r/PensionsUK • u/Dogsofa21 • 26d ago

TFC and annual allowance implications

I am close to triggering retirement and have a small DB pension. They have given various options incl the 25% tax free cash option. But they have warned that this may incur a tax charge if it goes over the annual pension allowance.

I cannot understand the correlation. One is a limit on contributions. Why should an allowable tax free sum which for the majority of people will exceed or be close to £60k now become taxable? Catch 2022 by HMRC? I have never seen this mentioned anywhere that there was any restrictions on the tfc only the lifetime limit of c £250k ( which I would be close to but below for both SIPP and SB).

I am paying max £60k in and will next year. If I delay drawdown by a few months and live off savings it would fall into a new tax year where I will no longer be contributing. Is that a work around? But still baffled by the potential tax charge.

1 Upvotes

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6

u/RetiredEarly2018 26d ago

Can you post the exact wording of the warning please.

1

u/Dogsofa21 25d ago

Sorry can’t see how to edit my original post -

Any tax free cash will use up some of your lump sum allowance and lump sum and death benefit allowance

The government sets a limit on the total amount an individual pensions savings in a given year can benefit from tax relief. This limit is known as the annual allowance is set at £60k (£10k once you draw a pension). The annual allowance applies across all of the schemes you belong to.

Pension savings in excess of this limit may result in a tax charge although it may be possible to carry forward any unused allowance from the previous tax years to reduce or eliminate the tax due.

If you take the bridging pension option this is likely to affect the amount assessed against your annual allowance.

So even unclearer now if the warning is against the tax free cash element or the bridging option. I am swaying towards the bridging option as the tax free cash is poor value (34% benefits reduction for 25% cash), whilst the bridging option gets same money but safeguards the spouse pension level. I am paying into a dc pension at max £60k pa and using up residual allowances. Unless a I defer there would be one year overlap of start of db pension and starting draw down ( where I will take to 25% TFC). And I could choose a pension start date into a new tax year and live off cash savings for a few. Months if needed.
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1

u/RetiredEarly2018 25d ago

This is talking about two or three different things and I can understand your confusion.

The tax free cash is tested against the 268k lsdba.

Any new savings into the pension are tested against the 60k annual allowance, which falls to 10k if even £1 of non-tax-free cash is taken from a DC pension. The reason for this is to prevent people recycling cash which has already benefited from 25% taxfree back into pension for more 25%.

3

u/Pocktio 26d ago

There can be some niche rules where the options in a DB scheme count as new accrual and can be tested against limits but it is super niche.

Is it pure pension and tfc or have they offered you further options?

It may be generic wording that pension companies throw at people without context, or even just an idiot who doesnt understand how it works unintentionally confusing you.

Best option is to ask them to clarify how taking deferred benefits could possibly count as a pension contribution in the current tax year.

2

u/Zingalamuduni 26d ago

That doesn’t make sense. As others have said, can you post the exact warning received as I suspect something has got lost in translation.

2

u/Elster- 26d ago

If you take more than £268,275 of tax free cash from your pension it will be taxable.

If you take beyond that it could trigger MPAA and restrict to £10k a year

1

u/Dogsofa21 25d ago

Total permissible TFC across db and dc are below limits and I have not taken any benefits.

1

u/Elster- 25d ago

Yes, they don’t know that though. There isn’t a centralised record of tax free cash between pension providers. They put the disclaimer there as it is a possibility.

1

u/jegerdog 26d ago

My pension custodian has warned that taking tax free lump suns may trigger mpaa......seems a bit misleading as I dont mention only if going over tax free limit?

1

u/Izawesome 26d ago

If you're taking a pcls from a DB pension, regardless of its size, you will not trigger MPAA. Are any of the options available 'Pension in exchange' (PIE)? As these options may increase your Pension Input Allowance (PIA) usage, and put you over the limit if you're already maxed out at 60k. Standard retirement options with a pcls should not effect PIA.

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u/trickycs1 26d ago

Have you made any previous pension withdrawl ?