If you crystallise a pension and take the full tax-free lump sum, how much per year can you still contribute thereafter? With funds left in the pension, can you still buy and sell investments as you see fit so long as you only contribute no more than that allowed?

Simon

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

‘Benefit crystallisation events’ are points when your pension savings are tested against your available lifetime allowance. These include taking your 25% tax-free cash, entering drawdown, buying an annuity and turning 75.

The lifetime allowance charge has been removed for the 2023/24 tax year, with the lifetime allowance being scrapped altogether from April 2024. Between now and then, these benefit crystallisation events will continue in the background.

The maximum tax-free cash someone can take is one quarter of the £1,073,100 lifetime allowance (i.e. £268,275). With the lifetime allowance due to be abolished next year, the government has said the maximum tax-free cash someone can take will be held at £268,275. Those with protection who are entitled to more tax-free cash than this will retain this entitlement.

To access your 25% pensions tax-free cash, you need to choose what to do with the remaining 75% of the pot. You could buy an annuity, for example, or keep your money invested by entering drawdown. Neither action will affect the amount you can contribute each year to a pension.

This overall ‘annual allowance’ (for personal and employer contributions combined) is set at £60,000 for most people, while your personal contributions are limited to 100% of your UK earnings.

This means if you have taxable earnings of £30,000 during the tax year, this is the maximum you can personally contribute to a pension during that year.

If you are a very high earner, your annual allowance may also be reduced by the annual allowance ‘taper’. 

If you flexibly access taxable income from your retirement pot, the money purchase annual allowance or MPAA will be triggered, reducing your annual allowance from £60,000 to £10,000.

Flexibly accessing your pension includes taking an income via drawdown (note you can allocate funds to drawdown without taking an income) or withdrawing an ad-hoc lump sum direct from your pot.

If you trigger the MPAA, you lose the ability to carry forward up to three years’ unused annual allowances from the three prior tax years in the current tax year.

Flexibly accessing your pension is a big decision, particularly for anyone planning to subsequently make significant pension contributions.

In relation to the second part of your question, there is no link between how much you contribute to a pension and your ability to buy and sell investments within that pension.

If you have allocated funds to drawdown, they will remain invested until you choose to withdraw them. Investments should be managed as appropriate regardless of whether new contributions are made.

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