Can I start a SIPP at age 63? Does it make sense?

[fosunfan]

I'd appreciate some help/guidance/info on what I hope isn't a stupid question.

I am age 63. Both my wife and I receive our pensions from the Teachers Pension Scheme. We are in the fortunate position of being able to save some money each month and have our full quota of ISAs thus far.

So ... a few questions please:

1) My understanding is that because I have no 'earned income', the maximum I would be able to contribute is £2880, which, with tax relief contributions would become £3600?

2) I could continue doing this until age 75 (if I last that long)?

3) because any such funds would be in a SIPP wrapper,these would not count towards IHT when I do eventually shuffle off.

4) I could nominate any future grandchild/grandchildren to be the nominated recipient of such funds when I shuffle off, with no tax liability for anyone under 18 under current legislation?

5) I do actually do a small amount of part-time work which brings in around £750.00 p.a. net. Does this make any difference to the potential calculations?

If the above is correct, this seems a remarkably efficient way of using spare cash, which we would be saving anyway by putting together a pot of funds towards later life/care requirements or a nest-egg for my daughters/any future grandchildren.

Or ... am I missing/misunderstanding something blindingly obvious/simple, which renders all of the above nonsense.

Any comments/observations/corrections to my thinking will be hugely appreciated.

Thanks for taking the time to read.

Best Wishes,
David

[sas62]

Don't forget you may be taxed as you draw out from the SIPP. This technique works best if you have not used your full personal allowance otherwise you'll lose 20% (or maybe 40% as you extract it).

[fosunfan]

But if I needed to withdraw I could take 25% tax-free at age 75?

David

[sas62]

Yes absolutely.

Assuming you're drawing the £3600 out as a 20% taxpayer, with consideration to the 25% so £3060 drawn out for £2880 in.

This gives a gain of £180 which is still worth doing but not as eye catching as the original £720 gain.

[fosunfan]

But this would not be money that I would need to access.

We have our emergency cash reserves and ISAs which we could also utilise if we needed to.

This would be money I could allocate each year and leave to accumulate until age 75 (knowing full well that all sorts of things could happen to me in the intervening time)

We have plans in place for money which we would like to leave as an inheritance.

If I were to have money in a SIPP, which I didn't utilise before I finally depart, am I right in thinking that this would not form part of the estate for IHT purposes?

Best Wishes,
David

[sas62]

Yes.

This link gives details on death before & after 75.

https://www.youinvest.co.uk/pensions-and-retiremen...

[fosunfan]

Thanks for the link - that was useful.

I'll continue researching.

David

[JulianPH]

fosunfan said:

I'd appreciate some help/guidance/info on what I hope isn't a stupid question.

I am age 63. Both my wife and I receive our pensions from the Teachers Pension Scheme. We are in the fortunate position of being able to save some money each month and have our full quota of ISAs thus far.

So ... a few questions please:

1) My understanding is that because I have no 'earned income', the maximum I would be able to contribute is £2880, which, with tax relief contributions would become £3600?

2) I could continue doing this until age 75 (if I last that long)?

3) because any such funds would be in a SIPP wrapper,these would not count towards IHT when I do eventually shuffle off.

4) I could nominate any future grandchild/grandchildren to be the nominated recipient of such funds when I shuffle off, with no tax liability for anyone under 18 under current legislation?

5) I do actually do a small amount of part-time work which brings in around £750.00 p.a. net. Does this make any difference to the potential calculations?

If the above is correct, this seems a remarkably efficient way of using spare cash, which we would be saving anyway by putting together a pot of funds towards later life/care requirements or a nest-egg for my daughters/any future grandchildren.

Or ... am I missing/misunderstanding something blindingly obvious/simple, which renders all of the above nonsense.

Any comments/observations/corrections to my thinking will be hugely appreciated.

Thanks for taking the time to read.

Best Wishes,
David

Hi David

Taking into account the very valid point made by sas62, you are correct. I'll go through each point individually for you:

1) Correct.

2) Correct. You can make additional contributions after age 75, but they would not qualify for tax relief.

3) Correct. Though whilst completely tax free in the hands of children/grandchildren on death before you reach 75, there would be income tax to pay on any withdrawals if death occurs after age 75 (though still no IHT).

4) Yes you can and I believe the tax liability rules are based upon the age of your death, not the age of a child receiving this. I'll speak to technical in the office on Monday and clarify this for you.

5) This makes no difference whatsoever.

It is worth remembering that your wife has exactly the same entitlement should you ever want to make higher levels of contributions. Between the two of you you can put aside £5,760 a year and have this topped up to £7,200 a year.

You are effectively using the pension/SIPP wrapper as an IHT planning tool. It may be worthwhile assessing your estate for IHT purposes if after both of you full allowances have been exhausted there may (or may not) be a sensible reason to place more money into a pension/SIPP to bypass the 40% IHT rate. This of course only makes sense if any beneficiaries pay tax at the 20% rate as they draw money out from the pension/SIPP if you live past 75 years of age (which one would hope!).

I'll not further complicate things by going into detail on this here, but if you want to know more just let me know.

Also be very explicit in your instructions to the pension/SIPP provider and keep these updated.

If you are worried about updating your Expression of Wishes then you can say that "X" is your nominated beneficiary - unless they produce grandchildren, in which event I instruct you to (whatever it is you want to happen).

I would also add something along the lines of "These instructions supersede any instruction contained within my Will and for clarity the assets within this pension/SIPP are to always be treated as completely separate to my other assets when it comes to me Expression of Wishes regarding my Nominated Beneficiaries, regardless to any future changes made within my Will."

I hope this helps!

[fosunfan]

Julian - my apologies for not replying sooner. I was out and offline pretty much all day yesterday.

Thank you for responding so fully - it is very much appreciated Thank you also for confirming the logic of my thinking.

That now gives us something to ponder as we try to plan sensibly for the next few years and hopefully give a boost to our daughters and/or any future grandchildren at some stage.

Best Wishes,
David

[anonymous-user]

Just a comment on your original post OP.

You say you're maxed out on your ISAs? So you're managing to out aside 40k pa from your teaching pensions and you still have further money for savings?

That's good going if that's right!

[JulianPH]

fosunfan said:

Julian - my apologies for not replying sooner. I was out and offline pretty much all day yesterday.

Thank you for responding so fully - it is very much appreciated Thank you also for confirming the logic of my thinking.

That now gives us something to ponder as we try to plan sensibly for the next few years and hopefully give a boost to our daughters and/or any future grandchildren at some stage.

Best Wishes,
David

No problem, always happy to help. Sorry about the multiple typos!

Just to further clarify using round numbers and not factoring in any growth (for simplicity):

You have £8,000 that falls outside of the IHT allowance. You place this into a pension/SIPP where it receives basic rate tax relief, taking the total up to £10,000.

Death before 75 = Tax free inheritance of the total amount.

Death after 75 to a basic rate taxpayer = 20% income tax but no 40% IHT, so beneficiary receives the original £8,000 inheritance free of IHT, saving 40% tax.

Death after 75 to a higher rate taxpayer = £6,000 inheritance IHT free and therefore effectively the tax is 25% rather than 40% - saving 15%.

Obviously this is just showing the workings.

I'll get back to you on that other point tomorrow.

Cheers

Julian

[red_slr]

What you are actually asking is what is the best way to limit IHT on your estate.

If you are saving £40k PA and thinking moving £5k ish a year into a SIPP might reduce IHT then I suspect you have a much bigger IHT problem!

I am far from an expert but I think you may want to investigate a trust.

It may offer a much simpler solution although the costs are front end loaded vs the IHT being back end loaded.

[fosunfan]

Julian - again, many thanks.

David

[JulianPH]

red_slr said:

What you are actually asking is what is the best way to limit IHT on your estate.

If you are saving £40k PA and thinking moving £5k ish a year into a SIPP might reduce IHT then I suspect you have a much bigger IHT problem!

I am far from an expert but I think you may want to investigate a trust.

It may offer a much simpler solution although the costs are front end loaded vs the IHT being back end loaded.

A trust is another option and is something a solicitor can put together very quickly.

However, it does not benefit from pension tax relief or tax free growth and income. It also takes 7 years to be fully removed from your estate (during this time it is classed as a Potentially Exempt Transfer).

The OP also said he wanted the flexibility to still be able to access funds if needed in later life. He would probably therefore need to consider a Loan Trust, but this doesn't not put the capital outside of his estate for IHT purposes (though any growth on the capital would be outside of his estate).

He could get around this by using his annual gift exemption of £3,000 (£6,000 if the trust was in joint names with his wife) and these are exempt transfers (not a PET) so immediately fall out side of his estate. However, this still creates the access issue.

David - No problem!

[JulianPH]

Hi David

Sorry, I completely forgot to speak to technical regarding a child (or minor, I should probably say) receiving funds as a beneficiary.

I did remember today though! Here is the response I received:

Intelligent Money said:

Hi Julian

Hope you are well.

Hayley passed your query on to me regarding death benefits.

If the member dies over the age of 75 any benefits will be taxed. If the beneficiary is a minor it will have to be ran through PAYE however they may not be taxed depending on whether or not they have any other form of earnings.

All first payments would be ran at Basic Rate until HMRC notify us of a tax code, this would then be allocated to future payments and any over or under payment of tax would be taken in to account.

Hope this helps, if you need anything else let me know.

Kind regards


Leanne Beckwith
Senior SIPP & ISA Manager
Intelligent Money

So basically, if the minor has any other taxable earnings then money taken from the inherited pension will be taxed accordingly. If not, there would be not usually be taxed.

I would imagine that if any payment was substantial HMRC would want to explore this, but at smaller amounts (or even larger amounts drawn in smaller parcels) there should be no tax issues

Please get back to me if I can provide greater clarity.

[fosunfan]

Julian - apologies.

I realised a short while back I hadn't thanked you for taking the time to query this onmy behalf.

It's much appreciated.

Best Wishes,
David

[JulianPH]

No problem David, happy to help!