Can I keep contributing to a private pension after I’ve taken money out?
Yes you can. While taking money out only to then start paying back in might sound like an odd thing to do, there can be good reasons for doing so. For example, you might want to take out your 25% tax-free lump sum to pay off your mortgage or to cover an immediate large expense, but still want to reap the tax and other benefits of contributing to your pension.
Be aware, though, that taking money out of your pension might restrict how much you can subsequently pay in each year and benefit from tax relief.
The standard annual allowance for pension contributions is £60,000 (or the equivalent of your annual earnings, if this is lower). This allowance will continue to apply after you take money from your pension if:
- You take a tax-free cash lump sum from a defined contribution pension and buy a lifetime annuity with the rest; the annuity must provide an income that stays level or increases
- You take a tax-free cash lump sum from a defined contribution pension but don’t withdraw any taxable amounts
- You cash in small pension pots worth less than £10,000
However, if you take money from a defined contribution pension that falls outside of the conditions above, you’re likely to trigger something called the Money Purchase Annual Allowance. This reduces the maximum amount you can contribute each year and get tax relief to £4,000. Types of withdrawal that could trigger this include:
- If you withdraw your entire pension pot, or start to take regular, taxable lump sums
- If you move your funds into a pension drawdown fund and start to take an income
- If you buy an annuity where your income could go down, such as an investment-linked or flexible annuity
The Money Purchase Annual Allowance only applies to defined contribution pensions and not to any defined benefit pensions you might have with an employer.