Final Salary Pensions And Private Pensions – Taking Income And Making Pension Contributions

We have a number of clients with either current or (more commonly) frozen Final Salary Pension Schemes as well as personal pensions or new employer workplace pension plans. When going through working life ‘collecting’ pensions it can be tricky and more so confusing to understand where you are up to with your retirement provision.

There are so many different historic types of pension scheme with a variety of different ways in which the benefits can be paid that it is no wonder people seek our advice to assist them to make the right decision for them and their needs.

We can help you to map out your desired life and what this might cost. Add to the mix your existing provision such as existing pensions, savings, investments etc and the help you to understand whether you have a shortfall or enough provision or could indeed choose to retire earlier than you had originally planned.

Can I take an income from my pension and continue to pay back into it or another pension plan?

You may have read some rules around what level of contribution you can make to a pension if you are already in receipt of pension income.

The answer to this lies within what type of pension your income is being taken from and whether the withdrawals from the pension are indeed classed as ‘income’ or tax-free cash:

Final Salary Pension Income can be paid without impacting on the level of contribution you can make towards a personal pension plan or money purchase workplace pension scheme.

Most Personal Pensions and Workplace Money Purchase Schemes allow up to 25% of the value to be taken as a Pension Commencement Lump Sum (or Tax Free Cash as it is more commonly known). Taking this and this alone will not impact on your normal pension contribution allowance – unless you try to recycle this tax free cash back into a pension to receive tax relief of course. This would then fall foul of Tax Free Cash Recycling Rules, which are a bit of a mine field in themselves.

Buying an annuity with the remaining 75% of a Money Purchase Pension Scheme will not reduce the amount you can pay into another pension scheme.

However, Income taken from the remaining 75% of a Money Purchase (Personal Pension, Workplace Personal Pension etc) pension scheme via Flexi Access drawdown will indeed trigger something called the Money Purchase Annual Allowance (MPAA). This means that you would then have a reduced annual pension contribution allowance of £4,000 gross, which can be quite limiting.

Why is this important?

Sometimes we have queries where clients are trying to raise capital for their businesses and seek to access some of their pension funds in the hope to replace them later down the line when the business can afford to do so. However, there are some pitfalls as mentioned above which may go overlooked.

If you would like to discuss your own retirement planning needs please do get in touch with our Financial Planning team on 01270 250800 or email awm@alextragroup.co.uk and they will be happy to take a look at how the rules may affect your personally.