Pension tax relief. Possible to game the system?
Discussion
Is it possible to gain a few 20% top ups in the last couple of years of paying into a SIPP?
As I understand it, you can pay the equivalent of your annual earnings into a SIPP, and 20% of this is credited by the government. I also understand you can backdate a maximum of 3 years unused allowances.
For example, assuming I earn £50k pa in the 2 years prior to my 55th birthday, could I make an investment of £120k (topped up to £150k) in my 53rd year, and then £40k (topped up to £50k) in my 54th year. Then in my 55th year, draw 25% as a lump sum?
Effectively, I convert all my ISA holdings to SIPP investments over a 2 year period and make (in this example) £40k which I can access to reinvest within 14 months, assuming my birthday is in May.
As I understand it, you can pay the equivalent of your annual earnings into a SIPP, and 20% of this is credited by the government. I also understand you can backdate a maximum of 3 years unused allowances.
For example, assuming I earn £50k pa in the 2 years prior to my 55th birthday, could I make an investment of £120k (topped up to £150k) in my 53rd year, and then £40k (topped up to £50k) in my 54th year. Then in my 55th year, draw 25% as a lump sum?
Effectively, I convert all my ISA holdings to SIPP investments over a 2 year period and make (in this example) £40k which I can access to reinvest within 14 months, assuming my birthday is in May.
I'm not an adviser so the following is from my own understanding.
The concept of what you are asking is correct, but the numbers are now incorrect. The maximum is now £40k p.a. You can top up any unused amount from the last three years. If you are a higher rate payer you can also make a claim to recover the additional 20% tax relief from HMRC. You can take out 25% tax free at 55.
The concept of what you are asking is correct, but the numbers are now incorrect. The maximum is now £40k p.a. You can top up any unused amount from the last three years. If you are a higher rate payer you can also make a claim to recover the additional 20% tax relief from HMRC. You can take out 25% tax free at 55.
The current annual allowance is £40,000.
You only get tax relief on contributions up to your taxable earnings in the tax year of payment. Any contribution in excess of this and within the annual allowance rules (including the carry forward) would not attract tax relief.
So you would need to fund over two years not four.
You only get tax relief on contributions up to your taxable earnings in the tax year of payment. Any contribution in excess of this and within the annual allowance rules (including the carry forward) would not attract tax relief.
So you would need to fund over two years not four.
Edited by PurpleMoonlight on Saturday 13th June 16:28
I see. Assuming I don't use any allowance for the three preceding years I can pay in a total of £96k in the tax year of my 53rd year, topped up by £24k, then £32k the next year, topped up by £8k, thus turning £128k into £150k. I can then draw £37.5k back once I'm 55. It'd be worth remortgaging to maximise the gain if cash and investments outwith the SIPP weren't enough.
PurpleMoonlight said:
CaptainSlow said:
If you are a higher rate payer you can also make a claim to recover the additional 20% tax relief from HMRC.
It is likely higher rate tax relief will be removed shortly. Expect details in next months emergency Budget.Will this impact contractors? ie company contributions prior to corp tax calc?
s2sol said:
I see. Assuming I don't use any allowance for the three preceding years I can pay in a total of £96k in the tax year of my 53rd year, topped up by £24k, then £32k the next year, topped up by £8k, thus turning £128k into £150k. I can then draw £37.5k back once I'm 55. It'd be worth remortgaging to maximise the gain if cash and investments outwith the SIPP weren't enough.
No, you need to put in:Age 51 - £32,000 (net)
Age 52 - £32,000 (net)
Age 53 - £32,000 (net)
Age 54 - £32,000 (net)
But don't forget that 75% of the fund will be taxable as you draw it as income.
CaptainSlow said:
One way to further fuel house prices.
Will this impact contractors? ie company contributions prior to corp tax calc?
It remains to be seen if they will seek to include employer contributions somehow. Labour did about 8 years ago for high earners (£150,000) whereby the individual was liable for some tax on the employer contribution over the prescribed level.Will this impact contractors? ie company contributions prior to corp tax calc?
PurpleMoonlight said:
CaptainSlow said:
If you are a higher rate payer you can also make a claim to recover the additional 20% tax relief from HMRC.
It is likely higher rate tax relief will be removed shortly. Expect details in next months emergency Budget.PurpleMoonlight said:
GT03ROB said:
Good news for the pensions business.....
Doubt it.It will likely restrict pension provision for higher rate tax payers. , Why would you want to pay 40% tax on your pension when you have only had 20% tax relief on the contributions.
....actually opens up a right taxation clusterf
k....will now have to also tax employers contributions or all that will happen is employees take a pay cut & employers pay into the pension.GT03ROB said:
My irony was a bit strong methinks....
....actually opens up a right taxation clusterfk....will now have to also tax employers contributions or all that will happen is employees take a pay cut & employers pay into the pension.
And what about the notional contribution for defined benefit schemes.....actually opens up a right taxation clusterf
k....will now have to also tax employers contributions or all that will happen is employees take a pay cut & employers pay into the pension.I think they will try to keep it simple, and restrict to personal contributions only. Salary sacrifice will likely continue to be an approved method of pension provision because the percentage that do it very small.
The tax take due to 'workplace pensions' will probably make it worthwhile for them.
PurpleMoonlight said:
GT03ROB said:
My irony was a bit strong methinks....
....actually opens up a right taxation clusterfk....will now have to also tax employers contributions or all that will happen is employees take a pay cut & employers pay into the pension.
And what about the notional contribution for defined benefit schemes.....actually opens up a right taxation clusterf
k....will now have to also tax employers contributions or all that will happen is employees take a pay cut & employers pay into the pension.I think they will try to keep it simple, and restrict to personal contributions only. Salary sacrifice will likely continue to be an approved method of pension provision because the percentage that do it very small.
The tax take due to 'workplace pensions' will probably make it worthwhile for them.
k..... 
PurpleMoonlight said:
GT03ROB said:
I must have missed the give bit
It's supposedly the increase in the IHT allowance to £1M.Still stupid though...wholesale pension underfunding & what does government come up with "I know lets make pensions less attractive"
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