Maximum AVC

sippnewbie

1st post so hello everyone.

hopefully a simple couple of questions which i cant find the answer to;

if i pay into a SIPP via a 1 off AVC next year ill be paying in money ive already paid 40% income tax on. so presumably the taxman gives me back my 40%, does he give it back to me or does he put it in the pension fund?

can i pay money in via AVC that ive earned this year? let me clarify. as of april next year i wont have paid any tax for that tax year, so if i make an AVC in april (obviously with money earned this year) do i get tax relief? taken to extremes if i earned nothing next year could i pay into a pension and get 40% tax relief on the basis that i payed 40% on the money that i was paying in this year?

thx people

DavidLaGuardia

sippnewbie wrote:

1st post so hello everyone.

hopefully a simple couple of questions which i cant find the answer to;

if i pay into a SIPP via a 1 off AVC next year ill be paying in money ive already paid 40% income tax on. so presumably the taxman gives me back my 40%, does he give it back to me or does he put it in the pension fund?

An AVC is a contribution made in connection with an occupational scheme, so I am assuming you actually mean a single contribution into a SIPP.
As an individual, you would make the contribution net of basic rate tax and the fund reclaims the 22%. As a 40% tax payer you then can claim back the 18% additional relief you are entitled to making the cost of contribution 60% of its gross value.

sippnewbie wrote:

can i pay money in via AVC that ive earned this year? let me clarify. as of april next year i wont have paid any tax for that tax year, so if i make an AVC in april (obviously with money earned this year) do i get tax relief? taken to extremes if i earned nothing next year could i pay into a pension and get 40% tax relief on the basis that i payed 40% on the money that i was paying in this year?

(Again I assume you have made a mistake calling it an AVC) If you have no relevant earings the maximum you can pay is £3,600 gross (paying £2,808 net of basic rate tax). You can only reclaim the additional 18% in respect of contributions from the earings you pay 40% tax on and as you won't be paying such tax then the answer to "can I claim 40%" is No.
You can currently "carry back" a contribution to a previous tax year, but from 6th April 2006 this facility is removed as the contribution limits go up to a maximum of whatever your earnings are with a minimum of £3,600.

sippnewbie wrote:

thx people

On this end note and the rest of your message, can I ask politely (without wishing to be unwelcoming or nasty) that you and anyone else reading this message reffrain from this lazy "faux-streetwise" phone-text style language. It only takes a few extra seconds to type the correct words (typos are acceptable errors)

Pal

Showing your age David?

DavidLaGuardia

Yes I'm a grumpy old fart

sippnewbie

David

many thanks for your detailed reply. as you correctly decifered from my clueless ramblings by avc i meant one off payment that i'd already paid income tax on, now i know the difference.

so is the following understanding correct?
i pay £10,000 into a sipp and after tax 'adjustment', the sipp gets £12,200 and i get a cheque for £1,800 from mr brown. (i know i've simplified the maths)

my plan is for my sipp (which i dont have yet) to buy my house from me (i'm moving and plan to rent it out permanently). due to the loss of 'carry back' it would seem that even if i earn enough this year to do that in april 06, unless i earn the same next year i wont get the tax benefit of relief on the full amount.

i guess the real problem is that i'm new to this so i dont even know how to find a competent IFA or one that i trust but thats a whole other thread.

many thanks for your time and wisdom and appologies for the 'txt speak', it irritates the hell out of me too, please put it down to a momentary lapse. as for capitals, i use them sparingly because the shift key is too small and too close to the dealing keys on my work keyboard. yes my knowledge of personal finance is shameful.

and happy birthday if indeed it is your birthday tomorrow

Cook_County

Your plan, if I understand correctly, is to sell the house you already own and in which you live to your SIPP.

The gain on the house is already CGT free (if I have understood the situation).

Your asset allocation into placing 100% of the SIPP into UK residential real estate sounds very high risk, especially since you'll have the sell the entire house at age 75.

Anyway the SIPP will need funds to pay for any interest on borrowings to buy the property, maintenance, expenses in void periods, utilities, insurance, gas and electrical safety, legal fees, SIPP management fees etc. Where will the cash be to pay for these expenses? Will the property generate sufficient rent to cover these costs?

Majority thinking is that very few SIPP providers will offer full SIPPs including residential real estate, and those that do will be high cost.

Would you not do better to sell the property tax-free, and use the cash to invest in a balanced portfolio post April 2006; and, say wipe out your tax bill in 2006/07?

sippnewbie

Cook, thanks for your comments.

I own the house outright and intend to rent it out when i get married next year. I dont need the income now so it seems to make sense to receive that rental tax free into a sipp. Furthermore its not cgt im trying to avoid but to claw back my income tax.

These are not the correct figures but to make the maths simple.
I put roughly £80k into sipp, sipp recovers £20k ish 22% basic rate tax back, so a total fund of £100k borrows £50k and buys my house from me for £150k. So i put £80k and my house into sipp. In return i recieve £150k, a cheque for £15k ish (reclaimed top rate tax on 80k) and a £100k pension asset that yields tax free (assuming rental yield and mortgage are similar %)

so my choice; have 80k cash and a 150k asset yielding 4% (after tax) OR have 165k cash and a 100k asset yielding 6%

With regards to 'all eggs in one basket'; I have little faith in pension fund managers and recon residential property yields (despite current prices) better value than most western economy equity markets. My work pension is fully invested in emerging market equity and bonds.

Your comment regarding being forced to sell at 75 is worrying, i had understood residential property could remain in a sipp and even passed on free of IHT. I have no intention of buying an annuity if they still exist in 30 years when i retire. Perhaps someone could shed light on this?

Am i missing something? Any comments welcome

dunstonh

I have little faith in pension fund managers and recon residential property yields (despite current prices) better value than most western economy equity markets

Its amazing how people get this view just after a stockmarket crash and then look to property. Even though property has not outperformed equities over the long term.

There are always pockets of periods when property does better and we have just had one of those. If you look at the property value line and take the long term average growth, then it is due for a correction. Rental yields against property value are very low currently.

Your comment regarding being forced to sell at 75 is worrying, i had understood residential property could remain in a sipp and even passed on free of IHT. I have no intention of buying an annuity if they still exist in 30 years when i retire. Perhaps someone could shed light on this?

Over the last few years the information regarding SIPPs has come out in stages. The final rules are not set to be known until January. The media has printed a lot of information that is based on partial facts and assumptions. The inland revenue have made it clear that they will not allow placement of the property into a SIPP to avoid inheritance tax.

You also need to be aware that the property will not be yours. You may not even be allowed to have a key to it. You will not be able to arrange repairs or redecoration. That will be handled by the property management company (which you pay for). Authorised professionals will have to do all the work (which you pay for you) and you will have to seek trustees permission on some, if not all work (which you will pay for). There will have to be periodic inspections (which you pay for) and periodic valuations (which you pay for). You will also have to pay for any insurances that the trustees want to have in place. Trustees are not going to be as concerned with the cost of the insurance but the level of protection. So forget shopping round for cheapest quote.

January's rules could water it down a bit and allow a few shortcuts. However, you need to be aware that as you don't own the property any more, it is the trustees that face the legal liability of ownership. So, expect them to enforce maximum protection possible as they arent going to want to end up in court because a tenant has died from carbon monoxide from an unserviced boiler.

sippnewbie

Dunstonh,

thanks for your thoughts.

i share your view on property vs. equities. my view on property is specific to mine (a small flat in the city of london with 15min connection to canary wharf - the rental yields in my block are currently excellent despite prices) furthermore i am already invested in emerging market equities via my work pension, i just dont see where past growth in g7 equities is going to come from over the next 30 years and see several factors lining up against them.

i must admit i had no idea the trustees would be so particular about managing the property, i had assumed they wouldn't want the hastle and would prefer you do all the work, taking the view if you balls it up its your pension, but i do understand the responsibilites of the trustees. ive had experience of property management via a management company before and they simply dont give a to55 so for me this is eneough to scupper the whole plan.

thanks for your insight, extremely helpful, it clearly requires much more research on my part, or at least wait till summer next year to see how things have panned out. thanks


just a thought could i be my own pension fund trustee? or could i be my trustee of my fiancee's and her of mine?

DavidLaGuardia

Cook_County wrote:

Your asset allocation into placing 100% of the SIPP into UK residential real estate sounds very high risk, especially since you'll have the sell the entire house at age 75.

A day proposals indicate that Income Drawdown will extend (under more restricted income terms) beyond age 75, so I question this point.

However, I agree the costs of running the scheme in practice should be considered (that is not to say the investment is a bad idea though)

As Dunstonh indicates, until the dust settles some things are a little uncertain until next year.