ASK TOM How much tax relief can I claim if I’m already taking a pension?

How much tax relief can I claim if I’m already taking a pension?

Our expert helps with a query from a reader who is considering taking two pensions at age 55

I left school at 16 and for eight years or so I worked for a major bank. Once I left the pension was deferred. It is now worth around £3,000 per year with a small lump sum. I realise I can take this pension at 55 (and this will move to 57 in the future).

I also have a police pension which I can take in three years’ time after reaching 30 years’ service.

If I take either or both of these pensions together at 55 or any other age, does this impact on what I can pay into a new pension, as I will almost certainly go into new employment?

If there is any limit once I have retired from the police and taken the pension, what is the most I can pay into a scheme to gain tax relief?

Steve

Tom Selby, AJ Bell Head of Retirement Policy, says:

The amount you can contribute to your pension each year while benefiting from tax relief is limited to 100% of your taxable UK earnings. If, for example, you earn £10,000 in 2022/23, then the maximum personal contributions you can make to a pension during that tax year, inclusive of tax relief, is £10,000.

There is also a separate, more general limit called the annual allowance. For 2022/23, this annual allowance – which covers personal contributions, employer contributions and tax relief – is set at £40,000.

If exceeded, you will be hit with a tax charge which effectively removes your tax relief.

If you are a very high earner then your annual allowance may be reduced, to a minimum of £4,000. You can read more about the annual allowance taper and how it may affect you here.

Finally, if you make certain types of withdrawals from your pension, you will trigger the money purchase annual allowance (MPAA), reducing your overall annual allowance from £40,000 to £4,000. Triggering the MPAA will also prevent you from ‘carrying forward’ any unused allowances from the three previous tax years.

If you access a defined contribution pension flexibly – such as by taking an ad-hoc lump sum or an income via drawdown – you will trigger the MPAA. If you just take your 25% tax-free cash, however, you won’t trigger the MPAA. The same is true if you use your pension pot to buy an annuity.

In addition, you are allowed to take up to three small pot lump sums in your lifetime. These lump sum withdrawals will not trigger the MPAA. In order to qualify as a small pots lump sum, the fund needs to be worth less than £10,000 and must be entirely exhausted when you access it.

Similarly, if either of the pensions you are considering accessing are defined benefit pensions, which sounds like it might be the case, taking this income also won’t trigger the MPAA.

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Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.