Barnett Waddingham’s James Jones-Tinsley helps a Money Observer reader with a pension-planning question.
Reaching age 55 was a rude awakening in terms of pension planning and provision. Since then I have been able to pay the maximum £40,000 annually into my self-invested personal pension and to use carryover from previous years. My plan is to pay in the maximum £40,000 during the first six months of the next financial year and then take early retirement in October 2020. I can access a small number of final salary schemes for both taxable and tax-free income, leaving the Sipp invested for a few years before taking it.
I am unclear about my pension contribution limits for the financial year 2020-21. Will the whole £40,000 apply or is it pro rata for the months I work? And will the £4,000 money purchase annual allowance (MPAA) kick in once I access my final salary schemes, resulting in a large tax bill?
Name withheld, by email
James Jones-Tinsley, self-invested technical specialist at Barnett Waddingham, answers: The annual allowance is not affected by your working patterns during a tax year. You would be able to contribute up to £40,000 gross during the 2020/21 tax year plus any ‘carry forward’ amounts from the three preceding tax years, provided your earnings are at least equivalent to your total Sipp contributions during that tax year. But if they are lower than £40,000, because you will only be working for half the year, the maximum gross contribution will be limited to 100% of your earnings.
Regarding your small final salary schemes, these are a type of defined benefit pension scheme, whereas your Sipp is a defined contribution or ‘money purchase’ arrangement. Therefore, taking benefits directly from your final salary schemes will not trigger the MPAA, as it only applies to money purchase pension arrangements. I would recommend, however, that you seek regulated financial advice before taking benefits from your final salary schemes.
If you need help with a tax, pension or financial planning problem, please email: firstname.lastname@example.org