28th November 2018 at 2:40pm
What happens when you’re taking your tax-free cash from your pension but want to keep saving into it? Technical Consultancy Manager for Standard Life Aberdeen, David Downie, explains in this Q&A.
Can I take a lump sum, tax-free payment of up to 25% when I reach 55 and still pay into my pension plan along with my employer making their usual payments up until I’m 65, or later?
If you’re in a modern flexible pension, you can take your tax-free cash and continue to make contributions into your pension.
And if you just take your tax-free cash and maintain the pension contributions you and your employer are currently making, there won’t be tax consequences.
But, bear in mind that not all company pension schemes are flexible enough to let you do this, especially if you’re still working.
And some older pension schemes don’t let you take just your tax-free cash without also taking an income, so you’d need to check.
What if I want to increase how much I pay in?
If you plan to increase your contributions, there are tax rules to discourage people from taking their tax-free cash from their pension pot and paying it back in.
This is to ensure you don’t get tax relief twice on the same money.
What is ‘recycling’ into your pension?
If you use your pension tax-free lump sum to make a new or increased payment into a pension plan, this could be what HMRC calls ‘recycling’. You may need to pay an extra tax charge of between 40%-55% of the lump sum you’ve taken.
This only applies if you’ve deliberately recycled your lump sum back into your pension – and that it was pre-planned.
There’s no charge if you’ve increased your payments as a result of a pay rise or promotion.
What if I’m planning to take income as well as tax-free cash from my pension?
If you start taking an income from your pension as well as your tax-free cash, what you might be able to continue saving could be affected. You can usually save up to 100% of your yearly income – up to a maximum of £40,000 as your annual allowance – into your pension and normally get tax-relief on what you pay in.
When you start taking an income from your pension, you might get a lower limit.
This is the Money Purchase Annual Allowance, and it’s £4,000.
The good news is that if you are only taking tax-free cash out of your pension, you’ll be able to keep the full £40,000 allowance.
Tax and legislation may change. The information here is based on our understanding in November 2018 and shouldn’t be regarded as financial advice. Your own circumstances will have an impact on your tax treatment. A pension is an investment, the value can go down as well as up and you could get back less than you paid in.