SIPP & Pension guidance - IM Private Clients

[Intelligent Money]

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:

• General investments
• Individual Saving Accounts (ISAs)
• Tax (including IHT) Planning
• General financial guidance

Intelligent Money

[Intelligent Money]

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 Pointy

As 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

[Intelligent Money]

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

[Intelligent Money]

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]

JapanRed said:

How would this work for my wife for example Nik? She has an NHS pension but no SIPP with you or anyone else? Should we suddenly find ourselves with a spare £160k (I wish) I’m guessing that she wouldn’t be allowed to open a SIPP and backdate 3 years...

Also, a more generic question: what happens to my NHS pension and my IM SIPP if I die before retirement age?

Thanks. Rob

Hi JapanRed

You can carry forward for the years that she was/is a member of the NHS Scheme. The calculation for the contribution made to the NHS scheme is based in the amount of benefit that the membership for that year accrued rather than the actual contribution made. Her membership of the NHS scheme means that she won't have a full allowance to carry forward for the years she was a member, as the NHS scheme will of used some of that allowance.

On death before retirement the NHS scheme will pay out a lump sum and a defendant's pension for your wife and any defendants.
If you die after retirement it will pay out a dependents pension. For a SIPP/Personal Pension the value of the pension pot is payed out.

Cheers

Nik

[Intelligent Money]

rockin said:

JapanRed said:

Should we suddenly find ourselves with a spare £160k (I wish) I’m guessing that she wouldn’t be allowed to open a SIPP and backdate 3 years...

I don't think your question has been answered.

My understanding is that in order to "go back 3 years" for contributions the relevant pension arrangement must have already existed in the relevant years. I don't think you can open a new arrangement and then suddenly chuck in up to £120k (3 x £40k)

Not sure wasn't hasn't been answered but for clarity, To carry forward you must of had a scheme that you either could of or did contribute to in the year you want to carry forward from. In this case you have, the NHS scheme.

You can then make the new contribution, including the carry forward element, into any scheme that will accept the contribution. So that could be into a scheme you already hold or you can open a new Pension/SIPP if you wish.

Nik

[Intelligent Money]

Mr Pointy said:

Intelligent Money said:

Not sure wasn't hasn't been answered but for clarity, To carry forward you must of had a scheme that you either could of or did contribute to in the year you want to carry forward from. In this case you have, the NHS scheme.

You can then make the new contribution, including the carry forward element, into any scheme that will accept the contribution. So that could be into a scheme you already hold or you can open a new Pension/SIPP if you wish.

In this particular case would the OPs wife only be able to use carry forward if she was still employed by the NHS in those years, given that she couldn't contribute to the NHS scheme if she wasn't employed by them?

She is likely to be treated as a deferred member of the NHS scheme if she has left service and so would still be able to carry forward as she had technically still accrued Pension benefits from the scheme even though she has left.

Nik

[Intelligent Money]

timbo999 said:

I have a reasonably large DC pension.

I would like to start drawing down from this pension, at the rate of about £17k per annum, but wish to avoid income tax.

I don't need the tax free money as a lump sum (other savings/assets can cover the Mclaren and the yacht) so my thoughts are to 'crystallise' £100k each year, draw down £12k from it and take £25k tax free. I would use £5k of the tax free money to top up my income and put the remaining £20k in an ISA (most likely S&S).

Is this legal, feasible, sensible?

Thanks!

Hi timbo999

Your plan is legal and feasible and sensible if it meets your needs.

An alternative to consider would be to crystallise £16,760 this year, slightly less than your £17k figure but very close!,

£12,570 can be drawn as income using your personal allowance, assuming no income from other sources and that you have a full personal allowance, £4,190 can be taken as the tax free cash part of your crystallisation so you will release £16,760 with no tax to pay. This will just leave the funds in your pension to be drawdown later as you need them and minimises the crystallised element of the pot.

The benefit of Pension Freedoms is the options available so no one route is better or worse than another it just taking the route that feels right for you,

Nik

[Intelligent Money]

timbo999 said:

Nik
Thanks for the reply.

What are the advantages of keeping the amount crystallised as low as possible? I assumed it didn't really matter as you could keep it invested in exactly the same way as the uncrystallised portion.

Secondly, could I not take more tax free cash in your scenario to achieve my target income?

Thanks again!

Hi timbo999

Once the pot is crystallised the tax free cash element is capped at 25% of that crystallised value. The idea is that if the pot continues to grow then you are able to release a greater amount of tax free cash at later date. If the fund value falls it then it works against you.

You could release additional tax free cash but that would leave a crystallised pot greater than your personal allowance for the year so you would pay a small amount of tax on the income drawn.

Cheers

Nik

[Intelligent Money]

Yorkshire Dangermouse said:

Intelligent Money said:

timbo999 said:

Nik
Thanks for the reply.

What are the advantages of keeping the amount crystallised as low as possible? I assumed it didn't really matter as you could keep it invested in exactly the same way as the uncrystallised portion.

Secondly, could I not take more tax free cash in your scenario to achieve my target income?

Thanks again!

Hi timbo999

Once the pot is crystallised the tax free cash element is capped at 25% of that crystallised value. The idea is that if the pot continues to grow then you are able to release a greater amount of tax free cash at later date. If the fund value falls it then it works against you.

You could release additional tax free cash but that would leave a crystallised pot greater than your personal allowance for the year so you would pay a small amount of tax on the income drawn.

Cheers

Nik

Just picking up on this, doesn't Timbo's plan have the advantage (assuming a spouse) of transferring a big chunk of his pension funds into an ISA, that has the benefit of a spousal exemption (whereas post-75 no tax-free transfer of his pension funds, other than personal allowance, which may already be used) ? Agreed there is a trade-off against an increasing tax-free element of uncrystallised funds, so I suppose the ideal would be to use Timbo's plan in the few years running up to age 75 ?

hi Yorkshire Dangermouse

It is a consideration, any funds left in the pot after age 75 will be subject to income tax, at the beneficiaries rate,on death of the OP. It is a good example that there is rarely a one size fits all solution. The OP would need to balance the potential benefits of Tax free cash growth against the possible tax charge on the pot at 75, and consider that you can only wrap £20k p.a. per person into an ISA each year.
It also obviously depends on the exited pot size at 75 and who the beneficiary may be.

Cheers

Nik

[Intelligent Money]

Chozza said:

When should I stop putting money in my Pension and start putting it somewhere else?
Is there an amount where at 51 , I should stop adding to my pension because of Life time allowance and start putting it somewhere else?

Let assume I'm 51 , I want to retire at 60 .. do I just calculate based on compound interest and an assumed growth - and then when i start hitting life time limits i'm better off investing elsewhere?

Hi Chozza

The simple answer is yes, a rough and ready compound interest calculation will give you the chance to work back from 60 and see what pot size at 51 is likely to take you over the LTA at the date you plan to start drawing.

In many cases people will "de-risk" the investment approach as they approach LTA as the reward for taking higher risk for potential higher return is less attractive when a higher return may just lead to a higher tax bill.

Wether or not to stop funding depends on a number of things, such as are where the contributions are coming from, If it is an employer supported plan or company based contributions the tax benefits of the contributions need to be taken into account.

Cheers

Nik

[Intelligent Money]

PorkInsider said:

markiii said:

i beleive you can get tax releif on teh whole 50k, assuming...

1. You've earnt enough this year to have aid tax on 50k
2. You have 10K allowance left from the previous 3 years you can carry

Thanks - yes, definitely no issue with having paid enough to claim back from previous years' leftovers, both in terms of the 40k max and the amount of higher rate tax I've paid.

I'm particularly interested in the mechanism of getting back the basic rate rebate when it's dues on contributions over and above the 'usual' £40k per year that pension co's claim back and add to your pension for you automatically.

For example, if I pay in £40k this year, the pension co' claim the extra £10k for me and automatically add that to my pension.

What happens when I pay in £50k, using up some of the cap left from previous years? Can they claim the other £2.5k basic rate tax over the cap for me or is that another wrestle with HMRC?

Hi Porkinsider

Your £50k contribution is treated the same as your previous contributions, we will claim the 20% back for you and you claim the additional 20% via your self assessment.

Cheers

Nik

[Intelligent Money]

markiii said:

PorkInsider said:

Intelligent Money said:

Hi Porkinsider

Your £50k contribution is treated the same as your previous contributions, we will claim the 20% back for you and you claim the additional 20% via your self assessment.

Cheers

Nik

Perfect, thanks Nik.

one other thing to consider is, the basic rate reclaim presumeably is art of teh contribution from a limit perspective. so he needs to have the ability to contribute 50k plus the basic rate addition?

Hi Markiii

With the typos/autocorrect I'm not 100% on your question, but I think you are saying that the OP needs enough income to cover the gross contribution, and if so yes he does.

Cheers

Nik

[Intelligent Money]

PorkInsider said:

Intelligent Money said:

markiii said:

PorkInsider said:

Intelligent Money said:

Hi Porkinsider

Your £50k contribution is treated the same as your previous contributions, we will claim the 20% back for you and you claim the additional 20% via your self assessment.

Cheers

Nik

Perfect, thanks Nik.

one other thing to consider is, the basic rate reclaim presumeably is art of teh contribution from a limit perspective. so he needs to have the ability to contribute 50k plus the basic rate addition?

Hi Markiii

With the typos/autocorrect I'm not 100% on your question, but I think you are saying that the OP needs enough income to cover the gross contribution, and if so yes he does.

Cheers

Nik

I thought it was clear but I'm a bit confused now.

Personally, I do have enough income to cover the contribution I'm considering but I'm curious as to what exactly this might mean for others.

Example: for the past 5 years a person earns £70k p/a gross and contributes £10k into their pension each year.

So now they have, as an unused contribution limit, (4 x £40k) - (3 x 10k) = £130k they can use up this year.

(And for ease, let's assume income tax bands were the same each year (£12.5k 20% / £37.5k 40%))

1. If they decided to pay in £50k this year, they have enough taxed income in this year alone to contribute that amount, but only pay higher rate tax on £20k of their £70k income. Can they can use the previous years of tax paid at 40% to get the higher rate rebate on the full £50k?

2. If they want to contribute £80k this year (again wanting to use previous unused cont. limit) are they actually unable to because their gross pay of £70k this tax year means their taxable income this year is too low, regardless of previous years?

(Hope this makes sense!)

Hi Porkinsider,

1) The tax relief claimable is based on the tax position in the tax year of the contribution.
2) They can pay £80k in but they will only get tax relief on £70k

Carry Forward needs to be viewed as two calculations, how much you can pay in and how much qualifies for tax relief.
In most cases where the amount you can contribute exceeds the amount that you can gain tax relief on people decide to only pay in the amount that gains tax relief and delay a further payment until the next year or invest using a different vehicle,

Cheers

Nik

[Intelligent Money]

LeoSayer said:

I'm trying to calculate the maximum my wife can pay into her SIPP and still get tax relief.

My wife is a member of the LGPS (career average) pension and is currently contributing around 6.5% from her gross pay (not via salary sacrifice). This will result in an annual pension and small lump sum.

She earns less than Annual Allowance figure figure of £40,000 per year.

Is it the lesser of:
- 93.5% of annual earnings ie. 100% less the 6.5% LGPS contribution
- £40,000 less the difference in accrued in lump sum compared to last year plus 16x the increase in the accrued annual pension compared to last year

Thanks

Hi LeoSayer

It is a combination of the two!

The contributions amount for the LGPS is calculated by taking the increase in pension pension benefit for the tax year in question x16
plus any increase in lump sum benefit for that tax year.


You then subtract this figure from her earnings for this year and that its the max contribution for this tax year.
You can then "carry forward" unused contributions from the previous 3 years.
For each of those years you calculate the LGPS contribution in the same way, using the increase in pension and lump sum for the appropriate year but you then subtract this from £40k irrespective of her earnings in those years.

Hope this is clear enough but feel free to drop me a message at [e-mail] if you need any additional info or help with the calculation.

Cheers

Nik

[Intelligent Money]

Tony Angelino said:

Potential daft question here please lads........

I am doing a bit of budgeting for the future, specifically retirement, and I am trying to work out what my state pension is likely to be. Now I have logged onto Government Gateway and my forecast is £179.60 per week (assuming I contribute for another 2 years), I understand this is the maximum. Now my question is what about the Additional State Pension or SERPS and if I am likely to get it. I can't seem to find any way of checking for sure other than waiting and seeing.

A bit of background:

Employed full time for the last 25 years, no gaps.
Only had a private pension for the last 8 years.
Never knowingly opted out.

Can anybody offer and help please?
Thanks

Hi Tony Angelino

SERPS accrual ended on 5/04/2002 and was replaced by S2P

If you had any SERPS benefits they will be paid along with any S2P benefits.

SERPS was based on “mid band earnings” i.e. earnings between a lower earnings and upper earnings limit. You accrued 1.25% of that band for each year for a maximum of 20 years. So in theory you could gain 25% of that band. That was reduced to 20% max from 6/04/1988.

In your case the maximum you could receive would have been 20% but as you would not of got 20 years in by the time it ended in 2002 you will have accrued 1.25% for each year you were in.

If that looks complicated welcome to S2P!!!

From 2002 to 2010 S2P worked as follows:
Band 1
Lower Earnings Limit to Low Earnings Threshold Accrues at 40%

Band 2
Low Earnings Threshold to Secondary Earnings Threshold Accrues at 10%

Band 3
Secondary Earnings Threshold to Upper Earnings Limit Accrues at 20%

From 2010 to 2012
Band 1
Lower Earnings Limit to Low Earnings Threshold Accrues at 40%

Band 2
Low Earnings Threshold to Upper Accrual Point Accrues at 10%

From 2012
Band 1
Flat rate announced each year

Band 2
Lower Earnings Threshold to Upper Accrual Point Accrues at 10%


The various thresholds are update each year

S2P Calculation

The calculation for the S2P is based on a three-step process.
• Earnings for each tax year from 2002/03 onwards are split across the bands and revalued from the tax year in question up to the tax year before you reach state pension age (earnings in the tax year before state pension age are not revalued).
• The revalued earnings at state pension age in each band are then multiplied by the accrual rate applicable to that band.
• These revalued earnings are divided by the total number of years in your working life since 1978 to give the S2P benefit. Working life is defined as being from age 16 to state pension age.

In summary based on the info you have supplied you will have accrued some SERPS and S2P benefits but calculating exactly how much is a bit of a task!!

Cheers

Nik

[Intelligent Money]

PM3 said:

What would the typical tax implications of transferring an overseas ( USD based ) employer pension into a UK SIPP ?
The amount is not large ( high 5 digit ) and was closed to new payments about 10 years ago . Rather coincidentally it is managed by a british company , but I am ideally planning to gather up a couple of these lower value pensions into one plot to manage as a lump sum for official retirement in 9 years.
Currently not working ( and not planning to either ) and have drawn no monies from any pension plan.
I have checked with the provider , they have no barrier to closing and moving the money to another provider while under nominal retirement age .
As I am Uk based now I am long term interested in moving the money out of USD (even if I might keep some vested in US investments )

Hi PM3

Unfortunately the answer is it depends! The main considerations are whether the existing scheme is a Recognised Overseas Pension Scheme in eyes of HMRC, the type of scheme and the tax treaty that exists between the UK and the territory that the scheme is registered in.

Happy to take a look if you want to send me some more details, [e-mail]

Regards

Nik

[Intelligent Money]

tighnamara said:

One for Nik, but feel free to comment.

I know you can't purchase residential property through your pension but can you purchase property with development potential for change of use to residential property.

Looking at possible options with a site available that looks to have possible potential, site is part of a farm mainly a large steading that would have planning permission for 4 x 3 or 4 bedroom houses.

Hi Tighnamara

The SIPP can hold the land as commercial property until it is developed to the point that it is viewed as habitable in the eyes of the revenue. The SIPP would then need to sell the property.

Cheers

Nik

[Intelligent Money]

Lily the Pink said:

I have a similar question to the last one. I'm considering buying some agricultural land within my SIPP and wondering what options I have for income from it. Specifically, could I build short term holiday lets (chalets/yurts/pods for example) on it, or are they considered residential ?

Hi Lily the Pink

This is very much a grey area and you would need to get HMRC approval that the lets would not be treated as residential. The grey area is that you could technically switch to long term lets at any stage and then they would be residential. In this case it is likely to be viewed on a case by case basis by the SIPP provider and HMRC.

Regards

Nik

[Intelligent Money]

Ziplobb said:

My children 18 and 19 want to start paying into a pension. It wont be a huge amount but I wanto encourage them to get in the habit. They can both afford £80/£100 a month even whilst at uni as they earn decent cash in the holidays. Can you recommend a low cost fund ?

Hi Ziplobb

As has been said we don't offer advice but are happy to provide guidance.

If they are happy with a low cost tracker and some equity exposure you can take a look at the likes of Vanguard or our own Index funds. As PH family there are no initial charges or minimum premiums with us.

If they prefer the idea of picking their own funds then the likes of Hargreaves Lansdown, Fidelity or AJ Bell are worth a look, if they want to pick individual shares then Hargreaves Lansdown or Interactive investor are a good starting point.


Regards

Nik