Lump sum to SIPP

kolofarthos

There have been several discussions about whether or not to take a lump sum out of a pension (and remain with a reduced income from the pension).:)

Would there be any advantage, and would it be legal to take a lump sum, give it to spouse to invest in a SIPP and immediately take a lump sum out of that?

Thinking along the lines of say, taking lump sum of 100K investing in SIPP, getting gov't to increase it to 120K (is that correct?) taking out as immediate vesting maximum amount and letting my spouse have the income from the SIPP (It's hers by then). I pay basic rate tax and she pays no tax. SIPP would probably be invested in corporate bond(s) and or high income investment trusts. :question:

How would HMRC view that? :shhh:

dunstonh

Thinking along the lines of say, taking lump sum of 100K investing in SIPP, getting gov't to increase it to 120K (is that correct?) taking out as immediate vesting maximum amount and letting my spouse have the income from the SIPP (It's hers by then). I pay basic rate tax and she pays no tax. SIPP would probably be invested in corporate bond(s) and or high income investment trusts.

So, (ignoring the fact the annual allowance is £50,000 and you only get tax relief on the amount up to your earnings) you would end up with £120,000 tax free in the pension for your wife but £300k taxable in your name. Instead of the £400k tax free that is currently the case.

Do you need the income now (or all of it)?

There is no debate at all if you are commencing the pension income. You always take the 25% tax free cash unless there are guarantees on the annuity rate which are far above the market rate.

As for whether you can do it, then the answer is no as a non taxpayer she doesnt have the income to support a contribution of that amount.

kolofarthos

Thanks Dunstonh. It seems I have overlooked a few basic points! I was using 100K as a nice round figure but had overlooked the 50K limit!

I am looking to maximise income but also want to optimise so that I do not sacrifice as much capital as I can to have an easily accessible sum for the shorter term, some to keep for the longer term and pass on to my beneficiaries upon death. (This is from a company FS DB scheme, by the way and a cash sum of 100K would mean a loss of about 6K pension income)

I did not understand your comment "...but £300k taxable in your name. Instead of the £400k tax free that is currently the case.". Perhaps you would be good enough to clarify please?

bobthedambuilder

kolofarthos wrote: »

I pay basic rate tax and she pays no tax.

Your wife is either a non-earner, or earning less than her personal allowance. If the former, she couldn't invest more than £2880 in a SIPP (to which would be added the 20% tax relief). If the latter, her investment in a SIPP could still not be more than 100% of her annual salary.

So this option doesn't really stack up for a one-off tax-free lump sum withdrawal.

If you want / need the £100K as cash in hand or to pass on as a gift now, take it, otherwise I would keep the $6K / year in the FS pension. If it's index linked, that will grow as well, and your gifts can be annual ones.

dunstonh

Final salary schemes are typically the opposite of money purchase schemes as in many cases, the best option is to take as little tax free cash as you need to boost income. In isolation, the pure monetary information would say take no lump sum. However, when you factor in personal circumstances (health, taxation, spouse provision, spending requirements in future etc), then you usually find taking lump sum can be better. Some also like the "bird in the hand" you get with a lump sum.

Nothing stops you putting £3600 gross (£2880 net) a year into a pension during retirement for your wife. If she was aged say 60, then 15 years of £3600 is £54,000. Then if you die and the spouse pension of 50% isnt enough, she will have a £54k pot (plus what it has grown to) to provide her an income. If she dies before commencement, the full fund value is paid to you (or other beneficiary if you prefer) with no tax.

Those in retirement do utilise the pension wrapper quite a lot to try and even out retirement benefits or even run it more like a tax wrapper rather than a pension.

I did not understand your comment "...but £300k taxable in your name. Instead of the £400k tax free that is currently the case.". Perhaps you would be good enough to clarify please?

That was based on the pension being money purchase. Not final salary. So, wont apply to you. Money purchase schemes are tax free before they are commenced. Tax relief going in, tax free growth and on death paid to beneficiary as a lump sum with no tax taken and outside of the estate. Once income commenced (even if zero income on a 25% tax free cash taken), the death benefits after that become taxable.

kolofarthos

Good bit of clarification and advice from a stalwart and devotee!

Thanks both.

jamesd

The spouse is limited to 3600 a year gross.

kolofarthos, why not go into drawdown now and use all of the drawdown income for pension contributions? You can use the 25% lump sum for gradual contributions within the limits set for recycling if you want to. Recycling isn't banned, just limited.