SIPP & Pension guidance - IM Private Clients

[bennno]

LeoSayer said:

bennno said:

So, let say I've got £700k in one of my personal pensions - Scottish Windows PP2.

Its been subject to a £200k swing in to 2020 (dropped to £518k) and then back to todays value thats around 5% more than pre pandemic.

I'm 47 and plan to retire as early as possible - but think thats 57 with the changes pending - so 10 years.

Should I be moving all or part of it in to cash and bonds or still going for growth given volatility of last 2 years?

My answer would be no. From a quick google your pension fund seems to be at least 8% in fixed income securities so you already have some de-risking built in. In any case, the chances of losing money on the global equity market over a 10 year period are very small. By moving into cash and bonds, you are almost guaranteeing a loss in value to inflation.

If it was me, I'd be 100% equities now and then I'd review with 5 years to go. At that point, assuming markets haven't tanked then I would start moving into cash with a goal of having 2-3 years of spending locked in before I needed the money.

Keeping a rolling 2-3 years of cash will give me a big enough buffer so that I can avoid being a forced seller if market crash at any point in the future.

All this assumes I am fully dependent on drawing on that pension at a certain age. If I had flexibility around that (working longer or other guaranteed income) then I might choose to reduce the buffer.

The key to good planning is working out what your spending requirements will be in retirement. The path becomes a lot clearer when you have that number.

Thank you, some good points there. Its also 100% in pension fund 2, whilst Scottish Widows have a huge list of other funds - should it be spread?

[LeoSayer]

bennno said:

Thank you, some good points there. Its also 100% in pension fund 2, whilst Scottish Widows have a huge list of other funds - should it be spread?

If the link below is the fund in question then you can see it already holds other funds.

https://markets.ft.com/data/funds/tearsheet/holdin...

My pension was invested by default in a similar fund - Blackrock Consensus 85. Like the SW fund and most other pension default fund, it has exposure to bonds and is overexposed to the UK market. I didn't want either of these features so I switched into a global equity index tracker.

[B9]

A few questions (and follow up ones)

Let's assume someone was earning £80k pa and salary sacrificed per below of the last few years.

2019 - £20k
2020 - £30k
2021 - £40k

From 1st April 22 their pay is to increase to £125k. Assuming they don't need the extra cash that year, can they simply increase their salary sacrifice to £70k in 2022 to use previous unused allowances? If so, is there any paperwork to fill out? How does this look with regards to only 'earning' £55k but contributing £70k (as I thought you couldn't contribute more than you earn). Does this rule apply on salary sacrifice?

I wondered if this was possible as the person would be benefitting from 40% ta relief (due to salary sacrifice) but the 2019/2020 years they would've been paying 20% as their contributions would've pushed their salary below £50k?

2019 - £20k + £20k salary sacrifice in 2022
2020 - £30k +£10k salary sacrifice in 2022
2021 - £40k
2022 - £40k salary sacrifice in 2022
2023 onwards - £40k via s/s

Slightly off topic, but if one were to earn £125k (which I hear puts you in the danger zone with tapered allowances etc), does a £25k pension via salary sacrifice negate all of that?

Edited by B9 on Monday 16th August 09:54

Edited by B9 on Monday 16th August 09:55

[Intelligent Money]

B9 said:

A few questions (and follow up ones)

Let's assume someone was earning £80k pa and salary sacrificed per below of the last few years.

2019 - £20k
2020 - £30k
2021 - £40k

From 1st April 22 their pay is to increase to £125k. Assuming they don't need the extra cash that year, can they simply increase their salary sacrifice to £70k in 2022 to use previous unused allowances? If so, is there any paperwork to fill out? How does this look with regards to only 'earning' £55k but contributing £70k (as I thought you couldn't contribute more than you earn). Does this rule apply on salary sacrifice?

I wondered if this was possible as the person would be benefitting from 40% ta relief (due to salary sacrifice) but the 2019/2020 years they would've been paying 20% as their contributions would've pushed their salary below £50k?

2019 - £20k + £20k salary sacrifice in 2022
2020 - £30k +£10k salary sacrifice in 2022
2021 - £40k
2022 - £40k salary sacrifice in 2022
2023 onwards - £40k via s/s

Slightly off topic, but if one were to earn £125k (which I hear puts you in the danger zone with tapered allowances etc), does a £25k pension via salary sacrifice negate all of that?

Edited by B9 on Monday 16th August 09:54

Edited by B9 on Monday 16th August 09:55

Hi B9

Assuming that the salary sacrifice is on the basis of an employer pension contribution in exchange for salary then the contribution will be treated as an employer contribution and is subject to employer contribution rules.

An employer can contribute a maximum of £40k p.a. irrespective of the employees earnings.
The contribution is treated as a gross contribution and is an allowable business expense.

You can use carry forward as you have shown in your example. Th Paperwork needed is dependent on the receiving schemes requirements.

The two danger figures for contribution taper increased to £200k threshold income and £240k adjusted income.

It is the £240k figure that triggers a calculation and salary sacrifice is added back in for that calculation so it isn’t that easy to avoid taper I’m afraid!

Cheers

Nik

[B9]

Thanks Nik as always

On that basis I assume said person can only contribute £40k via salary sacrifice in 2022 (as this is the employer limit), and the rest would be into their SIPP, or do employers have similar benefits of being able to use previously unused allowances?

[Intelligent Money]

B9 said:

Thanks Nik as always

On that basis I assume said person can only contribute £40k via salary sacrifice in 2022 (as this is the employer limit), and the rest would be into their SIPP, or do employers have similar benefits of being able to use previously unused allowances?

Hi B9

Your employer can use carry forward in the same way that you can so they can contribute £70k in 22 based on your example

Cheers

Nik

[coetzeeh]

Hi,

Any pointers re what a reasonable fee/amount/% would be for IFA advice moving from a former DB pension to a private pension.

Wife worked for a bank many years ago and was offered £180k - intention is to move this amount to her current private pension pot but conscious we need to engage IFA - just not sure what reasonable costs looks like for the IFA service.

Many thanks.

[LeoSayer]

coetzeeh said:

Hi,

Any pointers re what a reasonable fee/amount/% would be for IFA advice moving from a former DB pension to a private pension.

Wife worked for a bank many years ago and was offered £180k - intention is to move this amount to her current private pension pot but conscious we need to engage IFA - just not sure what reasonable costs looks like for the IFA service.

Many thanks.

A friend of mine paid around £3,000 at the end of last year and I believe prices have gone up since then due to indemnity insurance costs increases.

Please note that getting a recommendation to transfer is highly unlikely these days thanks to recently updated FCA guidance.

Without a recommendation you will probably struggle to find any pension provider willing to accept the transfer even though you have had the advice. AJ Bell were accepting such transfers (from 'insistent clients') but they closed the door last month.

[Ziplobb]

coetzeeh said:

Hi,


Wife worked for a bank many years ago and was offered £180k

out of interest which bank ? I am half expecting HSBC to try on something like this over the next few years as the memebrs of the old 'Midland' scheme pop off. I was pretty much one of the last to enter it and have 17 years in.

[coetzeeh]

Ziplobb said:

coetzeeh said:

Hi,


Wife worked for a bank many years ago and was offered £180k

out of interest which bank ? I am half expecting HSBC to try on something like this over the next few years as the memebrs of the old 'Midland' scheme pop off. I was pretty much one of the last to enter it and have 17 years in.

Natwest. We asked so no pressure from the bank.

[Hussein-z3ksd]

Am i correct in assuming pension payments via salary sacrifice is better than pension payments post tax/NI, because you can claim the tax back from hmrc but not the NI? So - Salary Sacrifice is the most economical method of the two?

[LeoSayer]

Hussein-z3ksd said:

Am i correct in assuming pension payments via salary sacrifice is better than pension payments post tax/NI, because you can claim the tax back from hmrc but not the NI? So - Salary Sacrifice is the most economical method of the two?

Correct.

With salary sacrifice, the contribution gets paid gross from your employer to the pension.

[brman]

Having read this thread there is something that still confuses me. That is annual allowance for tax relief.

Lets assume a gross salary of £37k. ie below the £40k allowance.
And then lets assume a normal tax code of 1250 so that is is broken down as follows:
£5000 taken in tax.
£3384 taken as employee NIC
leaving a net salary of £28616.

So, to get full tax relief,my annual contribution is limited to my income what is my "income"?
Googling I have seen various terms used "annual income" (suitably vague), "net income", "UK taxable earnings", "relevent earnings".
But what do they mean? What are my max contributions (for tax relief)?
1. Gross income? ie. I contribute 37000 (I assume not)
2. Gross income with tax relief? ie. I contribute 29600, HMRC contribute 7400 to give 37000 total.
3. Net income after tax and NIC? ie. I contribute £28616.
4. Taxable income. ie gross minus allowance. ie.I contribute 37000-12500=24500.

I thought I understood this but now I am not so sure......

ETA: Assume SIPP, contribution from net salary so tax already taken and relief to be claimed via the SIPP provider.

Edited by brman on Friday 20th August 14:15

Edited by brman on Friday 20th August 14:16

[LeoSayer]

The most you can contribute will be £37,000 ie. your gross salary.

The method of achieving this will differ depending on how you contribute eg. via salary sacrifice, net pay arrangement, SIPP, Final Salary etc.

[brman]

LeoSayer said:

The most you can contribute will be £37,000 ie. your gross salary.

The method of achieving this will differ depending on how you contribute eg. via salary sacrifice, net pay arrangement, SIPP, Final Salary etc.

Sorry, good point. I should have added that. Assume SIPP, contribution from net salary so tax already taken and relief to be claimed via the SIPP provider.

So, given that, are you saying option 2 above?

Edited by brman on Friday 20th August 14:17

[Intelligent Money]

brman said:

Having read this thread there is something that still confuses me. That is annual allowance for tax relief.

Lets assume a gross salary of £37k. ie below the £40k allowance.
And then lets assume a normal tax code of 1250 so that is is broken down as follows:
£5000 taken in tax.
£3384 taken as employee NIC
leaving a net salary of £28616.

So, to get full tax relief,my annual contribution is limited to my income what is my "income"?
Googling I have seen various terms used "annual income" (suitably vague), "net income", "UK taxable earnings", "relevent earnings".
But what do they mean? What are my max contributions (for tax relief)?
1. Gross income? ie. I contribute 37000 (I assume not)
2. Gross income with tax relief? ie. I contribute 29600, HMRC contribute 7400 to give 37000 total.
3. Net income after tax and NIC? ie. I contribute £28616.
4. Taxable income. ie gross minus allowance. ie.I contribute 37000-12500=24500.

I thought I understood this but now I am not so sure......

Hi Brian

As Leosayer has said in your example the maximum gross contribution is £37k

So for a personal contribution you pay £29,600 and £7,400 is claimed back from HMRC.

HMRC define relevant earnings as: employment income such as pay, wages, bonus, overtime, commission

Cheers

Nik

[brman]

Thanks Nik (and Leosayer!).
whew, that confirms what I thought

I just started to doubt myself as someone I was talking to was skeptical that HMRC would give back more than they actually took in tax. I told him to stop complaining and accept it!

[brman]

Actually, this just made me think of another question.
Lets say I want to do this for this year (ie put all my salary into my SIPP). Would it actually be better to get my employer to do this as salary sacrifice and not actually pay my salary?
Is this even "legal"? ie pension instead of salary?
Would that then mean no tax paid (or relief claimed) but also no NIC paid (or employer contributions)? With the figures above I assume that saves me about £1000.

Hmm... having written that realised that no salary might also affect my state pension? IIRC I need two or three more years to get max state pension.
Does that mean I need to keep a minimal salary (£10k or whatever it is??) then salary sacrifice the rest to the pension?

[Carbon Sasquatch]

Salary sacrifice will be easier if your employer will do it.

State pension will depend on whether you have enough qualifying years left when you will contribute. If not, then you can make a voluntary payment for the year which is likely less than your full NI contribution

[brman]

Carbon Sasquatch said:

Salary sacrifice will be easier if your employer will do it.

State pension will depend on whether you have enough qualifying years left when you will contribute. If not, then you can make a voluntary payment for the year which is likely less than your full NI contribution

Yes, I think I will have to do some more reading on that.
I basically plan to max out my pension until I retire. So if I go full salary sacrifice that will be no more qualifying years, and I currently have 2 or 3 needed to max my state pension.
However a brief google says I only need a salary of £6,240/year to count as a qualifying year. I think that at that salary I would not pay NI anyway. (or tax of course). The alternative being £800 to buy a year.
But then I realised that taking a salery of 6240 leaves 30760 for pension salary sacrifice.
So I still need a personal contribution of 6240 gross to get to my max 37000. So I calculate that as 4992 from me and 1248 tax relief from HMRC.
So my original net £28616 salary but with 29600 contribution. Would leave me with -£984.
With a 6240 salary, minus a 4992 contribution leaves me with +£1248. So I am up by 1248+984=£2232.

Hmmm... too much thinking for a friday. When my brain hurts less I will re-check this (and whether the £800 to by a year is better). But in the mean time, if anyone could confirm I am on the right track (or missing something) that would be great!
The one obvious thing is whether the annual allowance of my salary is my gross, before salary sacrifice, or after salary sacrifice. If it is the latter then I think that scuppers this scheme.