If I take 25% tax-free money from my pensions – can I then pay extra in?

I currently have two pensions, a defined contribution personal pension and a Sipp.

I was going to take the 25 per cent tax-free amount from both, and then leave the rest invested without taking any money from them for a number of years and continue to contribute.

Once in drawdown, do I have to take money from this (the taxable part) within any time period?

Retirement finances: What are the rules after you take 25% tax-free lump sums from pensions?

Based on only taking the tax-free element, is there any restriction in continuing to put money into the pension based on continuing to work. I am aware of the restriction if not in full-time employment.

For money I do pay in, is this still matched by the government? Do any future payments have any tax-free element to them or is this then lost?

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Steve Webb replies: My mailbag includes a lot of questions each week on the rules around taking 25 per cent tax free from a pension, so hopefully my reply to your question will be of benefit to many others.

With a couple of exceptions (which I cover below), when it comes to accessing your pensions, you can think about each pension separately.

This means that you can, for example, take a tax-free lump sum from one pension now and take a tax-free lump sum from another pension later – it doesn’t all have to happen at the same time.

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Or, you can take tax-free cash from one pension while still saving into another one (subject to certain limits which I describe below).

If you take out 25 per cent tax free and leave the rest in drawdown, this what is called ‘flexi access’ drawdown. All subsequent withdrawals are taxed in full.

The other main alternative is sometimes called ‘phased drawdown’, and in this case you take your pension in chunks, with each withdrawal being 25 per cent tax free and 75 per cent taxable.

If you go down the first of these routes (flexible drawdown) then, as long as you don’t touch the remaining 75 per cent, you won’t trigger any limits on future pension saving.

But once you do start tapping the rest of it, or if you go for the second option and start taking some taxable cash in chunks, you are then subject to the ‘Money Purchase Annual Allowance’ (MPAA).

This limits your further pension saving to £10,000 per year, up to which level you still get tax relief on pension contributions.

The limit is intended to prevent people from ‘gaming’ the tax relief system by repeated payments in and withdrawals in order to benefit from large amounts of tax-free cash.

Assuming you are not up against the MPAA, you can go on saving into a (new) pension and your contributions continue to attract tax relief, at least until you reach age 75.

This means, for example, that if you pay £800 into a personal pension this will be topped up with £200 from the Government giving you £1000 in all in your pension pot.

This pension pot behaves in the same way as your existing personal pensions/Sipp, and you continue to be able to take 25 per cent of the pot tax free when you wish.

Assuming you have gone for flexible drawdown, there is no time limit on accessing the other 75 per cent of your pension.

Some people may want or need to access the money quite swiftly, others may spread out their withdrawals (possibly to reduce their tax bills) and others may try to leave it untouched to provide an inheritance for their heirs.

A final consideration – which will only affect the lucky few – is that there is now a lifetime limit on the amount of tax-free cash you can take, and this is currently £268,275.

Whilst it is possible to take lump sums greater than this figure, for most people they will only enjoy the tax-free status of their withdrawals up to this overall limit.