YOUR MONEY: Raiding your pension pot can be very costly

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New rules that come in to force next month will restrict the amount of money that can be paid back into pensions for those who have already started taking withdrawals.

With the new flexible pension rules that allow any amount of money to be withdrawn from a private pension at any time from age 55, the temptation to raid the pot to provide a spending boost has never been greater.

However, taking benefits early has some potentially costly consequences.

Firstly, spending the pension money at an early age can obviously mean that the pot could run out too soon.

Secondly, there are limits as to how much can be paid back into the pension pot out of earnings in order to replenish it.

Currently, someone who has raided their pension early can pay back in up to £10,000 of earnings each year.

This contribution allowance, known as the money purchase annual allowance, is set to reduce in April to £4,000.

The objective is to prevent widespread recycling of pension income, where money is put back into pensions to generate future tax relief.

Any breach of the reduced allowance will result in a tax charge. This could particularly hit higher earners and those people continuing in company pension schemes where the employer contributions are generous.

Another pension change that limits what can be paid into pensions is the option to carry forward the £50,000 contribution allowance from the 2014/15 tax year will expire on April 5. This use-it-or-lose-it allowance will encourage higher earners to make significant pension contributions before the end of the tax year in order to maximise the generous tax reliefs that are currently available.

Of course, this very generous pension system is estimated to cost the government over £30bn each year, so any future budget could restrict this generous giveaway even further.

David Hill is a Chartered Financial Planner and Trust & Estate Practitioner at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814, email or see