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I currently have two pensions, a defined contribution personal pension and a Sipp.
I was going to take 25 percent of both of their tax-free amounts and then leave the rest invested without taking any money from them for several years and continue contributing.
Once in withdrawal, do I have to withdraw money from it (the taxable portion) within some period of time?
Retirement finances: What are the rules after withdrawing a 25% tax-free lump sum from pensions?
Taking into account only the tax-free element, are there any restrictions on continuing to contribute money to the pension on the basis of continuing to work? I am aware of the restriction if I do not have a full-time job.
As for the money I pay, does the government still match it? Do some future payments have any tax-free elements or are they later lost?
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Steve Webb responds: My mailbag includes many questions each week about the rules governing the tax exemption of 25 per cent of a pension, so I hope my answer to your question will be beneficial to many others.
With a couple of exceptions (which I cover below), when accessing your pensions, you can think about each pension separately.
This means that you can, for example, receive a tax-free lump sum from one pension now and receive a tax-free lump sum from another pension later; It is not necessary for all of this to happen at the same time.
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Or, you can withdraw cash tax-free from one pension while saving in another (subject to certain limits which I outline below).
If you withdraw 25 percent tax-free and leave the rest in withdrawal, this is called “flexible access” withdrawal. All subsequent withdrawals are fully taxable.
The other main alternative is sometimes called “tapering”, and in this case you take your pension in parts, with each withdrawal 25 per cent tax-free and 75 per cent taxable.
If you follow the first of these routes (flexible reduction), then, as long as you don’t touch the remaining 75 per cent, you won’t trigger any limits on future pension savings.
But once you start tapping into the rest, or if you go the second route and start taking some taxable cash in chunks, you’ll be subject to the ‘Money Purchase Annual Allowance’ (MPAA).
This limits your additional pension savings to £10,000 a year, a level up to which you still get tax relief on pension contributions.
The aim of the limit is to prevent people from “gaming” the tax relief system by making repeated payments and withdrawals to benefit from large amounts of tax-free cash.
Assuming you don’t face the MPAA, you can continue saving for a (new) pension and your contributions will continue to attract tax relief, at least until you turn 75.
This means, for example, that if you pay £800 into a personal pension, this will be topped up by £200 from the Government, giving you £1,000 in total in your pension fund.
This pension fund behaves in the same way as your existing personal pensions/Sipp and you will be able to continue receiving 25 per cent of the fund tax-free whenever you wish.
Assuming you have opted for a flexible withdrawal, there is no time limit on accessing the other 75 per cent of your pension.
Some people may want or need to access the money fairly quickly, others may spread their withdrawals (possibly to reduce their tax bills), and others may try to leave it intact to provide an inheritance for their heirs.
A final consideration, which will only affect a lucky few, is that there is now a lifetime limit on the amount of tax-free cash you can take, and it is currently £268,275.
While it is possible to accept lump sums greater than this figure, for most people they will only enjoy tax-free status on their withdrawals up to this general limit.
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