‘Could my RAF pension ruin my chance to take a £90,000 tax-free lump sum?’
Write to Pensions Doctor with your pension problem: pensionsdoctor@telegraph.co.uk. Columns are published weekly
Dear Becky,
Aged 60 and still employed, I would like to access the tax-free element of my pension savings (25pc, which equals £90,000 of £360,000 over two defined contribution pots).
I have not touched either pot to date, but do receive a pension from 30 years of RAF service. One of the pots is from a previous employer (with a value of £100,000), and the other is from my current employer.
I pay in large amounts each month to keep my overall earnings (including the RAF pension) below £100,000 (and the punitive 60pc tax rate).
Can I get my hands on the 25pc in both pots and still continue paying into my employer’s defined contribution scheme at up to £60,000 per annum?
Best regards,
Fraser
Dear Fraser,
Although you are taking an income from your RAF pension, you haven’t yet taken either lump sums or taxable income from your private sector, defined contribution pension pots.
Basically, yes: you can take 25pc as a tax-free lump sum from both pots and still continue paying in up to £60,000 a year – the annual allowance – into your current employer’s pension scheme, without losing tax benefits or incurring a tax charge on your contributions.
This would change if you reduced your hours and your earnings went below the £60,000 allowance, or if you started to take taxable income from these pensions.
In the first instance, if your earnings are lower than £60,000, the amount you can pay into your pension while benefiting from tax relief is up to the amount you earn.
You wouldn’t pay a tax charge unless you contributed more than £60,000, but you wouldn’t be entitled to tax relief on contributions above your earnings (which don’t include your RAF pension).
In the second instance, if you started to take taxable income from either of your defined contribution pots, you would trigger what’s called the “Money Purchase Annual Allowance” (MPAA), which means you’d have a lower maximum contribution amount of £10,000 that you could pay into your pension.
The key here is “taxable” income. Taking the 25pc tax-free lump sums doesn’t trigger the MPAA. But the moment you start to take an income from them that is taxable (so basically anything you take after the tax-free amount), either through flexi-access drawdown or through an annuity, the MPAA applies to your contributions.
The MPAA is only triggered on taxable withdrawals from defined contribution pensions and not defined benefit pension schemes, so taking the income from your RAF pension will not have already triggered the MPAA.
The reason there is such a thing as an MPAA, incidentally, is to avoid older workers who can access their private pensions but are still working from “recycling” money earned through their pension, benefiting from tax relief, then withdrawing it as income again straight away.
However, there are plenty of legitimate reasons someone may need to have accessed their pension income, then carried on working and paying in to boost their pension for when they do eventually retire.
