Pension Tax Benefits - can someone check my logic here please?

mickeypops

I am by no means a financial idiot, but I'm beginning to regret not having taken more personal control of my pension arrangements much sooner.

I'm in my late fifties, I have a good Defined Benefits pension scheme with my employer. My query here is about two personal pension funds from ex-employers, currently under performing with Standard Life, worth a total of around £85K. I'm going to set up a SIPP with a low cost provider and transfer in the SL pensions, and "passively invest" in a suitable mix of funds.

My wife and I also have considerable cash savings (£100K) in various ISAs, fixed-interest bonds, etc.

Now, having spent a day or so reading up the tax implications and benefits of personal pensions, am I correct in my (example) assumptions below.

1. Once my SIPP is opened, I can transfer £10,000 of my cash savings into the SIPP.

2. The SIPP provider will immediately credit me with tax at the standard rate, 20%, turning my £10K into £12K

3. I'm a higher rate tax payer. I can claim back another £2K from the Inland Revenue. (I'm aware of the £50K limit for tax breaks for pensions per year, and I've read up about how to value the increase in value of my company pension scheme, and I will be OK with this nominal £10K)

4. So, in fact I have only spent £8K and now have £12K in my SIPP!

5. But it gets even better than that! Sometime in the not too distant future I hope to retire, and can take 25% of the SIPP value as a tax free lump sum. So, (ignoring the fact that the investment may have increased, there is other money in the fund etc.) I can withdraw £3K of the £12K as a tax free lump sum. The £12K in the SIPP is now reduced to £9K.

6. So, the end state is that I have £9K in a SIPP which can be used to buy an Annuity, to start a Drawdown etc. WHICH HAS ONLY COST ME A NET £5K??

Is this really true? Surely I'm missing something?

mickeypops

I've just re-read the tax rules, and - again with the proviso that I'm off-base somewhere, it is even better than I described above??

As I read it, I can claim back the higher rate tax 20% from the £12K value of the pension investment, not just the £10K I've actually put in. So the IR will give me back £2,400?

So, the end-state calculation as at number 6. in my post above is that I will have £9,000 left in the pension pot for a net cost of £4,600?

grey_gym_sock

actually, it's even better still ...

if you pay in £10k, the pension provider adds £2.5k to that, (because £2.5k is 20% of the total of £12.5k). this might take a few weeks (because they claim the money from HMRC). note you have now used £12.5k of your £50k annual allowance.

then you claim back another £2.5k.

25% lump sum is £3125.

so the remaining pot of £9375 cost £4375.

however, any income drawn from the pot is taxable. though if, for instance, you're only paying 20% tax after you've retired, then it's massively tax-efficient. even if you're still paying 40%, it's not bad.

and there are restrictions on what income you can draw. annuities pay very little now. "drawdown" has funny rules about how much you can pay yourself.

kidmugsy

grey_gym_sock wrote: »

"drawdown" has funny rules about how much you can pay yourself.

A man with a good FS scheme and, presumably, a State Pension to come, might like to contemplate the wonders of Flexible Drawdown.

xylophone

http://www.pensionsadvisoryservice.org.uk/annuities-and-income-drawdown/flexible-drawdown

mickeypops

Thanks guys for the information. What a phenomenal tax break that is!

I'm on the case and I'm starting to get it organised right now.

Flexible drawdown sounds like the thing I would do if I was to retire right now, because annuity rates are so terrible.

But of course I don't have to worry about that until the time comes, I guess.

gadgetmind

mickeypops wrote: »

What a phenomenal tax break that is!

It's good but not phenomenal. It is, after all, your money that you're putting in there, money on which you paid tax and NI. You're now just getting that tax back but will have to pay some of it over again when you start to draw it down.

HMG (aided and abetted by some papers) do like to shriek on about how much tax relief on pensions costs them. Sorry chaps, you're just handing back a sliver of the wodge you extracted (with menaces) from me in the first place!

mickeypops

gadgetmind wrote: »

. Sorry chaps, you're just handing back a sliver of the wodge you extracted (with menaces) from me in the first place!

Yup, you've got that right! But it still feels like !!!!!! Turpin taking 10 sovereigns off me at gun point, riding off on Black Bess, turning round after a couple of seconds and giving me 5 of them back because he's in a good mood!

I'll take it!:j

xylophone

Sorry chaps, you're just handing back a sliver of the wodge you extracted (with menaces) from me in the first place!

:eek:

Ve haf vays of making you pay?:D

Spiderham

I would just add that you need to have 15k (10k+2.5k+2.5k) in the higher rate bracket (ie earnings over about 59k) this year for those numbers to stack up, otherwise you won't get the all the money back from HMRC relating to the 40% tax bracket. Apart from that it seems right though.

mickeypops

Spiderham wrote: »

I would just add that you need to have 15k (10k+2.5k+2.5k) in the higher rate bracket (ie earnings over about 59k) this year for those numbers to stack up, otherwise you won't get the all the money back from HMRC relating to the 40% tax bracket. Apart from that it seems right though.

Hi. Good point, which I hadn't considered - I'm about earning about £26K earning ahead of that though so I'm clear.

I might even find £20K, instead of the £10K I originally thought of, to move from cash savings into the SIPP.