Paying in to DC pension whilst drawing DB pension

[AleisterCrowley]

Hello all
I was having a chat with my mate the other day. He took early retirement from the NHS with a DB pension (he's mid 50s)
He's recently started a new job which he reckons he'll stick at for a few years to build up extra cash.
He's opted out of the pension in the new role, and was talking about sticking his spare cash in an ISA

I suggested he might want to have another look at the pension, as the wisdom seems to be that it's almost always a good idea to pay into a company pension if one is on offer , rather than invest the post-tax income in a savings account. He probably wouldn't touch an equities ISA: too risk averse

I didn't give him any direct advice as (a) I'm not an IFA, (b) I know nothing.

One question in my mind - will the fact he's already drawing his NHS DB pension affect the amount he can pay into a company DC scheme? Does it trigger the MPAA (?) or whatever it is?
Any general thoughts regarding what he should do with his spare cash? Pension, or ISA, or split?

cheers
AC

[ursaminortaur]

Hello all
I was having a chat with my mate the other day. He took early retirement from the NHS with a DB pension (he's mid 50s)
He's recently started a new job which he reckons he'll stick at for a few years to build up extra cash.
He's opted out of the pension in the new role, and was talking about sticking his spare cash in an ISA

I suggested he might want to have another look at the pension, as the wisdom seems to be that it's almost always a good idea to pay into a company pension if one is on offer , rather than invest the post-tax income in a savings account. He probably wouldn't touch an equities ISA: too risk averse

I didn't give him any direct advice as (a) I'm not an IFA, (b) I know nothing.

One question in my mind - will the fact he's already drawing his NHS DB pension affect the amount he can pay into a company DC scheme? Does it trigger the MPAA (?) or whatever it is?
Any general thoughts regarding what he should do with his spare cash? Pension, or ISA, or split?

cheers
AC

The MPAA is only triggered by drawing down a DC pension so him being in receipt of a DB pension won't trigger it. The money he gets from the pension though doesn't count as relevant earnings so he will be restricted to contributing the minimum of the annual allowance and what he actually earns from the new job to any pensions.

Note. An occupational pension will have some employer contribution - at least 3% and often more. Hence by not joining the pension he is giving up free money. In the past there might have been an argument for not joining the new company's pension scheme if he had a really large DB pension and was in danger of exceeding the lifetime allowance but that is no longer the case as the LTA excess charge has been abolished and the LTA is due to be abolished completely next year.

[kempiejon]

The MPAA is only triggered by drawing down a DC pension so him being in receipt of a DB pension won't trigger it. The money he gets from the pension though doesn't count as relevant earnings so he will be restricted to contributing the minimum of the annual allowance and what he actually earns from the new job to any pensions.

That is my understanding re MPAA.,

will the fact he's already drawing his NHS DB pension affect the amount he can pay into a company DC scheme?

I accrue a DB pension at work, I am also paying into a SIPP so I have to calculate the input amount of my DB and deduct that from my allowance/earnings to give a maximum value that I can contribute to the SIPP and get tax relief. Not sure if the same applies when taking the DB pension though. I would be interested to know if drawing the DB affects the input amount differently to when accruing it.

[AleisterCrowley]

Thanks both
That's how I see it, based on reading around (including some 'fascinating' HMRC PTM documents...)
I don't think my friend has a SIPP so he will be automatically limited to the max he can pay into his work DC scheme by salary sacrifice
I'm not sure what the maximum is - vague memory you have to leave a certain amount as taxable salary - either greater than your DC contribution, or greater than your annual allowance?

[AleisterCrowley]

Thanks both
That's how I see it, based on reading around (including some 'fascinating' HMRC PTM documents...)
I don't think my friend has a SIPP so he will be automatically limited to the max he can pay into his work DC scheme by salary sacrifice
I'm not sure what the maximum is - vague memory you have to leave a certain amount as taxable salary - either greater than your DC contribution, or greater than your annual allowance?

Or it may not be salary sacrifice - never sure how it works when it's non sal sac

[kempiejon]

They can have a SIPP and a works DC pension sal sac or nay. The maximum amount that can get tax relief is the minimum of total salary or £60k less any adjustment for DB pension. There would be carry forward for 3 years if unused and relevant earnings.

Your annual allowance applies to all of your private pensions, if you have more than one.
This includes:
the total amount paid in to a defined contribution scheme in a tax year by you or anyone else (for example, your employer)
any increase in a defined benefit scheme in a tax year

https://www.gov.uk/tax-on-your-private- ... -allowance

[BullDog]

Personally I'd say if you're an employee, opting out of an occupational DC pension is not a good thing. You lose any employer contribution. That's free money you're opting out of. Plus, if possible, you should look at salary sacrifice for DC pension contributions from salary. As others said, whilst drawing DB pension benefits you can pay a maximum of £60,000 or salary/income whichever is the lower into the DC plan.

[ursaminortaur]

The MPAA is only triggered by drawing down a DC pension so him being in receipt of a DB pension won't trigger it. The money he gets from the pension though doesn't count as relevant earnings so he will be restricted to contributing the minimum of the annual allowance and what he actually earns from the new job to any pensions.

That is my understanding re MPAA.,

will the fact he's already drawing his NHS DB pension affect the amount he can pay into a company DC scheme?

I accrue a DB pension at work, I am also paying into a SIPP so I have to calculate the input amount of my DB and deduct that from my allowance/earnings to give a maximum value that I can contribute to the SIPP and get tax relief. Not sure if the same applies when taking the DB pension though. I would be interested to know if drawing the DB affects the input amount differently to when accruing it.

The complication you refer to only occurs if you are contributing to a DB pension. And it should be noted that within that calculation the effect of inflation is discounted. When your DB pension is in payment (or for that matter if it is deferred) you aren't contributing to it and the growth is usually either at the rate of inflation or a capped rate of inflation and hence such a DB pension can be ignored when considering what you can contribute to other pensions.

https://techzone.abrdn.com/public/pensions/guide-pension-annual-allowance#anchor_3

DB schemes - pension input amount
The input amount is the capitalised value of the increase in the DB benefits over the input period, using a factor of 16:1.

The input amount is calculated by subtracting the opening value of the benefits from the closing value. These values are calculated as:

Opening value - The pension benefits at the start of the tax year are capitalised by multiplying the accrued pension by 16.

If the scheme provides a separate lump sum in addition to the pension, the accrued lump sum is added to this value (this is typically seen in older public sector schemes).

This total value is then allowed to be increased by the annual percentage CPI from September of the previous year. If the CPI figure is negative, the total remains the same, it does not decrease.

Closing value - This is the increased pension amount at the end of the tax year multiplied by 16.

Add in the increased amount of any separate lump sum.
Subtract the opening value from the closing value and any positive result is the pension input amount for the tax year.

If the result is negative, which can occur when the CPI figure to use for uprating the opening value is quite large and the actual accrual during the year is small, then the pension input amount is just zero, not the negative amount.

[kempiejon]

The complication you refer to only occurs if you are contributing to a DB pension. And it should be noted that within that calculation the effect of inflation is discounted. When your DB pension is in payment (or for that matter if it is deferred) you aren't contributing to it and the growth is usually either at the rate of inflation or a capped rate of inflation and hence such a DB pension can be ignored when considering what you can contribute to other pensions.

Thank you for that. I suspected as much as when I do the calculation for my DB input amount it looks at the difference in the value of the pension between one year and the next so if not accruing, if in payment or as you say if deferred only the inflation amount changes between years.

[Blagdon]

Personally I'd say if you're an employee, opting out of an occupational DC pension is not a good thing.

Generally, but be careful of...
* Already used maximum tax free lump sum
* Likely to pay 40% on way out of pension
* Amount of employer contribution versus employee contribution
* If only saving 20% tax on way in

It is certainly possible for it to be pretty borderline.

[LP54]

Tricky one here.. my wife got made redundant and had a hybrid DC & (an old) DB pension. The whole of the DC pension was taken as the 25% tax free lump sum and she now takes the DB pension.
She is working again and as the DC pension tax free lump sum does not trigger the MPAA (or does it?) is she able to pay into her SIPP and get the full tax allowance?
Finding it quite difficult to get an answer to this one when researching.

[kempiejon]

Tricky one here.. my wife got made redundant and had a hybrid DC & (an old) DB pension. The whole of the DC pension was taken as the 25% tax free lump sum and she now takes the DB pension.
She is working again and as the DC pension tax free lump sum does not trigger the MPAA (or does it?) is she able to pay into her SIPP and get the full tax allowance?
Finding it quite difficult to get an answer to this one when researching.

I think she is able to pay in. As I understand it 25% lump sum provided no other income from DC taken does not trigger MPAA, taking DB does not and she can still add to a SIPP or other DC pension up to allowances. Does she get anything from the new employer? The DB will have an impact on annual contribution amount. What's it called pension input amount?

[LP54]

Tricky one here.. my wife got made redundant and had a hybrid DC & (an old) DB pension. The whole of the DC pension was taken as the 25% tax free lump sum and she now takes the DB pension.
She is working again and as the DC pension tax free lump sum does not trigger the MPAA (or does it?) is she able to pay into her SIPP and get the full tax allowance?
Finding it quite difficult to get an answer to this one when researching.

I think she is able to pay in. As I understand it 25% lump sum provided no other income from DC taken does not trigger MPAA, taking DB does not and she can still add to a SIPP or other DC pension up to allowances. Does she get anything from the new employer? The DB will have an impact on annual contribution amount. What's it called pension input amount?

Thanks.

Tricky one here.. my wife got made redundant and had a hybrid DC & (an old) DB pension. The whole of the DC pension was taken as the 25% tax free lump sum and she now takes the DB pension.
She is working again and as the DC pension tax free lump sum does not trigger the MPAA (or does it?) is she able to pay into her SIPP and get the full tax allowance?
Finding it quite difficult to get an answer to this one when researching.

I think she is able to pay in. As I understand it 25% lump sum provided no other income from DC taken does not trigger MPAA, taking DB does not and she can still add to a SIPP or other DC pension up to allowances. Does she get anything from the new employer? The DB will have an impact on annual contribution amount. What's it called pension input amount?

Thanks. This is the way we see it too. Her new employer is me but we are trying to maximise this years allowance up to her earnings for the full year (not including DB pension of course) but have really struggled to find a definitive answer even from people that really should know.

[kempiejon]

we are trying to maximise this years allowance up to her earnings for the full year (not including DB pension of course) but have really struggled to find a definitive answer even from people that really should know.

A couple of years ago I was looking for similar answers and had similar questions. Pension input amount was the sticky one for me MPAA was fairly clear. I had DC and DB and at 55 was looking to take 25% from my SIPP and keep working and start taking my DB maximising my contributions. I struggled to understand it too but I got great answers from Moneywise. It was a couple of years back but I think the rules are broadly the same. Here's the contact details I used.

Twitter: @TPASNews
Facebook: /pensionsadvisoryservice
Pensions helpline: 0300 123 1047 General Office: 020 7630 2250
Website: www.pensionsadvisoryservice.org.uk

Seems they are no longer operating in the way I used them but Pensionwise seem to have taken over for the over 50s.

[LP54]

we are trying to maximise this years allowance up to her earnings for the full year (not including DB pension of course) but have really struggled to find a definitive answer even from people that really should know.

A couple of years ago I was looking for similar answers and had similar questions. Pension input amount was the sticky one for me MPAA was fairly clear. I had DC and DB and at 55 was looking to take 25% from my SIPP and keep working and start taking my DB maximising my contributions. I struggled to understand it too but I got great answers from Moneywise. It was a couple of years back but I think the rules are broadly the same. Here's the contact details I used.

Twitter: @TPASNews
Facebook: /pensionsadvisoryservice
Pensions helpline: 0300 123 1047 General Office: 020 7630 2250

Seems they are no longer operating in the way I used them but Pensionwise seem to have taken over for the over 50s.

Thats a great help, Thanks. I am pretty sure that you are correct but I will post an update once I have it confirmed.

[DrFfybes]

Another one to sort of confirm it here. MrsF had a DB scheme and SSAVCs when she retired the first time. She took the AVCs as a TFLS as the one related to the DB pot was relatively small.

She is still paying into CARE DB scheme, and was able to SSAVC above the MPAA, and I assume a SSAVC has the same rules as a SIPP.

Paul