Is it worth paying into a pension when you are 64 and a non-taxpayer?

I am not a taxpayer, so have not benefited from an additional amount from the Government into a pension I opened.

I was going to pay money in annually but am I right in thinking that this might not be worth my while as I’ll be taxed when I cash it in.

I am 64 years old and will become a taxpayer when I receive my state pension.

Is paying money into a private pension at my age something you would recommend? Do you think I should cash it in before I become liable for tax? Thank you in advance.

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Retirement finances: Is it worth paying into a pension when you are 64 and a non-taxpayer?

Steve Webb replies: The good news is that even as a non-taxpayer you can still benefit from tax relief on pension contributions up to an annual limit, provided you have the right sort of pension.

This applies to personal pensions (or stakeholder pensions) where you make your own personal contribution and the government then adds a top-up.

Currently the annual limit is £3,600 in total going into your pension, of which 20 per cent is contributed by the government.

So, you can put in up to £2,880 each year and benefit from an additional £720 from the government.

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When you draw your pension out, a quarter can be taken tax free, and then the rest is subject to income tax in the normal way.

You can read more about tax relief on pension contributions on the Money Advice Service website here. 

On your second question about whether it is worth paying into a pension at 64, clearly the fact that you can get a tax-free lump sum is an attractive feature, as well as the potential for investment growth on the money that you put in.

I’m not sure if you are in paid work, but anyone who does have an employer who is willing to put money into a pension should think seriously about taking up this opportunity.

It’s hard to think of any other form of investment where someone else will make contributions for you!

You raise an interesting point about timing the withdrawal of money from your pension.

If you wait until you are drawing a state pension to draw your private pension then everything beyond the tax-free lump sum will be added to your taxable income for the year.

At current tax rates that would presumably be taxed at 20 per cent. By contrast, if you take money out before the financial year in which you draw your state pension then you may be under the tax threshold and pay no tax.

One thing to bear in mind is that as soon as you start taking taxable cash out of a ‘pot of money’ type pension you then trigger a much lower annual limit on future tax-relieved pension contributions.

This limit – currently £4,000 – is known as the ‘Money Purchase Annual Allowance’.

This may not be relevant to you but if – for example – you subsequently decided to go back to work and start saving more money into a pension, you would be caught by this limit.

Although this may not be your current intention, a surprising number of people do ‘un-retire’ and go back to work later in life, so it might be worth keeping your options open.

A separate, but related, point to bear in mind for anyone planning to cash in a larger pot is to make sure you don’t find yourself accused by HMRC of ‘recycling’ pension contributions.

Some people access their pension pot and take a 25 per cent lump sum and then use this money to bump up their contributions back into a pension in order to get extra tax relief.

If HMRC thinks this has been pre-planned as a way to exploit the tax relief system you can face penalties. You can read more about what ‘recycling’ is on the Pensions Advisory Service website here. 

This post first appeared on Dailymail.co.uk