SIPP & Pension guidance - IM Private Clients

[crusty]

Hi, my wife turns 60 in August and is receiving a lump sum of £50K from her teachers pension.

She plans to continue working for another couple of years.

Is she allowed to put the lump sum into a private pension, and gain tax relief, or if not what are her other options?

Also, is it still worth her while to still contribute to her teachers pension, one she starts to receive benefits?

[Intelligent Money]

pingu393 said:

One for Nik.

I'm a sole trader, so I can only input 80% of my annual income (with HMRC inputting the other 20%).

If I were a limited company, could I input as much as I like, but HMRC would only input 20% of my annual income? Or would HMRC add more?

Hi Pingu393

As a sole trader your contributions are treated as personal contributions so your gross annual pension contributions allowance is 100% of your earnings or £40k which were is the lower.
You will get tax relief based on your marginal tax rate, 20% relief at source into the pension and any higher rate relief via your tax return.
So assuming £40k gross is your allowable contribution you can pay £32k net with £8k tax relief claimed and paid into the pension to top up to £40k.

A LTD company can make an employer contribution. The annual allowance is still a maximin of £40k but this is irrespective of earnings. This is treated as a trading expense so is not subject to corporation tax, and as it is not paid to the employee as salary there is no income tax or employer of employee NI to pay on the contribution.
There is no income tax relief to claim back on the contribution so no additional funds are payed into the pension.

Cheers

Nik

[Intelligent Money]

tighnamara said:

Mr Pointy said:

tighnamara said:

I am not sure that is correct, I thought ............but could be wrong.....

1. Pension contribution was based on income/ profit, where the company had to have the required income / profit for the year the payment is made (including any carry forward).

2. If pension is paid directly from Limited Company there would be nothing claimed back from HMRC as no tax would have been paid so nothing to claim back.

Hmm I'll have to check what I was told.

I could be totally wrong though and misunderstood

Nik will be along to put us right......

Hi Gents,

Company/Employer contributions need to be made from company funds so are indirectly linked to company profits/turnover but the contribution limits are not dictated by the this. The maximum annual contribution is per individual and is £40k irrespective of the individuals income. The caveat is that the pension contribution should be commensurate with the role the individual plays within the company.

Contributions are a business expense so free from corporation tax, income tax and employer and employee NI but no additional tax relief is claimable for payment into the pension.

Cheers

Nik

[Intelligent Money]

crusty said:

Hi, my wife turns 60 in August and is receiving a lump sum of £50K from her teachers pension.

She plans to continue working for another couple of years.

Is she allowed to put the lump sum into a private pension, and gain tax relief, or if not what are her other options?

Also, is it still worth her while to still contribute to her teachers pension, one she starts to receive benefits?

Hi Crusty,

Yes she could make a payment into a private pension, subject to the usual annual allowance limits. You could also make use of carry forward to increase the allowance for this year but to gain tax relief on the whole contribution her income needs to be 100% of the contribution or over in the year of the contribution.

I believe she can still contribute to the Teachers scheme after taking benefits, from memory there is a minimum period of 12 months of contributions to gain additional benefits, It would be worth contacting the teachers scheme to ask for an estimated benefits statement for ongoing contributions to see if you think the benefits obtained are worth the contributions.

Regards

Nik

[fourfoldroot]

Intelligent Money said:

Hi Crusty,

Yes she could make a payment into a private pension, subject to the usual annual allowance limits. You could also make use of carry forward to increase the allowance for this year but to gain tax relief on the whole contribution her income needs to be 100% of the contribution or over in the year of the contribution.

I believe she can still contribute to the Teachers scheme after taking benefits, from memory there is a minimum period of 12 months of contributions to gain additional benefits, It would be worth contacting the teachers scheme to ask for an estimated benefits statement for ongoing contributions to see if you think the benefits obtained are worth the contributions.

Regards


Nik

This is something I looked at as I am due a lump some from the NHS scheme. It looks from this document that you can’t reinvest the lump sum into a pension . Is it wrong?
https://www.nhsbsa.nhs.uk/sites/default/files/2018...

[Carbon Sasquatch]

It does look like it would be fairly blatant recycling…..

You could maybe live off the lump sum and put 100% of your income into a SIPP instead ?

[Intelligent Money]

Re-cycling is defiantly a consideration. There are six criteria to consider :

The individual receives a pension commencement lump sum
Because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be.
The additional contributions are made by the individual or by someone else, such as an employer
The recycling was pre-planned.
The amount of the pension commencement lump sum, added to any other PCLS received in the previous 12 month period, exceeds:
- £7,500 for events on or after 6 April 2015, or

- 1% of the standard lifetime allowance for events before 6 April 2015

The cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.

If any one can be discounted then re-cycling is not likely to be an issue

Cheers

Nik

[pingu393]

Intelligent Money said:

Re-cycling is defiantly a consideration. There are six criteria to consider :

The individual receives a pension commencement lump sum
Because of the lump sum, the amount of contributions paid in respect of the individual is significantly greater than it otherwise would be.
The additional contributions are made by the individual or by someone else, such as an employer
The recycling was pre-planned.
The amount of the pension commencement lump sum, added to any other PCLS received in the previous 12 month period, exceeds:
- £7,500 for events on or after 6 April 2015, or

- 1% of the standard lifetime allowance for events before 6 April 2015

The cumulative amount of the additional contributions exceeds 30% of the pension commencement lump sum.

If any one can be discounted then re-cycling is not likely to be an issue

Cheers

Nik

Thanks for the reply on the limited company thing. There seems to no advantage to be had there - back to plan A but...


I know this is to do with "recycling" a pension lump sum, which doesn't apply to me - yet. Does it apply to any other lump sums, such as lottery wins, inheritance, etc.?

Edited by pingu393 on Tuesday 13th July 20:53

[Jasey_]

Lottery wins and inheritance are given as an example on the gov website where its ok to invest in a pension.

Getting a 50k lump sump and putting it into a sipp to get further tax relief sounds like the definition of recycling to me.

[pingu393]

Jasey_ said:

Lottery wins and inheritance are given as an example on the gov website where its ok to invest in a pension.

[tighnamara]

Intelligent Money said:

Hi Gents,

Company/Employer contributions need to be made from company funds so are indirectly linked to company profits/turnover but the contribution limits are not dictated by the this. The maximum annual contribution is per individual and is £40k irrespective of the individuals income. The caveat is that the pension contribution should be commensurate with the role the individual plays within the company.

Contributions are a business expense so free from corporation tax, income tax and employer and employee NI but no additional tax relief is claimable for payment into the pension.

Cheers

Nik

Thanks Nik

[brightmotiv]

Hello.

I have a SIPP question: apologies if this is a basic one.

Last tax year I maxed the contributions; I plan to max it this year and for the next few years.

I want to use the remainder of my allowance from the year before, where I only used part of my allowance (c7k).

Is this just a case of paying in a lump sum and then detailing it on your self assessment?

Thanks for your help

[Intelligent Money]

brightmotiv said:

Hello.

I have a SIPP question: apologies if this is a basic one.

Last tax year I maxed the contributions; I plan to max it this year and for the next few years.

I want to use the remainder of my allowance from the year before, where I only used part of my allowance (c7k).

Is this just a case of paying in a lump sum and then detailing it on your self assessment?

Thanks for your help

Hi Brightmotiv

If you are making a personal contribution you will get basic rate tax relief on the contribution via the SIPP provider, any higher rate relief come via your self assessment.

Just a summary of the carry forward process for you :

You max out this years contribution, either £40k or 100% of Earnings whichever is the lower.

You then go back three years, so in this case to tax year 18/19.

You can carry forward £40k minus any contributions you made in that year.

You can also do the same for tax years 19/20 and 20/21

You will only gain tax relief based on your earnings in the year that you make the contribution.

Cheers

Nik

[brightmotiv]

Thanks Nik, very clear

[Lily the Pink]

I understand that I can take 25% of my SIPP tax-free. Say its current value is £400,000 and I withdraw £50,000 now and don't want to withdraw any more for a few years, by which time the remaining value has grown from £350,000 to £390,000. Can I then withdraw only the remaining £50,000 from the initial tax-free allowance, or is the total value re-evaluated as £390,000+£50,000, 25% of which is £110,000 so I have a remaining allowance of £60,000 ?

[Jasey_]

You only get one lump sum. If you want to take more money out before you actually retire then you have to start drawing down your pension.

In your example to get 50k what you are doing is crystallising 200k of your pot. You end up having two pots. The other 200k when crystallised the first 25% would be tax free but you can just take the tax free bit you would need to take the other 75% that would be taxable.

Say you wanted the other 50k tax free that you could have had in your lump sum you have to take 200k but pay tax on the other 150k.

And once you start the second part you can only get tax relief on 4k per annum additional contributions.

This is how I understand it but I'm not a pro.

[Intelligent Money]

Lily the Pink said:

I understand that I can take 25% of my SIPP tax-free. Say its current value is £400,000 and I withdraw £50,000 now and don't want to withdraw any more for a few years, by which time the remaining value has grown from £350,000 to £390,000. Can I then withdraw only the remaining £50,000 from the initial tax-free allowance, or is the total value re-evaluated as £390,000+£50,000, 25% of which is £110,000 so I have a remaining allowance of £60,000 ?

Hi Lilly the Pink,

When you start to draw your pension the pot can be sectioned off into different sections. In your example your £50k tax free cash we use £200k of your pot. The £50k you have taken is the 25% tax free cash, The remaining £150k can only be drawn as income. In your example this will remain invested and any growth in this part can also be drawn as income.

The other £200k remains available to draw both tax free cash and income from. Again if this grows you can draw 25% of this pot as tax free cash and the rest as income.

Using your example of £40k growth and assuming the growth is equally split over both pots so £20k to each. Your new pots are
£170k that you can only draw as income
£220k, 25%(£55k) is available as tax free cash and the rest as income.

Cheers

Nik

[Lily the Pink]

Thanks both. I have a much better understanding now.

[bennno]

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?

[LeoSayer]

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.