Sticking money in SSAS/SIPP - ouch on the way out?

[Ken Figenus]

Pensions are tax deductible so sticking money in (esp if it gets you below higher rate tax) is a no brainer, right??? Essentially saves about 21% corp tax on pension contribs (on a £100k turnover company) for the self employed PB company director who has a SSAS/SIPP?

On the way out said PB director gets 25% tax free lump sum and then the £12,500 personal allowance before 20% tax is due on your pension drawings. Higher rate 40% tax on drawings after about 50k.

So the real gain is that a quarter of pot is tax free via lump sum and corp tax saved on the way in.

So if the pot is worth 400k you will save about 20% of the avoided previous corp tax in taking a 100k lump sum (so are £20k up), but the remaining 300k will lose £60k in being drawn if you have used up your personal allowance before drawing?

Higher rate tax rates completely screw this 'deal'...

Have i got this right as sticking stuff in my SASS now looks less attractive... But it is good for IHT...

Thanks - brain spinning!

[Sunday Drive]

Assuming you’re a marginal rate business (taxable profits £50k to £250k) and a basic rate taxpayer, then you’re saving 36.25% tax on extraction of the cash (26.5% CT and 8.75% dividend tax).

Then when you retire, as you say, the lump sum is tax free and then you’re into the annual allowance at 0%, followed by 20% at the basic rate.

Would you like to share details of the business profitability, your personal tax rate, and the amount of tax extraction/SIPP contribution we are talking about?

[Ken Figenus]

Thanks for that! I'd forgotten dividend tax.

Basically its about sticking a backdated lump sum in SASS (think allowed about 120k backdated) after porting it to the business as a directors loan rather than doing something else directly with it. Its currently a tax free sum but in popping it in the SSAS i voluntarily expose it to tax... If I avoid c36% tax and end up paying 20% on 75% of it it may still make sense? So many variables I just cant decide!

[Rufus Stone]

You are also getting tax free investment growth in the SSAS remember.

[Ken Figenus]

Thanks Rufus. Of course. I need a spread sheet to work this all out don't I! On the case! I think the IHT protection valuable too.

[Rufus Stone]

If you are a 40% tax payer now, and will be a 20% tax payer in retirement the pension scheme is a no brainer really.

The IHT is good, but nominated beneficiaries will be liable to income tax on any drawdown if you die after age 75. I can see Labour tinkering with this.

[Ken Figenus]

Gosh - another thing I didn't know about the post age 75 drawdown. Bloody minefield.

I do have an IFA & acct but nothing stands still and I'm always trying to plan the future with crystal ball. Thanks for the tips.