DB Stepped Pensions and Annual Allowance Impact

It's another mixed-bag of questions this week, covering income protection, the local government pension scheme, avoiding the 60% tax trap and much more besides!

Shownotes: https://meaningfulmoney.tv/2025/10/08/listener-questions-episode-28/ 

01:33  Question 1

Hello Pete & Rog

I like to think of you as a couple of great mates offering me life changing information in a relaxed & entertaining fashion. When putting income protection in place, how do people/planners typically frame a target?

Just replacing essential income? Or also replacing  large contribution to pensions (including lost employer contributions) and S&S ISAs for long term wealth building?

Thoughts on how I should frame these questions are very welcome! Many thanks, Duncan

11:27  Question 2

Dear Pete and Roger,

Firstly thank you so much for all the free resources you put out there to try and help make the world more financially literate and astute. I myself started a journey of self awareness a few years ago thanks in no small part to your content.

I have a question about pension recycling and what is allowable. I've read the rules on the criteria, all of which I think have to be met in order to fall foul of the rules, but am not clear on my wife and my specific situation.

My wife and I met later in life and have been married for 13 years in a happy and stable relationship. I've just turned 50 but my wife is eight years older. In summary when we came together I brought earning potential but no assets (previous divorce wiped me out!) and she brought assets (house, SIPP pension built up, inheritance) but, through mutual agreement, no earning potential. Fortunately we have a healthy open discussion about money.

I am an additional rate tax payer and use my £60,000 limit of pension contributions every year. We have paid off our mortgage and we have always lived using my salary for all our outgoings and live within our means with little consumer debt. I max out my ISA allowance too. Essentially I have no more tax breaks we could take advantage of by her giving me money, save for CGT or dividend allowances.

After thinking about her tax implications I have encouraged my wife in the last couple of years to start to withdraw from her DC pension the maximum amount that would result in no income tax being paid (currently £16,760 of which 25% is tax free). Since we don't need the money for living expenses she tops it up with her savings to £20K and puts it in a S&S ISA so really is just moving investments from a less flexible tax free wrapper to a more flexible one while she pays no income tax. We will do this for the next ten years until she reaches state pension age and I retire myself. She'll still have a sizeable SIPP at this point as this strategy won't deplete all her pension.

She still has significant other assets that attract tax as she earns more interest than the starter rate for savings allows tax free. She's fully paid up all her NI through additional contributions, has the maximum in premium bonds and I also have started to get her to put £2,880 into a new SIPP in her name every year to get 20% tax relief.

My question (sorry it took so long to get here) is that now she is drawing an income of sorts from her DC pension could she recycle more than £2,880 into a SIPP? Clearly it fails on the intention front, on the >30% of the tax free cash and the fact she has actually taken tax free cash. But she's not taking in excess of £7,500 of tax free cash in a 12 month period (another one of the criteria) and I'm also not sure if her taxable DC withdrawals (on which she pays no income tax as <£12,570) count as relevant earnings as to how much she could add to a SIPP. Basically could she pay say  £5,000 or £10,000 a year into a SIPP (gross as she has triggered MPAA), gain 20% tax relief on her net contribution and not be falling foul of pension recycling rules? The reality of the situation that the real source of all the contributions is significant savings she has that are now attracting tax and we don't need any of it, nor its growth, for at least ten years.

Any advice gratefully received, Tom

15:56  Question 3

Dear Pete and the lovely Roger Weeks,

Hope you are well. Thanks for all the amazing work you are doing to support people to have a better understanding of their personal finances. I have recently bought and read your new book, it's fantastic. Plus, I have bought several copies of your first book and given them to family and friends as presents. I love a practical gift haha; not sure the recipients feel the same but it's a gift that will keep giving if they follow your advice.

Anyway, my question is related to a defined benefits pension.

Background info, I am 49 (50 in a few weeks) and my husband is 64.

From 1996 to 2000 I built up benefits within Merseyside Local Government Pension Scheme. I transferred this along with a DC pension from the voluntary sector (at the time I heard this was a good idea, I literally didn't have a clue about pensions but can't change that decision now) into my Wiltshire LGPS, which I was in from 2006 until mid 2012.

After listening to your podcast on the Bill Perkins book Die With Zero, I started to run the numbers on accessing my DB pension scheme at 55, as this would enable me to pay off mortgage earlier and maybe work part time. This is a big consideration for me as my husband is almost 15 years older than me and I want to be able to spend some quality retirement/semi-retirement years with him whilst he is still in his 'go go years'.

Wiltshire LGPS has a good portal and all the information states my normal retirement date is July 2040 (65). I know the government is increasing the normal pension retirement age for works pensions in 2028 to 57 years old. However, I recently read this on the LGPS website and wondered if I would have protective rights and would still be able to access my pension at 55.

https://www.lgpsmember.org/your-pension/planning/taking-your-pension/ Taking your deferred pension If you left the LGPS on or after 1 April 1998 Your deferred benefits are payable in full from your Normal Pension Age in the LGPS. You do not have to take your deferred benefits at your Normal Pension Age, you can take them at any time between age 55 and 75. If you were a member of the Scheme before and after 1 April 2014, the benefits built up before 1 April 2014 will have a protected Normal Pension Age – usually age 65. The Government has announced the earliest age that you can take your deferred pension will increase from age 55 to 57 from 6 April 2028. This will not apply if you apply for your pension early because of your ill health.

I have emailed Wiltshire LGPS and got a one liner back saying I can't access my pensions until 57. The limited response makes me wonder if they had considered the dates, I built up my benefits; 1996 to 2012. Or am I just clutching at straws hoping I will have protected rights when I do not.

I would really appreciate your opinion on this matter, as I am only 5 years and 6 weeks (clinging on to my 40's LOL), away from 55 and this is not a long time in the world of personal finances to try to get my ducks in a row.

Thank you sooooo much Liza

21:58  Question 4

Hello Pete and Roger

I've been a listener for almost 2 years and love the show. It helps that you both make it entertaining and I laugh along whilst I'm walking the dog.

I'm single, 49 years young and aggressively investing so I can retire early in approximately 5 or 6 years time. I earn £120Kpa, annual bonus of £24K and quarterly bonuses possible but these are erratic. They can vary so I would roughly estimate they could be an additional £20k to £50k per annum.

I salary sacrifice £60K into my pension in a global index tracker by paying 24% of my monthly salary and 100% of any bonus received. Once I max out the £60K I can stop payments for the remainder of the financial year. I also pay £20k into a stocks and shares ISA effectively maxing both tax advantaged accounts out. I also add £2880 into each of my 2 children's pensions per annum and some into their JISA's.

My question is, how am I best avoiding the 60% tax trap whilst also wanting to make the best use of tax advantaged accounts? I honestly wish everyone had a coup regarding this tax trap. It feels so unfair! First world problems I know.

I have a fear of my annual earnings falling at £125K after my pension contributions effectively making me pay 60% tax on £25K.

Any advice would be helpful and appreciated.

Thank you for the advice and entertainment! Hope.

27:47  Question 5

Hi Pete & Roger,

Love the podcast and have been a frequent listener for a number of years now. I'm in my early 30's and feel that as a family (Wife and 2 kids) we are in a great position to build wealth and a good future retirement due to the knowledge you have shared.

I have a question with regards to Stocks & Shares ISA's and when is deemed a suitable reason to actually use the money invested in them.

We have been investing monthly into global index funds as part of ISAs for a few years now without a real planned end goal aside from it being money that we know we didn't need in the immediate future and likely money that would allow us the option of an earlier retirement in the future should we choose. These ISAs are currently sitting at around £25k.

We budget well, have cash savings for our short term goals plus an emergency fund in place so mentally the money in the Stocks & Shares ISA isn't really allocated.

We are currently looking at extending our property and are weighing up how best to fund this. The work will cost around £50k and have equity in the house which means we could get this funded via an additional mortgage loan. The other option would be to get a smaller loan and cash in our Stocks & Shares ISA however mentally we are finding it difficult to do this as we see them as long term savings rather than something for now.

Does it make sense in your opinion to use the money in the ISAs for something like this or would it be best to keep building them as we have been doing for a future early retirement as that is the primary reason I see mentioned as Stocks & Shares ISA funds eventually being used for.

Thanks, Adam

33:55  Question 6

Hi, New to the site and finding it a superb resource. My question is about DB stepped pensions.

I had to stop work due to ill health and am due to take a small DB pension @65. The pension has a stepped option which makes sense for me because my analysis shows taking the stepped option pays the most over 12 years which is probably all I have got.

The figures: Basic pension £5000 p/a or Stepped pension £12000 for 1 year until state pension then £3600 p/a. However I have been told this increases my pension input.

I have been told HMRC assume this 112k is a single contribution in a tax year and as it is a discretionary award it will be tested against the Annual Allowance.

I have no other income and have been unable to make pension contributions that would allow tax relief (other than the 2.88/3.6k which I have done).

It seems to me if I took the stepped pension I would have to pay a 25% tax charge on the HMRC perceived £112k pension input. i.e. £28k (112k x 25%) in a pension tax charge, double the first years stepped pension!

This seems crazy, can you shed any light if this is correct?

Regards, Ray