Basic (Grossed up) SIPP contribution

symonsays

I think, reading a few posts here, I may have laid a small egg:eek:.

I've just made my annual SIPP contribution online but as I see the grossed up figure is less than £3,600 I wonder if £2,808 is the correct amount anyone can add from taxed income.

But, that is not the reason for panic. I pay said £2,808 from my monthly pension income - which is taxed. Reading various comments makes me wonder if this practice is in fact wrong. This pension income from my former employer is paid due to ill health. I still have almost 10 years to official State pension age (SPA). Therefore, I no longer work.

I have checked previously re eligibility of using 'pension income' to fund the SIPP and have been told that this is in order. I started the SIPP specifically to meet (and I hope beat) the abatement from my work's pension which occurs when I reach SPA.

Could some kind person clarify if I have boobed (and been misinformed) and accordingly should not be funding another Pension out of the taxed pension income I receive from my former company?

If I have mucked up, can contributions be regarded as coming from other sources, e.g. stocks and shares income?

I hope this is clear. If I have to go cap in hand to HMRC I will lay more than an egg.

Any clarification will be appreciated. Sorry if I appear thick.

Aegis

2 issues here:

1. The net figure associated with £3,600 is £2,880, not £2,808.

2. Pension income, although taxed, does not form part of your relevant UK earnings, therefore cannot be recycled back into another pension with tax relief. However, everyone is entitled to pay up to £3,600 gross (i.e. £2,880 net) per annum into a pension and get tax relief on it regardless of the level of their earnings or the rate of tax they pay.


Hope that helps.

symonsays

Yes, it does help, Aegis. Thanks for the fast response too.

I think I'm just having a senior moment. :j

It is amazing how many websites - official ones - that say £2,808 is the net contribution for 2011/12.

But the bigger issue was legality and I panicked there.

Thanks again for jumping in, much appreciated. :T

Freecall

An interesting point.

So if after starting to draw a pension one can still contribute to another scheme (and get the relevant tax refund) does the following work?

I pay £2,880 into scheme each year in late March which is grossed up to £3,600. In Early April I take 25% cash leaving £2,700 to be invested at say 5% giving an income of £135. This is from my effective investment of £2,880 less £900 = £1.980.

This is a real return of 6.8% before tax.

Obviously I have lost access to the capital but in practice if one is planning to live off income from investments for life then it is not available to spend anyway.

Further, assuming that the original pension is of sufficient size it would be possible to drawdown the new scheme and recover the investment if one so decided.


There must be something wrong with this logic otherwise every IFA in the land would include it as part of their client’s retirement planning.

I am sure that someone on here will tell me what the error is.

jamesd

Yes, you're completely free to make contributions to another pension scheme from pension income or any other income or savings, except that there are some payment limits that apply, particularly if no longer working or if recycling a pension lump sum.

There is no error, anyone who is not barred due to something like taking one of the HMRC protection schemes is able to do what you have described.

It's better than that. For a normal money purchase/defined contribution pension you can at age 55 start taking the income using income drawdown (or annuity, but that would seldom make sense) and recycle that income into new pension contributions to get a second tax free lump sum. If still working that can be a lot more than just £2,880 and can even get higher rate tax relief.

This is one of the fairly well known approaches that can increase the value of pension contributions.

The costs might make it uneconomic to do every year with just £2,880 but that can be solved by going into drawdown every few years instead of every year.

symonsays

Thanks for additional information Jamesd.

No doubt some readers are wondering about my reference to abatement. This came about thanks to the administrations of Harold Wilson, yes all the way back then, and a fear that there would be insufficient monies to meet future pensions. Essentially, a chunk of a person's pension in payment is sucked back by the employer when that person reaches state retirement age. This I think can only apply to final salary schemes and (when those were the norm), all providers seemed to use abatement even when it was unnecessary. It is only in recent times that some stopped doing so. Typically, with my luck, it still applies to me, ergo the plan to use the self invested simple SIPP to hopefully at least restore the amount my employer's will deduct from my entitlement. Thus, Harold's white heat of technology will still burn me and some others.

Of course, the demise of final salary schemes has probably finally removed this anachronistic nonsense.

That is the background to what I thought was a cunning plan. I think tiredness overtook me yesterday; actually it was about 05:00 hours, and I uncharacteristically went blank. I have had the legality confirmed before but, like so many things done these days, I do not have it in writing ~ a lesson for the future!

The SIPP is with Alliance Trust as are my accumulated ISAs. Together, I regard those as part of my pension as I know I shall not qualify for other benefits and must be self-sustaining.

Not much time to 5th April, good people: Use it or lose it.