The Lemon Fool

Would welcome any thoughts on a problem I have. I am currently on a career break due to return to work next March. When I do I can pay contributions to my work pension for the two years I will have been off (I pay one third and employer pays two thirds, totalling around £30k). I was planning to draw down on a SIPP this year not so much because I need the money but as I have no other income £12.5k will be tax free (ignoring 25% tax free). My worry is that by drawing down the SIPP I will be limiting the money I can pay into my work pension and work related AVCs to £4k per annum. Is this the case?

totaltool wrote:Would welcome any thoughts on a problem I have. I am currently on a career break due to return to work next March. When I do I can pay contributions to my work pension for the two years I will have been off (I pay one third and employer pays two thirds, totalling around £30k). I was planning to draw down on a SIPP this year not so much because I need the money but as I have no other income £12.5k will be tax free (ignoring 25% tax free). My worry is that by drawing down the SIPP I will be limiting the money I can pay into my work pension and work related AVCs to £4k per annum. Is this the case?

Yes - If you drawdown anything other than the 25% tax free lump sum from your SIPP then you will be restricted in the future to only being able to contribute a maximum of £4k a year (the MPAA limit) to any DC pension in the future. This restriction though doesn't apply to DB pensions just DC pensions. Hence it would apply to further contributions to a work DC pension or a DC AVC associated with a DB pension or a SIPP.

https://www.moneyadviceservice.org.uk/en/articles/money-purchase-annual-allowance

The MPAA won’t normally be triggered if:

You take a tax-free cash lump sum and buy a lifetime annuity that provides a guaranteed income for life that either stays level or increases
You take a tax-free cash lump sum and put your pension pot into a flexi-access drawdown scheme but don’t take any income from it
You cash in small pension pots valued at less than £10,000

The MPAA only applies to contributions to defined contribution pensions and not defined benefit pension schemes.

You mention paying in two years contributions for the time you were off. After triggering the MPAA you will not be able to use carry forward to use up previous years' unused annual allowances when contributing to DC schemes.

https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/carry-forward

Where an individual is subject to the MPAA and they want to pay more than £4,000 into their money purchase pension scheme, they cannot carry forward any unused annual allowances from the three previous tax years.

It is also worth noting that carry forward even where the MPAA is not an issue is only applicable where you have sufficient earnings in this tax year to cover the payments and that you have to fill up this year's annual allowance of £40,000 first before you can start using any previous years' annual allowances.

To use carry forward, you must make the maximum allowable contribution in the current tax year (£40,000 in 2019/20) and can then use unused annual allowances from the three previous tax years, starting with the tax year three years ago.

You can’t receive tax relief on contributions in excess of your earnings in a tax year and you only receive higher rate tax relief to the extent that you have paid it.

If a particular tax year’s unused annual allowance is not fully used, it can only be carried forward for up to three years, after which it is lost.

If you are using carry forward to make larger pension contributions, you will only receive tax relief on total contributions that you pay into your pension scheme(s) that do not exceed your earnings in the tax year that you pay them.

Thanks for coming back so quickly and in such detail. I will digest it in more detail later. For info my work pension is DB.

For further information, as noted above the MPAA restriction only applies to contributions to DC or AVC contributions. However, if you don’t need the money, you might regret restricting yourself in this way for the sake of saving a few thousand pounds in tax - the restriction is permanent. And what will you do with the money you’ve withdrawn from your pension - would it be a better use of it than leaving it inside the pension wrapper?

You should also be aware of how the annual allowance is calculated for DB pensions, to make sure that making 3 years contributions in one go isn’t going to put you over the limit. It is complicated, and based not on the amount of money contributed into the scheme, but on the increase in your pension benefits that you accrue in that year.
See this (a little way down the page, under ‘calculating pension input into a defined benefit pension’ for the method used:

https://www.pensionsadvisoryservice.org ... -allowance

HTH.

Btw if you did need money from your SIPP, you could avoid triggering the MPAA by simply taking the 25% tax free cash. But you said you specifically wanted to take taxable money, and that will certainly trigger it.

Jabd2001 wrote:For further information, as noted above the MPAA restriction only applies to contributions to DC or AVC contributions. However, if you don’t need the money, you might regret restricting yourself in this way for the sake of saving a few thousand pounds in tax - the restriction is permanent. And what will you do with the money you’ve withdrawn from your pension - would it be a better use of it than leaving it inside the pension wrapper?

You should also be aware of how the annual allowance is calculated for DB pensions, to make sure that making 3 years contributions in one go isn’t going to put you over the limit. It is complicated, and based not on the amount of money contributed into the scheme, but on the increase in your pension benefits that you accrue in that year.
See this (a little way down the page, under ‘calculating pension input into a defined benefit pension’ for the method used:

https://www.pensionsadvisoryservice.org ... -allowance

HTH.

HTH,

I can't actually see much about the DB calculation in that link.

Possibly this would be better

https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/annual-allowance/

For increases to the pension rights under a DB scheme a 16:1 valuation factor is used (the factor was 10:1 prior to 6 April 2011). When calculating the pension to value, no actuarial reduction factor is to be applied, nor is the member to be treated as though in ill health.

What happens is the opening value of rights, (uprated by CPI each September), is subtracted from the closing value of rights. The difference is the pension input amount. The CPI measure used is the measure for the year to September in the tax year immediately preceding the tax year the pension input period ends. eg. for the 2018/19 tax year the CPI figure from September 2017 is used.

Immediately following this paragraph are a couple of examples.

Example 1: calculation for a Defined Benefit pension input amount

The assumed basis for calculating a defined benefit pension input amount in this example is a 1/60th accrual scheme, and CPI of 3%

15 years’ service
£75,000 pensionable earnings; increasing to £78,000
Inflation 3%
Money purchase AVC contributions £4,680
.
.
.
Example 2: calculation for a Defined Benefit pension input amount

Assumed basis for this example is 1/80th plus 3n/80th cash scheme

15 years' service
£75,000 pensionable earnings; increasing to £78,000
Inflation 3%
Money purchase AVC contributions £4,680
.
.
.



As you can see HMRC have made it nice and simple - not.

ursaminortaur wrote:
I can't actually see much about the DB calculation in that link.

.

Down at the bottom, you need to click through. But I’m sure your info is better
I was trying to find an ‘official’ source, but searched in vain on gov.uk.

Btw, HTH means ‘hope that helps’

Jabd2001 wrote:

ursaminortaur wrote:
I can't actually see much about the DB calculation in that link.

.

Down at the bottom, you need to click through. But I’m sure your info is better
I was trying to find an ‘official’ source, but searched in vain on gov.uk.

OK I see it now - the examples are pretty similar to those in my link.

Jabd2001 wrote:Btw, HTH means ‘hope that helps’

Sorry I just assumed it was a signature - there is another poster who signs himself HYD though that corresponds more closely to his posting name.