can my 74 year old mother open a sipp?

happyhero

Hi my mother is 74 and I am helping her organise her finances. She has over £50,000 invested in funds within an ISA with Hargreaves Lansdown. She will be 75 in February, and is receiving a pension (I'll have to check if it is a private or state pension). She has very little total income and so does not pay tax, she relies on my Stepfather for income who is 86 but unable to help with this sort of stuff anymore.

I've looked into Sipps and see that 75 is the limit but can she still open one if she is only a few months away from 75 if she is already receiving a pension from somewhere else?

Also is it worth it as I notice the limit she can put in as a non taxpayer is £2880?

She would have to take the money from her ISA, but it appears worth it to me just for the government top up that would turn it into £3600.

Is my thinking correct with this, would you recommend it as the increase in worth is more than she will make on any fund short term and she can reinvest in the same funds within the SIPP that she had in the ISA anyway?

Also at 75 does she have to take it as a pension and lump sum or can she leave it invested?

It appears to me that it is a pity she is a non tax payer because otherwise she could put a lot more of the money from her ISA into a SIPP and have it topped up by the government giving a nice instant increase.

One of my main reasons for asking these questions is it just looks a bit odd and obvious what you are doing opening a SIPP just before you reach 75, I mean if someone was a tax payer they could put a massive sum in there just before their 75th birthday and get a big top-up from the government to use as a pension or whatever else you can do with it.

Should she have been transferring her money into a SIPP for years or is my thinking incorrect?

Any advice appreciated.

Linton

As a non tax payer you are limited to £2880 for a refund of tax top up. If you are a taxpayer you are limited to your net earned income in that year, a pension or investment income isnt earned. So it wouldnt help a rich retired person.

Your idea of paying into a SIPP has the little problem of how you get it out again. If mum has no other pension provision beyond state pension she could claim < £18K triviality and get it back as a taxable lump sum. But with her state pension I guess she would then be over the tax free allowance and so would start to pay tax, which begins to defeat the whole objective. Also you would have to factor in the charges. I dont know whether you could claim triviality more than once.

If you cant claim triviality you would have to get an annuity (if you could get one for a lump sum of £3600) which would take many years to repay the cost and involve charges.

So it seems to me that the whole exercise isnt worth the effort. It would probably be more lucrative to simply put 11K into an S&S ISA.

FatherAbraham

Linton wrote: »

As a non tax payer you are limited to £2880 for a refund of tax top up. If you are a taxpayer you are limited to your net earned income in that year, a pension or investment income isnt earned.

That's not correct, I'm afraid.

It has nothing to do with paying tax. It has to do with having taxable income. Someone who earnt £5,000 gross during a tax year wouldn't income tax on it, but it's taxable income, and so the earner would be able to pay in £4,000 to a relief-at-source pension, which would gross up to £5,000.

Warmest regards,
FA

kidmugsy

Put £1800 gross to each of two pensions. Then apply for commutation of each under the "stranded pots" provisions.

Perhaps the gain would outweigh the costs.


Or, you could google "immediate vesting personal pension".

Linton

FatherAbraham wrote: »

That's not correct, I'm afraid.

It has nothing to do with paying tax. It has to do with having taxable income. Someone who earnt £5,000 gross during a tax year wouldn't income tax on it, but it's taxable income, and so the earner would be able to pay in £4,000 to a relief-at-source pension, which would gross up to £5,000.

Warmest regards,
FA

True , I was trying to keep things simple as it doesnt actually relate to aged mum. In your example a key word is earnt which of course does not inclue the pension.

margaretclare

I don't think Father Abraham is correct. It used to be the case that only earned income could be put into a pension. This ceased to apply with the invention of stakeholders. Anyone could put any money into these, earned or not. Or even, savings from benefits!

I've put unearned income into a SIPP. What mum would have to decide, after she's got her SIPP, is whether she wants to put it into annual drawdown (to provide her with an income), to leave it in there to grow (in which case it's probably doing just as well in the funds - the S&S ISA) or to buy an annuity with it.

HL don't give advice, but they do provide a lot of very useful information on which to base a decision. SIPPs are really for people who have at least a basic idea of what's going on and what they want. Does Mum keep an eye on her funds, where they're going, are they growing or not, does she know how to sell, buy more, switch to another fund, those kinds of things?

happyhero

margaretclare wrote: »

Does Mum keep an eye on her funds, where they're going, are they growing or not, does she know how to sell, buy more, switch to another fund, those kinds of things?

For a few years I have no idea what happened (but some funds were picked by somebody)and they seemed to have done nicely luckily but now for the last year or so I have looked after them and they are doing well still.

From what you guys are telling me it does sound like it is probably not worth the messing about with, it just seemed a shame to me that she had all this money in the ISA and could have done the SIPP thing getting money to boost her investments each year and has never taken advantage and now its nearly D day and she wont be able to anymore anyway, pity one of us did not think about it earlier.

Now its just a case of looking at one last chance of taking advantage and the maths seemed simple on the surface to me, ie take £2880 out of the ISA put it in a SIPP and get it topped up to £3600 for a nice little boost that she has missed out on for years and possibly back into the same fund.

Oh well was worth a try, thanks guys for all the help

jem16

margaretclare wrote: »

I don't think Father Abraham is correct. It used to be the case that only earned income could be put into a pension. This ceased to apply with the invention of stakeholders. Anyone could put any money into these, earned or not. Or even, savings from benefits!

I've put unearned income into a SIPP.

You can put whatever money you like into a pension ( with the slight exception of recycling pension money ) but whether or not it attracts tax relief is another matter.

Father Abraham is correct in that from a tax relief point of view, it is £3600 gross or 100% of earnings, whichever is greater.

Linton is also correct in that pension income is not earned income so doesn't count for tax relief purposes.

So basically, as far as you're concerned, if your only income is pension income, then you will only be entitled to tax relief on £3600 gross.

margaretclare

Happyhero, might be worth having a word with someone at HL on Monday. They don't give advice, but they're worth talking to just to clarify your thinking.

Funny about funds - I was warned long ago that 'ethical investment' was a waste of time, wouldn't make me any money, leave it to the experts, you don't know what you're doing, you're too old to learn....In fact, one of my best funds, held in my HL S&S ISA, is Kames Ethical Equity, Edinburgh. I didn't want any investment in tobacco products you see. This has been - consistently - one of my best funds.

grey_gym_sock

an immediate vesting pension would be a simple idea, and might make sense under the circumstances.

this involves giving up £2880 of capital in exchange for an income for life. which is very different from investing in funds, but may make sense in her circumstances (you suggest she is short of income), and since annuity rates are decent at age 74.

it is also tax-efficient, since the £2880 is increased to £3600 with the tax relief, and then the annuity paid would be untaxed (assuming her total income remains less than her personal allowance).

e.g. suppose a 74-year-old can get an 8% flat rate annuity (which may not be accurate, but is hopefully in the right ballpark). on £3600, that is £288 per year. but it only cost £2880, so it's effectively a 10% rate.

that is not index-linked, i.e. the real value of the £288 would decline over time. an index-linked annuity would pay less, but would be similarly boosted by the tax relief.

margaretclare

This sounds like a good idea. I think it was suggested earlier, by kidmugsy.

Even if you have a SIPP, you get asked every year if you want to buy an annuity with it rather than annual drawdown from the SIPP. This is required by the government and of course, you get to pay for the privilege by selling some units!

So far I've left the SIPP alone because there is still the possibility of growth, the funds that are in the SIPP. With an annuity that's it, there would be no further growth. But it might be the best option for your mother.