Last year, I retired from my job as a civil servant. While I was employed, I paid into an Additional Voluntary Contributions (AVC) scheme. AVC schemes allow members of workplace pension schemes to pay extra contributions to build up additional benefits.
On retirement, I took advantage of the new pension freedoms, and moved my AVC fund into a drawdown retirement account and took my 25% tax- free lump sum. I have not taken any further income or cash from the remaining fund.
In February, I made a one-off payment to my retirement fund. I now wish to claim higher-rate tax relief on this, but have been told that I can’t as I was not employed at the time of payment. Is this correct?
You can have tax relief in respect of any relievable pension contributions, provided you are an active member of a registered pension scheme. An active member is an individual who is accruing benefits under one or more arrangements in a pension scheme.
When you stop accruing benefits, your entitlement to tax relief is lost. You should check whether your retirement fund qualifies as a registered pension scheme. Additionally, you must be under the age of 75 to be able to obtain tax relief.
From 6 April 2015, if you start to take money from your defined contribution pension this can trigger a lower annual allowance of £10,000. That means you’ll only receive tax relief on pension contributions of up to 100% of your earnings or £10,000, whichever is lower.
Earnings include employment income and income from a profession or trade, among other things.
Pension income doesn’t count. If your only income is through your pension, then your entitlement to tax relief under this route is lost. Assuming you are still entitled, you can claim tax relief on the lower of your employment income or £10,000. If your employment income was, say, £49,000, then your entitlement to tax relief is limited to £10,000.
Whether the lower £10,000 annual allowance applies depends on how you access your pension pot and there are some complicated rules around this. As a basic guide, the main situations when you’ll trigger the lower allowance are if you start to take ad hoc lump sums from your pension pot as you did, or if you put your pension pot money into an income drawdown fund and start to take income.
You can’t carry this allowance over to another tax year if you haven’t used it.