New SIPP for four years - worth it?

gterr

Hi there,


I am 58, female, will reach SP age in 2021. Have recently stopped working (self-employed) except that I still run a small seasonal bed and breakfast which brings in about £6k, with £4k of this taken tax-free under the Rent-a-Room scheme. I have two small final salary pensions in payment (total approx. £5.5k pa). Also have S&S Isa and S&S unwrapped funds totalling approx. £100k, £15k cash in a cash Isa and about £18k cash in a Santander 123 account paying 3%.


Husband has similar S&S and cash provision, is aged 60, and still works part time.


For additional retirement income I had decided to go for DIY S&S Isa and take income from this when necessary, and possibly buy an annuity in a few years if/when rates improved.


What I overlooked was the fact that from April 2014 until I reach SP age I will be earning under the basic rate tax threshold. This being the case, is it worth starting a SIPP, and making the £2880 contributions each year for a few years? If I made, say, four years' worth of contributions could I then withdraw the whole amount under triviality rules before the fund reached £18k, and before I reached SP age and became a basic rate taxpayer again? (I don't want to have to deal with SIPP drawdown with a very small pot).


Can't quite get my head around things, so I'd be grateful for your comments.

kidmugsy

gterr wrote: »

I have two small final salary pensions in payment (total approx. £5.5k pa).

The capitalised value of those is much greater than £18k, which knocks your scheme on the head.

I'm afraid the best I can suggest is pretty obvious. (i) If you aren't going to have 35 years of contributions to State Retirement Pension by 2021, start making self-employed contributions. (ii) Move the unwrapped funds into ISAs. (iii) Maybe you might look at Immediately Vesting Personal Pensions.

One last thought: what yield are you making on the unwrapped funds? You could always consider putting enough in an investment with high yields, such as a bond fund, or gilts, which you could get tax-free from April. But maybe you are already happy with your balance of equities to bonds, or maybe you feel that interest rates are bound to rise soon - that being bad for bonds. Mind you, interest rates in Japan have stayed low for a generation.

jamesd

Yes, you could use triviality but not the under 18,000 version because of the value of your existing defined benefit pensions.

If you could use the £18,000 rule your maximum gain would be the 20% basic rate income tax saved on the 25% tax free lump sum. After four years this lump sum would be £3,600 ignoring investment performance and the tax gain would be £720.

However, since you can't use the £18,000 version of triviality, instead you have to use the rule that lets you use triviality for a personal pension pot with a value of £2,000 of less and you can only do this for two pots. That means the maximum gain in each of the two posts is 20% of 25% of £2,000, which is £100. The cost of a triviality payment may well be greater than that, though it probably could be deducted from the pension pot not the tax free lump sum so there's a chance of a slightly higher overall gain.

Taking the lump sum and using drawdown is probably a better idea than that. But since you don't want to do that it may not be worth you using a pension at all unless you instead want to leave the money invested until annuities have a value that makes sense for you.

gterr

Thanks both.


That's fine, and I'll stay as I am. I'm actually rather relieved not to have to add another element to my retirement planning.


Kidmugsy: I've gone for quite a high equity percentage in the S&S funds: 70%, on a capital value of approx. £195k total between husband and I. Of the 30% bonds, most of these are corporate bonds or high-yield bond funds. But to counter that husband and I have between us nearly £70k in cash funds - cash ISA and Santander 123. So, we don't need to touch the S&S investments for some years should the market suffer a setback, and when we do we can take an income from selling capital.


All the best.