Navigating Pension Schemes and Tax Relief Confusions

It’s another packed and mixed bag of questions here on Meaningful Money. Today we deal with Seafarer’s pension contributions, tax-free cash on DB pension schemes and annual allowance calculations. Plus we give some thought to the evolution of the show…

Shownotes: https://meaningfulmoney.tv/QA25 

01:10  Question 1

Hi Pete and Roger

Many thanks for all that you do.  I am a long time podcast listener and happy client of Jacksons.

I am currently playing catch up on the current series and have a couple of thoughts on points raised in two episodes.

In episode 3 - there was a question on pensions and the answer included the point that when making contributions to a scheme they are generally paid net and the scheme reclaims basic rate tax from HMRC.  Just to say that this is not always the case.  My employer recently moved its scheme to an Aviva master trust.  I wanted to make a lump sum co tribute. Ahead of the tax year end.  However I found that the scheme could only accept gross contributions and I would have to reclaim the tax myself.  As it was quite a decent sum and I preferred not to wait for the tax I made the contribution into a different scheme.

In episode 7 you had a question about moving abroad.  The point we made that you can’t continue to contribute to UK tax favoured schemes when abroad which is correct.  However there is another watch out in that ISAs in particular may be subject to income tax in the new country of residence - as they were when j lived in the US.  It is therefore critical to get advice so you can make the right choices when moving abroad

All the best, Richard

05:06  Question 2

I have been listening to your podcast for the last 5 or 6 months. Like so many of your listeners, I have spent many hours catching up on your early episodes, no longer do I watch movies or drama series or wildlife programmes. I listen to Pete. Your advice has been priceless. However, I do have a question that I seemingly cannot find the answer to. Perhaps, I already know the answer, but am putting my head in the sand because I do not like it.

I know that the pension tax free lump sum is limited to £268,275 and I believe that this applies to the total taken from multiple pensions. I retired from the police in 2013 as a chief inspector. I took the maximum lump sum available at the time which was £206,000. I started a new job with the NHS and am paying into the NHS 2015 scheme. My projection on retirement from the NHS at age 67 suggests that I can expect a lump sum that combined with my police pension lump sum will take me well beyond £268,275.

I have seen some articles on line about lump sum protected allowances, but do not know if this is something I can access. Clearly, if all I can take from my NHS pension is £62,275 I will be paying 40% on a greater proportion of my pension in payment.

I suspect there may be others like me that maxed our their lump sum when first retiring and have gone on to further employment and have built up a tidy pension that has the potential to pay out another handsome lump sum.

Your advice is gratefully appreciated. Kind regards, John

11:25  Question 3

Hi Pete and Rog

Always a delight when a new episode comes out – I hope Rog is getting fairly compensated for his efforts!

I have been a keen listener for a number of years though until recently had lived outside of the UK, so while not everything was applicable (ISAs or pension contribution limits etc), the podcast has always been a valuable tool as I improve my personal finances

I have a question I was hoping you could clarify for me which relates to questions you answered on previous podcast Q&A.

Trying to keep it short but failing:

On a couple of occasions when talking about pensions there seems to be an assumption that your income will fall in retirement and so income tax on the way out of the pension is less relevant.

You recently had a question around moving money from a Lifetime ISA to a SIPP for a higher rate tax payer who was moving abroad and the calculation / discussion went something like:

Invested 4k, got the extra 1k but have to take a 25% penalty when taking the money out so down to 3.75k. Then when investing that back into a SIPP you get tax relief so back up to 4.7k or even 6.25 with higher rate relief.

Then the discussion seemed to suggest in such a case you might even be better off than if you had left it in the LISA. However, doesn’t this depend on what your tax rate is on retirement / withdrawal?

Now on to my question:

Similarly, you had someone who had maxed out their annual pension contribution limit and they were trying to decide whether to pay more in to their pension (foregoing the tax relief) or to put it in to a GIA. This is a situation I find myself in and the Q&A discussion seemed to suggest it doesn’t make much difference. There were comments that an ISA would be better than a GIA but assuming the ISA allowance was already fully used then there was little difference.

This confused me and brings me to my question. If I overpay into a pension and so get no tax relief, don’t I still pay income tax when I withdraw the money from the pension? So for any contribution above the annual limit I receive no tax relief initially (ie I have effectively paid tax) but then future withdraws from a pension are taxable so I pay tax again when I retire. Is this the case or is there some way the pension knows what proportion of the pot received tax relief and what proportion didn’t? If no such split exists then surely a GIA is a far better option where I will only pay CGT on any growth in the investment (or income tax on dividends). Imagine a situation where there is no growth or dividends then in a GIA I take the initial money back out with no tax to pay, in the pension I still pay income tax on the withdrawal.

What am I missing here?

Kind regards, Matt

17:02  Question 4

Hi - love the podcast and really enjoying the Q&A series! Keep up the great work!

I was hoping you can assist me. I have a pretty simple salary structure and lucky to earn annually (salary and bonus) around 190k.

I’m looking at what I can add to my pension and very aware of the 60k limit and also the 200k income threshold. Is it as a simple as if my only income stream is from employment, that by definition in the above scenario I’m below the £200k. Or am I missing anything else that feeds into this as a consideration?

Thanks, Steve

20:20  Question 5

Thank you Pete & Roger for an amazingly insightful informative podcast. This has given me a giant springboard to the next level of financial literacy.

My question is:

I am a seafarer and all of my income from it is subject to seafarers earnings deductions (SED). My annual salary is £79,000. How much can I pay into a SIPP claiming the full amount of tax relief given that all of my income is subjected to SED?

Thanks very much for everything you do.

Kind regards, Benjamin

24:00  Question 6

Absolutely love the podcast - always look forward to driving home on a Wednesday so I can listen to it.

I'm 47 and my husband is 55 and we have 2 fabulous children aged 13 & 11. I am an additional rate taxpayer and have a good DB pension for the future (NHS consultant). My husband did the tougher job of being a full time Dad so only has a small SIPP at present worth about £50,000 which we add £2880 to each year. I am hoping to retire early so we are building our Stocks & Shares ISAs each year to bridge the gaps between my retirement and state pension etc although we don't use the full allowance at present although may do in the future as my pay increases.

We just wanted advice about the best way to extract the money from my husbands SIPP. He works a few hours now making approximately £5000 per year so is a non-taxpayer (and all our emergency cash is in his name!). We had planned to start drawing down his pension in a few years once fully retired to try to get it all tax free before his state pension kicks in but we don't actually need the cash and thus it would be reinvested into his ISA.

Is there any reason not just to start that process now so we put the money in the ISA gradually over the next few years (bearing in mind that we may be able to fill our ISAs in the future)? Can we still top up with £2880 each year one this process has started?

Maybe this sounds like an obvious thing to do but just can't work out if its the correct path?

Thanks so much, Ciara Mulligan

30:10  Podcast and Video plans.