Am I able to continue investing £3,600 per year into my SIPP while, in parallel, taking an income (pension) from my SIPP pot?

Malcolm

Tom Selby, AJ Bell Head of Retirement Policy says:

The most someone with little or no UK relevant earnings can save in a pension each year and still get tax relief is £3,600 (inclusive of the tax relief). As this is the figure you have mentioned, I’m going to assume these are your circumstances.

For those with earnings above £3,600, the personal contributions that benefit from tax relief are capped at 100% of those earnings. It’s worth noting that when we say ‘relevant earnings’, this covers things like salary and bonuses. It does not include dividends, pension income or most types of rental income.

For completeness there are several other annual pension saving allowances that may be relevant to some readers.

The annual allowance looks at total contributions each year – including personal contributions, employer contributions and tax relief – and is set at £40,000. Any contributions over the annual allowance will result in a tax charge.

If you are a very high earner you might be affected by the annual allowance ‘taper’. This taper will kick in if you have ‘threshold’ income above £200,000 and ‘adjusted’ income above £240,000, with your annual allowance reducing by £1 for every £2 of adjusted income above £240,000, to a minimum of £4,000 for anyone with adjusted income above £312,000.

You can read more about the taper – including what counts towards threshold and adjusted income – in this excellent guide. 

In addition, if you flexibly access taxable income from your fund this will trigger the MPAA (money purchase annual allowance), reducing your annual allowance for SIPPs and other money purchase pensions from £40,000 to just £4,000.

There should be nothing stopping you saving £3,600 a year in a pension while simultaneously taking an income from it. However, if you significantly increase your contributions after taking a tax-free lump sum you could fall foul of HMRC’s ‘recycling rules’.

You can read more about tax-free cash recycling here. 

Once you have accessed your pension you can continue contributing, although once you have taken a flexible withdrawal of taxable income the £4,000 MPAA will permanently apply.

Provided you intend to keep contributing £3,600 gross a year then this shouldn’t be a problem, although if your circumstances change in the future and you want to boost your contributions the MPAA could become a factor.

The only other thing to remember is that after your 75th birthday any pension contributions you make will no longer qualify for pension tax relief, so you might want to consider saving in other products such as ISAs.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not
provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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