'Will there be a cap on tax-free withdrawals from pensions?'
To kick off 2019 we’ve got a bumper edition of ‘Ask Tom’, with resident AJ Bell pensions expert Tom Selby answering three of the questions sent in over the festive period.
Question 1 Anonymous
My pension closed at age 60 and I transferred what monies were in it (£4,000) into a SIPP. I did not claim any tax relief on it. It is now with another provider and I still do not claim any tax relief on it, even though its value has increased.
Can I claim tax relief or not?
The way pension tax relief is added to your fund depends on that type of scheme you saved in. If you were in a defined benefit (DB) scheme then tax relief will have been added automatically, so it will be included in any money you transferred to a SIPP.
If it was a ‘net pay’ defined contribution (DC) pension – where your contribution is taken from your salary before any tax has been paid - then your tax relief should also have been added automatically, unless you were earning below the personal allowance at the time you made your contribution.
If it was a ‘relief at source’ DC scheme then your provider should have added on tax relief at the basic-rate (20%), regardless of how much you were earning at the time. You would then be able to claim
back an extra 20% or 25% if you were a higher or additional-rate taxpayer through your tax return.
So it’s likely you’ll have received some or all of the tax relief you were entitled to automatically, although this will depend on the type of scheme you were in.
If you do think you have missed out on tax relief it’s worth writing to HMRC to set out your case. You can find details on how to do this here.
However, even if you are eligible to reclaim tax relief this will based on the value of your original contribution only, so won’t take into account any investment growth your fund has enjoyed since.
Question 2 Clive, 59
I have consolidated all of my defined contribution pensions into a SIPP, but I also have a small defined benefit pension which is due to start paying out in 3 months’ time.
Will this affect my ability to put the full amount into my SIPP? If so, I’m guessing I would need to defer my DB pension payout (not including tax-free amount).
As you have alluded to in your question, the amount you can save in a UK pension scheme each year is determined by the annual allowance.
Slightly confusingly, there are different annual allowances depending on your earnings or how you have accessed your pension savings.
For most people, the annual allowance is £40,000 (including tax relief). However, those with total earnings above £150,000 could be subject to the annual allowance ‘taper’, which gradually reduces the amount you can save in a pension each year to a minimum of £10,000.
There is also a third version called the ‘Money Purchase Annual Allowance’ (MPAA). This kicks in when you access your fund using the pension freedoms introduced in April 2015.
In order for the MPAA to take effect two conditions must be met.
Firstly, the income you withdraw must be taxable (i.e. taking a tax-free lump sum won’t affect your annual allowance).
Secondly, it must be a flexible withdrawal from a defined contribution pension from age 55.
Provided you do not meet both of these conditions the MPAA shouldn’t affect you. So receiving a DB pension shouldn’t impact on your ability to save in a DC vehicle such as a SIPP.
Similarly, if you purchased a non-flexible annuity – a product which provides a guaranteed income for life – this should not impact your annual allowance.
Question 3 Brian
I’ve read stories suggesting the Government is going to cap the amount you can take tax-free from your pension at £40,000.
Is this true, and if so should I take my tax-free cash now
while I still can?
No, it’s not true. While clearly you can never rule anything in or out categorically when it comes to political decisions such as this, there are no current plans to alter pension tax relief or reduce the amount you can withdraw tax-free.
I suspect the story you have read was reporting on proposals from a think-tank called the Resolution Foundation, which has put forward a number of ideas designed to save money and make the tax system “fairer”.
Even if there were to be any changes in this area – and it should be noted that despite constant rumours the entitlement to 25% tax-free cash has remained unaltered – it is likely some sort of transitional arrangements would be put in place. Anything less than this would risk fundamentally undermining trust in pensions.
More broadly, it’s rarely a good idea to make decisions which could affect your financial future based on speculation which may or may not be grounded in fact.
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