How do I calculate how much I can place into SIPP

cepheus

I have been paying into a final salary company pension scheme over most of this year and have recently been made redundant. I wish to minimise the tax liability on the redundancy payment through a SIPP pension. How do I calculate how much I should pay into the SIPP to minimise the tax liability? (note I cannot buy any extra company pension, or split payment into different tax years)

This site says

Of course you could always just put part/all of your redundancy money directly into a personal pension or SIPP, .... But the tax relief you get on those pension contributions will be limited to how much income tax you have paid - i.e. if you've paid tax on earnings of £30k, then you will only get tax relief on pension contributions up to £30k in the same tax year.

http://uk.messages.finance.yahoo.com/Your_Money/threadview?m=tm&bn=UKF-PensionPlanning&tid=160&mid=173&tof=5&so=R&rt=2&frt=2&off=1

So I work out my taxable earnings during this financial year, and this is the total amount it is worth placing into pensions for tax purposes. Then I subtract the amount I have already placed into the company pension and the remaining is how much I should place into a SIPP? To put some figures on this:

Say taxable earnings this FY = 25k of which 5k has already been placed into the company pension, I should place £20k into a SIPP within this FY to minimise the tax liability. Can only income tax on earnings be sheltered, or the taxable proportion of the redundancy payment itself as well?

cepheus

I'm surprised there has been no answer to this question since a lot of people may be in a similar situation to myself over the next few years. From my enquiries I think the following is correct:

Providing the redundancy has been approved by the revenue, anything above £30000 counts as earnings for the purposes of personal pensions such as SIPPS, so this can be added to your normal salary.

If you want to shelter £50000 of earnings which has been taxed at 40% you pay the £30000 into a personal pension which is grossed up to £40000 (to allow for basic rate tax) and you claim back an additional £10000 directly from the revenue.

The maximum you can place into a personal pension is equivalent to your earnings in that Financial Year up to a limit of £235,000. However, if you have subscribed to a company pension in that year you have to subtract employee but not company contributions into that pension.

One financial adviser from a SIPP firm suggested to me that it was important how the redundancy was "structured" to make it eligible for tax relief. However a pensions specialist at the Inland revenue said to me that reclaiming tax through a SIPP is unlikely to be a problem providing you keep all the paperwork and he had no idea what was meant by "structured".

Hopefully, this information is correct and will be useful to others (although please re-check yourself)

whiteflag_3

cepheus wrote: »

I'm surprised there has been no answer to this question since a lot of people may be in a similar situation to myself over the next few years. From my enquiries I think the following is correct:

Providing the redundancy has been approved by the revenue, anything above £30000 counts as earnings for the purposes of personal pensions such as SIPPS, so this can be added to your normal salary.

If you want to shelter £50000 of earnings which has been taxed at 40% you pay the £30000 into a personal pension which is grossed up to £40000 (to allow for basic rate tax) and you claim back an additional £10000 directly from the revenue.

The maximum you can place into a personal pension is equivalent to your earnings in that Financial Year up to a limit of £235,000. However, if you have subscribed to a company pension in that year you have to subtract employee but not company contributions into that pension.

One financial adviser from a SIPP firm suggested to me that it was important how the redundancy was "structured" to make it eligible for tax relief. However a pensions specialist at the Inland revenue said to me that reclaiming tax through a SIPP is unlikely to be a problem providing you keep all the paperwork and he had no idea what was meant by "structured".

Hopefully, this information is correct and will be useful to others (although please re-check yourself)

thanks fot post-

can you explain what a financial adviser from a SIPP firm is?

MikeJones_2

Hi cepheus,

cepheus wrote: »

The maximum you can place into a personal pension is equivalent to your earnings in that Financial Year up to a limit of £235,000. However, if you have subscribed to a company pension in that year you have to subtract employee but not company contributions into that pension.

I hope you don't mind me making a technical observation (for the value of future readers of this post) - but you can actually put as much as you like into a registered pension scheme - the limitation you refer to is simply for the purpose of obtaining tax relief.

A mute point maybe, but an important technical one nevertheless.

I have to say, your post is an interesting one, and I'd agree that it will probably benefit many people in the current economic climate.

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

cepheus

can you explain what a financial adviser from a SIPP firm is?

I probably should have said 'adviser from the SIPP helpline', most SIPP firms have one (I can't remember which firm mentioned the importance of structure). To be fair the one from Hargreaves Lansdown (HL) was quite explicit and he thought the process of sheltering tax through a SIPP was straightforward as well although I didn't explain my circumstances in detail. HL do offer a proper fee based service which they claim is independent.

Yes the first post was referring to the limits for sheltering tax rather than the absolute limits of investment.

Another point that I should have mentioned. For some people this only delays basic rate tax since most would pay tax when drawing the eventual pension, although I understand that it is possible to have a 25% lump sum tax free.

whiteflag_3

cepheus wrote: »

HL do offer a proper fee based service which they claim is independent.

.

given that, did they explain that you could achieve what you desired by using a personal pension, which are normally available at a lower cost than a SIPP.

cepheus

No, but then I wanted a SIPP anyway. When I last checked the HL SIPP fees seemed quite reasonable.