SIPP & Pension guidance - IM Private Clients
Discussion
Pensions can be the most tax efficient retirement savings vehicle available. Just as with ISAs all internal growth and income is tax free, but there are very big differences in the tax treatment when you put money in or take it out.
When you put money in you get a full rebate of income tax that would otherwise have been retained by HMRC. When you take money out, the 25% is tax free and the balanced charged at your future marginal income tax rate.
Contributions to your pension/SIPP gain tax relief based upon your income tax rate. This means you will gain an additional 20% contribution into your pension and if you are a higher rate tax payer you can claim the additional tax relief via your tax return.
Tax relief varies a little dependent on the way you make your contributions and whether the contribution is an Employer or Employee one.
You can currently draw funds from your pension at age 55, though this is likely to change to be 10 years before your State Retirement Age. You can take 25% tax free with any further income taxed at your income tax rate at the time.
We are also often asked what the difference is between a pension and a SIPP – the answer these days is virtually nothing. Go back a few decades and the differences we quite large, with SIPPs offering far more flexibility and functionality. Now may pensions have caught up in most (though not all) of this.
The IM Pension is a fully managed pension that does offer SIPP functionality for holding commercial property and for full drawdown functionality.
This thread is wholly related to answering any questions you may have about Pensions/SIPPs.
If your post is not related to pensions/SIPPs, we have four other threads:
When you put money in you get a full rebate of income tax that would otherwise have been retained by HMRC. When you take money out, the 25% is tax free and the balanced charged at your future marginal income tax rate.
Contributions to your pension/SIPP gain tax relief based upon your income tax rate. This means you will gain an additional 20% contribution into your pension and if you are a higher rate tax payer you can claim the additional tax relief via your tax return.
Tax relief varies a little dependent on the way you make your contributions and whether the contribution is an Employer or Employee one.
You can currently draw funds from your pension at age 55, though this is likely to change to be 10 years before your State Retirement Age. You can take 25% tax free with any further income taxed at your income tax rate at the time.
We are also often asked what the difference is between a pension and a SIPP – the answer these days is virtually nothing. Go back a few decades and the differences we quite large, with SIPPs offering far more flexibility and functionality. Now may pensions have caught up in most (though not all) of this.
The IM Pension is a fully managed pension that does offer SIPP functionality for holding commercial property and for full drawdown functionality.
This thread is wholly related to answering any questions you may have about Pensions/SIPPs.
If your post is not related to pensions/SIPPs, we have four other threads:
- General investments
- Individual Saving Accounts (ISAs)
- Tax (including IHT) Planning
- General financial guidance
jimPH said:
Can I start one for my wife (housewife/mother) and can I pay into it for her. If so, how much?
Depending if your wife is younger than 40, you may want to investigate the use of a LISA as part of your retirement planning process as generally it may be more tax efficient than using a pension. It all really depends on broader circumstances.Edited by cloud_dog on Wednesday 7th April 13:58
cloud_dog said:
jimPH said:
Can I start one for my wife (housewife/mother) and can I pay into it for her. If so, how much?
Depending if your wife is younger than 40, you may want to investigate the use of a LISA as part of your retirement planning process as generally it may be more tax efficient than using a pension. It all really depends on broader circumstances.Edited by cloud_dog on Wednesday 7th April 13:58
Something that comes up quite frequently is how to transfer out of a DB scheme into a SIPP/Personal Pension (there's a nother topic posted today). We all know that it's difficult to find an IFA to undertake the analysis but would it be possible for this thread to hold a list of advisors known to be undertaking this work? It might be a useful resource.
Mr Pointy said:
Something that comes up quite frequently is how to transfer out of a DB scheme into a SIPP/Personal Pension (there's a nother topic posted today). We all know that it's difficult to find an IFA to undertake the analysis but would it be possible for this thread to hold a list of advisors known to be undertaking this work? It might be a useful resource.
Hi Mr PointyAs this is an IM Sponsored thread we couldn't put a list together as it could be considered as advice or endorsement.
That said any PH'r who has had a good exeperince with a DB specialist and is happy to share is very welcome to do so.
Cheers
Nik
cloud_dog said:
jimPH said:
I'm trading the maximum you can deposit is 40k/Yr.
When you haven't used your full allowance, does it carry over for 3 years, so you could still have allowance from 2018-19, including this year, so 120k retrospective + 40k current year?
Yes, if you have earnings of £120kWhen you haven't used your full allowance, does it carry over for 3 years, so you could still have allowance from 2018-19, including this year, so 120k retrospective + 40k current year?
Mr Pointy said:
Doesn't he need sufficient earnings in each year equal to the proposed contribution for that year?
Perhaps I misunderstood your post?In order to use unused carry forward you must have pensionable earnings in the current FY that support / match the amount you wish to contribute. So contributing £80k requires earning of at least £80k in the current FY (I say at least because I assume they may already have standard/ongoing pension commitments). Obviously, if someone is a super earner (£200k) then tapered relief becomes a consideration but that is for another day.
cloud_dog said:
jimPH said:
I'm trading the maximum you can deposit is 40k/Yr.
When you haven't used your full allowance, does it carry over for 3 years, so you could still have allowance from 2018-19, including this year, so 120k retrospective + 40k current year?
Yes, if you have earnings of £120kWhen you haven't used your full allowance, does it carry over for 3 years, so you could still have allowance from 2018-19, including this year, so 120k retrospective + 40k current year?
There are two distinct measures which need to be considered.
For clarity, can you confirm if you are receiving company contributions of £40k at present, i.e. perhaps you are a director of your own limited company?
If you are, then that is the maximum that can be contributed by the company.
For you to contribute more you would need pensionable earnings above £40k. Example: If you had a PAYE income of £120k then you could contribute a further £80k
We have to verify both measures are applicable separately.
For clarity, can you confirm if you are receiving company contributions of £40k at present, i.e. perhaps you are a director of your own limited company?
If you are, then that is the maximum that can be contributed by the company.
For you to contribute more you would need pensionable earnings above £40k. Example: If you had a PAYE income of £120k then you could contribute a further £80k
We have to verify both measures are applicable separately.
There is always a bit of confusion around carry forward rules
The first variable is company vs personal contributions,
For personal contributions there are two calculations to consider.
1) How much can you contribute
2) How much qualifies for tax relief
Calculation 1)
For this tax year the maximum contribution is £40k or 100% Net Relevant Earnings, which ever is the lower.
You then go back 3 years. For each of these years, starting with furthest back, you deduct any contributions made in that year from the £40k allowance and carry that forward.
As a simple example if you have contributed a steady £25k p.a. into a pension and you use carry forward this year you will have :
£40k 21/22
£15k 20/21
£15k 19/20
£15k 18/19
so you could contribute £85k in tax year 21/22
Calculation 2)
You will only receive tax relief on a pension contribution up to 100% of your net relevant earnings in the year on contribution
So if your earnings were £60k in 21/22 you could contribute £85k but you would only gain tax relief on £60k of that contribution.
If your earnings are £100k you gain tax relief on the full £85 contribution.
In most cases people only make a contribution up the amount they can claim tax relief on.
Employer/Company Contributions
A company can make a contribution of £40k p.a. for an employee/director irrespective of the earnings of that individual.
The company can also carry forward unused contributions from the previous three years, as detailed above, and make that contribution, again irrespective of the earnings of the individual in the year of payment.
The caveat for employer contributions within HMRC rulings is that any contribution should be commensurate with the role/value that the individual plays in the business.
Hope that helps
Nik
The first variable is company vs personal contributions,
For personal contributions there are two calculations to consider.
1) How much can you contribute
2) How much qualifies for tax relief
Calculation 1)
For this tax year the maximum contribution is £40k or 100% Net Relevant Earnings, which ever is the lower.
You then go back 3 years. For each of these years, starting with furthest back, you deduct any contributions made in that year from the £40k allowance and carry that forward.
As a simple example if you have contributed a steady £25k p.a. into a pension and you use carry forward this year you will have :
£40k 21/22
£15k 20/21
£15k 19/20
£15k 18/19
so you could contribute £85k in tax year 21/22
Calculation 2)
You will only receive tax relief on a pension contribution up to 100% of your net relevant earnings in the year on contribution
So if your earnings were £60k in 21/22 you could contribute £85k but you would only gain tax relief on £60k of that contribution.
If your earnings are £100k you gain tax relief on the full £85 contribution.
In most cases people only make a contribution up the amount they can claim tax relief on.
Employer/Company Contributions
A company can make a contribution of £40k p.a. for an employee/director irrespective of the earnings of that individual.
The company can also carry forward unused contributions from the previous three years, as detailed above, and make that contribution, again irrespective of the earnings of the individual in the year of payment.
The caveat for employer contributions within HMRC rulings is that any contribution should be commensurate with the role/value that the individual plays in the business.
Hope that helps
Nik
Jockman said:
Don’t forget the elephant in the room. If you had no pension pot in the preceding years you ain’t gonna be able to use carry forward.
It is an additional consideration. The technicality is that you must of had a scheme you could of contributed to, so you don't need to of made any contributions or even had a pot, just had a pension open. It also counts if you had an old DB scheme that you are now a deferred member of.
Nik
Intelligent Money said:
Jockman said:
Don’t forget the elephant in the room. If you had no pension pot in the preceding years you ain’t gonna be able to use carry forward.
It is an additional consideration. The technicality is that you must of had a scheme you could of contributed to, so you don't need to of made any contributions or even had a pot, just had a pension open. It also counts if you had an old DB scheme that you are now a deferred member of.
Nik
Also, a more generic question: what happens to my NHS pension and my IM SIPP if I die before retirement age?
Thanks. Rob
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