I’m a member of a defined benefit scheme which has my normal retirement date as my 62nd birthday. 

If I start to receive income from this scheme from this date does this crystallise the funds in my company defined contribution and personal pension schemes?

Neil

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

In this post-automatic enrolment world, it is very easy to build up different pensions of varying types.

As a reminder, a defined benefit (DB) scheme is one which pays out an income based on your salary and how long you have worked.

Most public sector workers have a defined benefit scheme, but they are far less common in the private sector, and of the few which remain, almost none are open to new members.

Instead, private sector workers will likely have a workplace defined contribution (DC) pension, where you and your employer pay in contributions and these are invested to build up a pension pot.

People could also have an individual pension – such as a SIPP or personal pension – which works in the same way.

In other words, you won’t be alone in having several different types of pension.

To some extent, these different pension schemes can operate independently of each other. If you take income from your defined benefit scheme, that shouldn’t affect your other pensions – the investments will continue, and you are not forced to take an income from those pensions at the same time or stop contributing.

This means you can stagger when you start your income from different pensions. If you take out drawdown from your SIPP (and possibly from your workplace defined contribution pension, depending on whether it offers it) you can control when you take an income and how much you take.

For example, you may want to take some of the income from your SIPP to boost your retirement income until the state pension kicks in and then stop it.

But you need to be careful as your annual allowance usually caps contributions from both you and your employer and tax relief at £60,000. If you access flexible pension income (like drawdown), this drops to £10,000 per year.

You don’t always have to take your income from your defined benefit scheme on the ‘normal pension date’. You may be able to delay it or take it earlier - but it’s always worth checking with the scheme what flexibility it offers and then working out if it’s worthwhile for you.  

If you take your defined benefit scheme pension, you can carry on paying contributions into your personal pensions and possibly also your workplace pension (but check when your normal retirement date is and the scheme’s rules).

Any individual contributions you pay into your personal pension will receive tax relief up to age 75. Theoretically, you can contribute beyond that date, but as you won’t receive tax relief, most pension providers won’t accept contributions beyond age 75.

Tax relief is available on individual contributions up to £3,600 per year (including tax relief) or 100% of earnings, whichever amount is greater.

The total annual allowance limit is £60,000, which covers personal contributions, employer contributions and tax relief.

The definition of earnings excludes pension income, such as income from a defined benefit scheme pension.

If you do want to continue contributing more than £3,600 you will need an income from another source.

Finally, although I said pensions often work independently of each other, it’s important to remember pension limits and allowances are measured at an individual level, so these limits apply across all your pensions.

That will include the limit on tax-efficient contributions I covered above, but it also covers the tax-free lump sums you can take out of pensions.

This limit – the lump sum allowance (LSA) – is usually set at £268,275 and covers all the tax-free lump sums you can take from all your pensions in your lifetime.

Anything over this will be taxed as income, so if you think you might reach this limit you may want to think about the order in which you take your tax-free lump sums and whether your pension schemes can offer any flexibility.

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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