I am planning to take the maximum tax-free lump sum from my pension pot and go into drawdown. I have a sum of money invested in my limited company and plan that the company will stay trading albeit on a limited basis for the foreseeable future.

I understand that the amount that I can personally pay into my pension pot from the point at which I go into drawdown is £10,000 per annum, but are employer contributions also capped at £10,000?

I understand the cap on personal contributions is to avoid double paying of HMRC tax relief, but the situation for employer contributions is different isn’t it, and there is no personal tax relief on these contributions – so I thought the cap on employer contributions would still be the maximum £60,000 per annum?

Mark

Tom Selby, AJ Bell Head of Retirement Policy, says:

The main pensions annual allowance, which covers personal contributions, employer contributions and tax relief, recently increased from £40,000 to £60,000. The money purchase annual allowance (MPAA), which is triggered when you flexibly access taxable income from your pension, has also increased from £4,000 to £10,000.

In addition, the minimum tapered annual allowance, which applies to very high earners, has risen from £4,000 to £10,000. The ‘adjusted income’ figure beyond which the taper kicks in has also increased from £240,000 to £260,000. Where someone is affected by the taper, for every £2 of adjusted income they earn, a £1 deduction will be made to that person’s annual allowance, to a minimum of £10,000.

You can read this guide to the annual allowance taper. 

Once you make a pension withdrawal via drawdown you will trigger the MPAA. Unfortunately, this lower annual allowance will apply to all pension contributions made to your scheme – including any employer contributions.

Triggering the MPAA will also mean you can no longer carry forward up to three years of unused annual allowances from the three previous tax years.

That is not to say you shouldn’t take a drawdown income – that is entirely up to you. But it’s important to carefully consider the significant tax implications of doing so, as well as the sustainability of your income strategy.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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