relatively young, while ignoring the experience of other people you likely know who lived to a ripe old age.

In terms of the mechanics of having triggered the Money Purchase Annual Allowance,
You very definitely can pay further contributions in excess of the MPAA
The excess contributions are, in effect, treated as taxable income and tax is thus due on those excess contributions. It’s up to you to calculate the liability through your tax return, and then pay the tax due
I’m not sure if “scheme pays” can be used for the MPAA - I think it can but don’t quote me on that.

[Mr Pointy]

Zigster said:

It’s a terrible idea to blow your pension now because you know someone who died relatively young, while ignoring the experience of other people you likely know who lived to a ripe old age.

In terms of the mechanics of having triggered the Money Purchase Annual Allowance,
You very definitely can pay further contributions in excess of the MPAA
The excess contributions are, in effect, treated as taxable income and tax is thus due on those excess contributions. It’s up to you to calculate the liability through your tax return, and then pay the tax due
I’m not sure if “scheme pays” can be used for the MPAA - I think it can but don’t quote me on that.

Don't you risk getting hit twice for tax though as the excess payments come from taxed income, so you get taxed on them again AND you don't get the tax relief?

[xeny]

wax lyrical said:

I ideally need the money now, not when I retire - assuming I live that long.

Why are/have you been making pension contributions at all then?

[iphonedyou]

xeny said:

Why are/have you been making pension contributions at all then?

He said a colleague of his died at 62 of cancer a few years ago; one presumes it is that which has changed his outlook.

[Zigster]

Mr Pointy said:

Zigster said:

It’s a terrible idea to blow your pension now because you know someone who died relatively young, while ignoring the experience of other people you likely know who lived to a ripe old age.

In terms of the mechanics of having triggered the Money Purchase Annual Allowance,
You very definitely can pay further contributions in excess of the MPAA
The excess contributions are, in effect, treated as taxable income and tax is thus due on those excess contributions. It’s up to you to calculate the liability through your tax return, and then pay the tax due
I’m not sure if “scheme pays” can be used for the MPAA - I think it can but don’t quote me on that.

Don't you risk getting hit twice for tax though as the excess payments come from taxed income, so you get taxed on them again AND you don't get the tax relief?

Sounds right. It’s not a great idea from a tax efficiency point of view.

The only reason I can see why one might do it is either in a DB scheme where you can’t control the Pension Input Amount (e.g. senior doctors) or in a DC scheme because you’ll lose the employer’s contribution if you opt out.

But that’s the Annual Allowance. It really does seem a daft approach to trigger the MPAA and then deliberately contribute in excess of it. Much better just to take the tax-free cash from existing funds and leave the rest invested so you at least continue to benefit from the £60k AA.

[Ken_Code]

wax lyrical said:

I ideally need the money now, not when I retire - assuming I live that long.

A colleague of mine had lovely retirement plans and then died of cancer a few years ago at 62.

OddCat said:

If you are earning so much tgat your workplace contributions are in excess of £10,000, why would you want to take taxable money from a pension ?

Then why will you continue to want to fund your pension?

[Sir Bagalot]

So let say I have a £120K pension pot.

Take 25% tax free when 55 £30K, and then say pay additional payment of say £5K per year for 5 years (25K plus tax relief, £30K)

Is that right? (Assuming I don't break £10K pa limit)

[isleofthorns]

Sir Bagalot said:

So let say I have a £120K pension pot.

Take 25% tax free when 55 £30K, and then say pay additional payment of say £5K per year for 5 years (25K plus tax relief, £30K)

Is that right? (Assuming I don't break £10K pa limit)

from what I understand, if you only take the Tax free amount and not any of the 75% in drawdown, you can still make full payment contributions up to 60k

[modeller]

isleofthorns said:

from what I understand, if you only take the Tax free amount and not any of the 75% in drawdown, you can still make full payment contributions up to 60k

mine too

[Franco5]

wax lyrical said:

I know someone who died in a car crash at 17. Hasn’t stopped me from saving into a pension.

[sugerbear]

If you are lucky enough to have a DB pension then you can take it at 55 without triggering the 10k yearly limit.

[AndyAudi]

Sir Bagalot said:

So let say I have a £120K pension pot.

Take 25% tax free when 55 £30K, and then say pay additional payment of say £5K per year for 5 years (25K plus tax relief, £30K)

Is that right? (Assuming I don't break £10K pa limit)

Before we all go chasing free money, Fairly sure I got shot down by someone more knowledgeable last time I mentioned it but I need to question,

That to me looks like what’s described as“pension recycling” ?
(Planning to use the tax free lump to fund future contributions & I think that’s not allowed)

https://www.gov.uk/hmrc-internal-manuals/pensions-...

[Sir Bagalot]

AndyAudi said:

Sir Bagalot said:

So let say I have a £120K pension pot.

Take 25% tax free when 55 £30K, and then say pay additional payment of say £5K per year for 5 years (25K plus tax relief, £30K)

Is that right? (Assuming I don't break £10K pa limit)

Before we all go chasing free money, Fairly sure I got shot down by someone more knowledgeable last time I mentioned it but I need to question,

That to me looks like what’s described as“pension recycling” ?
(Planning to use the tax free lump to fund future contributions & I think that’s not allowed)

https://www.gov.uk/hmrc-internal-manuals/pensions-...

Can someone put that into plain English?

I would be planning to use the 25% to pay a lump sum off my mortgage, Once the mortgage debt is settled I would then aim to build back up what I took out of my pension.

[bompey]

i suspect you would be better off increasing your mortgage repayments and reducing your pension contributions, until it's paid off, if you are continuing to work. Once you retire then it's a different matter and by all means take the lump sum and clear the mortgage.