I am currently taking taxable income from a SIPP in drawdown. I will be completing on the sale of a property shortly. Am I able to contribute £10,000 of the sale proceeds from the property to my SIPP under the money purchase annual allowance?

Rob 

Rachel Vahey, AJ Bell Head of Public Policy, says:

There are a couple of aspects in your question which are worth unpicking for readers. The first is how much money can you pay into your pension (and receive tax relief), and the second covers which financial sources you can use for contributions.

The first question – how much money people can pay into a pension and receive tax relief – seems like a simple one. However, the answer can be quite complicated. 

TWO DIFFERENT ALLOWANCES

There are two different allowances. The first is on the contributions an individual may make to their pension and that is a maximum of £3,600 or 100% of the pension saver’s relevant UK earnings, whichever is higher, including tax relief. (I’ll come back to what relevant earnings are below.) If someone pays in more than their 100% of their relevant earnings, they can’t receive tax relief on the excess, and the excess is usually refunded to them by the provider.

The second allowance is the annual allowance which covers any personal contributions, employer contributions and tax relief. The standard annual allowance is £60,000 but it could be lower if someone is a very high earner or has previously ‘flexibly accessed’ their benefits, usually by taking taxed withdrawals from their flexi-access income drawdown plan.

Doing so would trigger the money purchase annual allowance (MPAA) which is £10,000. Once triggered, there is no going back; even if the individual paused or stopped taking taxed withdrawals the lower limit will still apply.

If someone pays in more than their available annual allowance, they will get a tax charge which effectively removes the tax relief received above this level.

If someone doesn’t use all their annual allowance in a tax year, then it might be possible to carry it forward to another tax year to count against contributions paid in then. However, this doesn’t apply if the MPAA has been triggered. If that’s the case, unused MPAA will just be ‘lost’ once the tax year ends.

WHAT CONSTITUTE ‘RELEVANT EARNINGS’

I promised to come back to what ‘relevant earnings’ were. This should help you identify how much you can contribute and get tax relief on.

‘Relevant earnings’ are, generally, any earned income, and includes pay, wages, bonus, overtime and some commission. It also includes self-employment income derived from carrying out a trade, profession or vocation.

If someone receives a redundancy payment, generally the first £30,000 is tax free and doesn’t qualify as earnings for income tax or tax relief purposes. But any money above this usually qualifies as relevant UK earnings.

However, there are some important sources of income that are not counted as relevant earnings, including investment income, dividend income, pension income and some buy-to-let income. (Some rental income may be included if it’s in respect of a UK or EEA furnished holiday lettings business.)

Profits on a sale of assets, including a property, also wouldn’t count as relevant earnings. However, if you have other sources of income that do count as relevant UK earnings, you could certainly use the cash from the sale to make the contribution.

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to askrachel@ajbell.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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