Maximum pension contribution and 25% lump sum question

[Rob-Ed]

Apologies if this is not the most appropriate forum for this thread.
I reach 55 early in the 2025 financial year. I believe (please correct me if either of these assumptions are wrong) I'm entitled to pay up to 60K into my pension each year without any tax liability providing this is not more than my annual earnings (I take tax efficient PAYE and the balance in dividends, do dividends count as 'earnings'?) Upon reaching 55 I'm entitled to drawdown 25% of my entire pension pot.
My thought is that I could put, say, £40K into my pension this year and take £10K back tax free upon reaching 55. The obvious use of this is to pay off my mortgage and therefore avoid paying interest using money I've been taxed on.

Do I need to declare myself as 'retired' in order to drawdown a lump sum? I need to carry on as I am for a few years yet, i.e. not drawing a pension/buying annuity but continuing to make pension contributions. I'm just not sure if anything changes legally once I take my lump sum allowance.

Also, if I continue to pay into my pension am I unable to take any further lump sum, despite the total pension pot being higher than it was when the 25% was drawn?
e.g. Pot is £100K at 55, I take £25K tax free and continue paying into pension, it reaches £175K at 60 but at that time I've only taken 12.5% of the total. (£175K+£25K drawn)

I'm confused, any advice appreciated.
Cheers
Rob

 

[DontAsk]

My thought is that I could put, say, £40K into my pension this year and take £10K back tax free upon reaching 55. The obvious use of this is to pay off my mortgage and therefore avoid paying interest using money I've been taxed on.

HMRC do not like this. There are rulees about recycling tax relief in this way. I looked into contributing the maximum to top up the last three years when I retired from the day job but this put me off.

Make sure you understand the implications of taking the 25%. It's generally not the bast strategy unless you really, really need the money now. Educate yourself and then get some proper advice, not from a forum. I would recommend James Shack's videos on YouTube.

Do I need to declare myself as 'retired' in order to drawdown a lump sum?

No. You just need to tell the pension company Your pension may be moved into a different investment vehicle depending whether you want to go into regular draw-down or leave the remainder invested for ad-hoc withdrawals. E.g. mine is now in a "retirement account". You can still control the investment strategy, etc.

I need to carry on as I am for a few years yet, i.e. not drawing a pension/buying annuity but continuing to make pension contributions. I'm just not sure if anything changes legally once I take my lump sum allowance.

The amount you can contribute is drastically reduced (£4k/pa atm) once you start taking benefits.

Also, if I continue to pay into my pension am I unable to take any further lump sum, despite the total pension pot being higher than it was when the 25% was drawn?

You don't get another bite at the cherry.

Also beware another lump sum will be taxed in the month you withdraw it and coul land you with a large tax payment. You will get it back eventually (or partially, or not at all), depending on the full years earnings.

 

[Rob-Ed]

Great answers and very helpful, thank you!
Forum was my second port of call for info, my accountant isn't forthcoming with ad-hoc advice so I guess I need to speak to an IFA.
The amount I could potentially free up would be the difference between paying the mortgage off in 2025 and being stuck on a variable rate/signing up for a new fixed rate. I really want the mortgage done and dusted.
I'll give it some careful thought.
Thanks again.

 

[Bobbo]

Forum was my second port of call for info, my accountant isn't forthcoming with ad-hoc advice so I guess I need to speak to an IFA.

This is very much the domain of an IFA. Your accountant is probably not licensed to give you financial advice, though they could give factual answers to some of the questions re allowances and thresholds

 

[DontAsk]

The amount I could potentially free up would be the difference between paying the mortgage off in 2025 and being stuck on a variable rate/signing up for a new fixed rate. I really want the mortgage done and dusted.

Could be a very poor choice. Investment returns will likely outstrip what you are paying on the mortgage in the medium term.

 

[Rob-Ed]

Could be a very poor choice. Investment returns will likely outstrip what you are paying on the mortgage in the medium term.

I feel that any investment with significant growth is always going to be a gamble whereas paying off my (small) mortgage is guaranteed to save me over £300 pcm, which is otherwise gifted to the lender. That really adds up over the remaining (long) mortgage term.
I take your point about the pension lump sum potentially being a poor decision in the long run, I don't have a lot of cash to play with though and my overall situation is unusual at my age.
Thanks again.

 

[WaveJumper]

Speak to Pension Wise before going any further- link on the gov website

Personal pensions

Personal pensions, stakeholder pensions, SIPPs

www.gov.uk

 

[David Griffiths]

Definitely a matter for an IFA. A few comments might be helpful but take proper advice.

1 Dividends are not counted as earnings for any tax purpose, even from your own company. You might be able to pay more pension contributions by making employer contributions from the company.

2 My understanding is that future contributions are restricted to £4k only if you start taking benefits over and above the tax free lump sum. Get this confirmed.

3 Again my understanding is that you can take more than one tax free sum. Briefly if you take a lump sum, the pension will transfer 3x that amount into a ring-fenced fund, from which you cannot draw further tax free cash. So if your fund is £100k, and you take £25k, then £75k is ringfenced and no more tax free withdrawal. However if you take say £15k lump sum the ring fenced amount is £45k leaving £40 in a normal fund and you can take a further lump sum (25%) out of that.

And if you pay in more contributions, then those go to a non-ring fenced fund and are available for a lump sum.

Pension Wise will give information but are very clear that they do not give advice. It's a complex area, ofthen with big numbers so proper (IFA) advice is essential.

 

[Rob-Ed]

Definitely a matter for an IFA. A few comments might be helpful but take proper advice.

1 Dividends are not counted as earnings for any tax purpose, even from your own company. You might be able to pay more pension contributions by making employer contributions from the company.

2 My understanding is that future contributions are restricted to £4k only if you start taking benefits over and above the tax free lump sum. Get this confirmed.

3 Again my understanding is that you can take more than one tax free sum. Briefly if you take a lump sum, the pension will transfer 3x that amount into a ring-fenced fund, from which you cannot draw further tax free cash. So if your fund is £100k, and you take £25k, then £75k is ringfenced and no more tax free withdrawal. However if you take say £15k lump sum the ring fenced amount is £45k leaving £40 in a normal fund and you can take a further lump sum (25%) out of that.

And if you pay in more contributions, then those go to a non-ring fenced fund and are available for a lump sum.

Pension Wise will give information but are very clear that they do not give advice. It's a complex area, ofthen with big numbers so proper (IFA) advice is essential.

Thanks David, some really helpful info there. I think enough has now been said to deter me from my original plan. The numbers involved in my case are very small but that suggests I should probably be even more careful with my limited equity.

Have a great Christmas all...