SIPP & Pension guidance - IM Private Clients

[Intelligent Money]

Jack ketch said:

Can you help me understand the LIFETIME ALLOWANCE on pensions.
I have retired with 2 pensions and make no further pension contributions. One pension is with the PPF and I now receive monthly payments having taken a tax free lump sum. The other is a SIPP. Part of the SIPP is in Drawdown having taken a tax free lump sum. What are the implications if the value of these 2 pensions exceeds the current Lifetime Allowance?
Cheers. Rick

Hi Rick,

The LTA charge is linked to amount of pension that you have crystallised.

In the case of the PPF pension you can ask the PPF to confirm how much of the LTA is used by that scheme. They will provide this as a %.
You then need to work out, or ask your SIPP provider what % of LTA you have used placing that part of your SIPP into drawdown. This will be the % of the LTA in the tax year that you placed that part of the SIPP into drawdown.
You now know what % of LTA you have left.
When you crystallise more of your SIPP you will be subject to an LTA tax charge if you exceed the LTA with that crystallisation. The rates are 55% on lump sums and 25% on income.

eg, PPF used 45% of the LTA
You took £100k tax free cash in 2019. This would crystallise £400k of pension. The LTA in 2019/20 was £1,030,000 so 38.83% of LTA was used.

You have now used 45% + 38.83% of LTA so have 16.17% of LTA left.

The 21/22 LTA is £1,073,100 so you can crystallise an additional £173,467 in tax year 21/22 before the LTA tax rates are levied.

Cheers

Nik

[Intelligent Money]

Jack ketch said:

Nik ~ thank you. You’re a hero in explaining it to me. I think I understand (if I don’t the fault is with me being dim) and I’ll have a go working things out with pen and paper.
Cheers. Rick

Hi Rick,

If you need any help or want me to take a look at it for you very happy to help. Just drop me a message at [e-mail]

Cheers

Nik

[Intelligent Money]

Jasey_ said:

anonymous said:

[redacted]

Sure does.

Thanks for clearing it up .

Hi Jasey

It is exactly as chicken dinner has said above, the annual allowance is the gross contribution to your pension so the maximum personal (net) contribution is £32k. Employer/company contributions are typically gross so the max for them is £40k.

Cheers

Nik

[Intelligent Money]

Mr Pointy said:

Jasey_ said:

https://www.ii.co.uk/pensions/contributions/carry-...

Says if you have unused allowance of 90k after 3 years you can pay 90k and get tax relief on it.

Indeed, that's how the carry forward rule works; in fact if you hadn't made any pension contributions in the previous three years you could, in theory, contribute £160k gross (£128k from you, £32k topped up by HMRC). There's probably caveats around taper relief but that's the principle.

Apologies for being Mr Picky on this one, but with carry forward it is an area that is often missed, You can only get tax relief on carry forward contributions if you have the earnings to cover the contribution in the year of payment. So while you can carry forward the amount that you can contribute you also need to have the earnings in the year of contribution to gain the tax relief.


Cheers

Nik

[Intelligent Money]

Jockman said:

Mr Pointy said:

Intelligent Money said:

Mr Pointy said:

Jasey_ said:

https://www.ii.co.uk/pensions/contributions/carry-...

Says if you have unused allowance of 90k after 3 years you can pay 90k and get tax relief on it.

Indeed, that's how the carry forward rule works; in fact if you hadn't made any pension contributions in the previous three years you could, in theory, contribute £160k gross (£128k from you, £32k topped up by HMRC). There's probably caveats around taper relief but that's the principle.

Apologies for being Mr Picky on this one, but with carry forward it is an area that is often missed, You can only get tax relief on carry forward contributions if you have the earnings to cover the contribution in the year of payment. So while you can carry forward the amount that you can contribute you also need to have the earnings in the year of contribution to gain the tax relief.

How about if you are a Director & the company is making the payment

Full annual allowance then. No link to salary on an employer contribution. You still need to have a pension scheme in place for that period though.

Hi Both,

Spot on Jockman that is exactly it.


Cheers

Nik

[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

[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

[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

[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

[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

[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

[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

[Intelligent Money]

LeoSayer said:

brman said:

LeoSayer said:

brman said:

hmm. good point. So I currently work a nominal 20 hour week. So that limits me to £9266 min, assuming I did my sums right. I think that would still avoid tax and NI though so should still work?

So if you get paid £9266, then £27,746 goes into your pension via salary sacrifice.

Then you contribute the £9,266 which gets grossed up to £11,582 in your pension.

So you end up with a total of £39,328 in your pension. That's not bad considering you only earned £37,000!

Is that right though?
I did the sums like this:
gross, pre sacrifice salary: 37000
9266 post sacrifice.
Leaves a sacrifice of 27734 going into the pension.
Max gross pension contribuition is 37000, so needs a personal contribution of 9266 gross to top it up. That is 7412 from me and 1853 from HMRC.
Leaving with 37000 in my pension and 1853 in my pocket.
Have I got that wrong?

ETA: Of course this still means I am getting 38853 from a 37000 salary so I am awaiting someone telling me I have got something wrong

Yes, I think that's correct and something that never occurred to me before.

The difference of 1853 comes from getting relief on income that you would not have paid tax on, because it was inside your personal allowance.

HI both,

brman's calculation is the correct one.

If your "salary" in this case is £9,266 then the maximum GROSS personal contribution that will gain tax relief is £9,266

So the net contribution is £7412 with £1,854 tax relief gross contribution £9,266

Cheers

Nik

[Intelligent Money]

randlemarcus said:

Trivial question - I have a little crystallised fund coming from my mother's pension. Current provider doesn't accept them, and her IFA wants 3% to consider giving me advice to leave it with the current lot at (what look like) exorbitant charges. Do IM accept crystallised funds? No intention of drawing it while I am on my current salary.

HI randlemarcus

Yes we will take crystallised funds.

Regards

Nik

[Intelligent Money]

ade73 said:

Might be a simple question but I'm sick of waiting on my 2 company pension providers to get back to me on this.

State pension is going up to 67 in 2028.

I have 2 pensions, both with the same employer. The first is a final salary that was frozen at the end of 2020, and we now pay in to a defined contribution one. One of the statements on the change over referenced "retain the current early retirement factors for members who remain in employment with the company at the point of retirement.

This is currently 57 with no penalty or a 5% penalty for each year down to 55.

Would this be effected by the new state pension age or just something the company could do of their own choice?


On top of that, the changes will happen at the early part of 2028 but I wont be 55 until November, is there any way I could still get retirement at 55?

TIA

Hi ade73

The changes to your workplace scheme will be part of the scheme rules not changes in the State Retirement age so its will down to the scheme trustees to confirm the penalties applied for early access.
Most final salary schemes have a set retirement age, typically 60 or 65, and taking benefits earlier attracts "actuarial reductions".

There is a government policy statement that says that access to defined contribution schemes will move to age 57 in 2028 but this hasn't become legislation yet.

Cheers

Nik

[Intelligent Money]

SunsetZed said:

Intelligent Money said:

Hi ade73

The changes to your workplace scheme will be part of the scheme rules not changes in the State Retirement age so its will down to the scheme trustees to confirm the penalties applied for early access.
Most final salary schemes have a set retirement age, typically 60 or 65, and taking benefits earlier attracts "actuarial reductions".

There is a government policy statement that says that access to defined contribution schemes will move to age 57 in 2028 but this hasn't become legislation yet.

Cheers

Nik

Maybe I misunderstood but I thought that the government policy was drafted in a way saying that DC's setup after a date TBC, I think it was next year, would be accessible from 57 but that DC pensions setup prior to this would still be accessible?

Hi SunsetZed

I have seen both retrospective and "line in the sand" interpretations of the policy statement. We wont know what the final position is until it is moved into legislation.

Cheers

Nik

[Intelligent Money]

s111dpc said:

This is probably a very basic question so apologies in advance. I have two daughters aged 19 & 21 who have recently finished full time education and have started part time non-pensionable jobs. I am keen they start some regular savings into a pension and wondered where would the best place for them to start?

Hi s111dpc

If they want to start a pension plan there are a number of providers that they could use to set up a personal plan, IM being one of those providers! Most plans are very flexible and will adapt to their circumstances as they change.

They may also want to consider a Lifetime ISA (LISA). For contributions up to £4k they will get an additional 25% contribution from the government. The proceeds can be used as a retirement fund or for their first house purchase so may be viewed as a little more flexible than a pension plan. There are again a number of providers that offer LISA's unfortunately for us IM isn't one of them!

Cheers

Nik

[Intelligent Money]

JulianPH said:

CornishRob said:

I have a pension from my employer with Aviva. They are paying in their max percentage, and I'm paying the same.

I also have a SIPP with IM, which I transferred from an old pension I had.

I would like to make additional monthly payments into one of my pensions.

My question is, is there any difference / benefit / negative if I either just setup a DD into my IM SIPP, or ask my employer to just increase my pension contribution?

Thanks

Hi Rob

If your employer would make an additional contribution alongside yours then go with this option every time.

If they are paying the max they will go to already then it is simply down to personal preference. There are no particular differences/benefits/negatives of either, other than cost/performance differences and investment choices.

Costs and investment choices are known at outset, performance is always unknown - but comparing like for like investment strategies and how they performed in the past can be of some indication.

Have a chat with Nik if you would like to go over things. Aviva are a great pension provider and we are not too bad ourselves!

Cheers

Julian

HI Rob

Just to chip in on your question

If you employer will consider an increased contribution as an employer contribution via salary sacrifice/exchange this is the most cost effective way of making a contribution as you save the employer and employee NI cost.

On a personal contribution you can claim the income tax back but not the NI.

As Julian has said you then need to consider the investment approach and charges. It is these that will differentiate the schemes as the benefits and flexibility are likely to be the same with either the company scheme or a personal plan.

Cheers

Nik