Is this allowed ?

Taxiboy

Hi all ,

I am aged 54 and self employed , my wife 52 and also self employed in partnership with me . I have a SIPP of approx 250k , my wife has a SIPP with just 12k. Neither of us have contributed for at least 2 years

Next year my plans are to crystallise 50% of my SIPP taking the lump sum and using it all to pay debt. I then intend to take taxed income from the crystallised part and pay this into my wifes SIPP(ie tax neutral ) with the aim of balancing them in order to maximise her personal allowance .

I would like to carry this out over the next 5 years so potentially transferring 100k over that time . We would then take the lump sums from my uncrystallised half and my wifes entire pot and review our options then .

I realise that her earnings would have to match the contributions and could reallocate the partnerships profits to satsify this .

My concerns are that I may fall foul of the recycling rules even though I will be able to show where the lump sum was spent. Is this likely ?

Any comments and observations on this or the plan in general would be much appreciated

DaveMcG

The first part of your plan is to take some benefits from your Sipp, which is permissible.

The second part is for your wife to contribute to her Sipp, which is permissible within the available allowances.

The part of the plan that is slightly grey is that you intend to alter the profit share of your partnership for the purposes of tax efficiency. This is the area that you probably want to run by your accountant.

mgdavid

Only the first 25% lump sum is tax free, so you are going to pay at least 20% and more likely 40% on £62500 next year - is this wise? What interest rate are you paying on the debt?
Unless you are managing to live on a low-ish income you may pay 40% tax on the other funds released from your SIPP for the next 5 years too.
Might it be better to turn the partnership into a limited company and have the company pay your pension contributions?
At what age do you plan to retire, as it may be better to invoke the eventual plan over 10 years rather than 5?

HarryD

You can take 25% cash out of your SIPP tax free and put the remainder into drawdown. The 25% cash goes to pay off debts. OK.

Anything else you take out of your pension pot counts as income and is taxed accordingly. So, as mgdavid says, you need to be careful that your earnings plus what you take out of your pension does not push you into the 40% tax bracket.

When you've paid off debt, you then want to use further withdrawals from your pension to put into your wife's SIPP.

If your wife is a 40% taxpayer, then putting however much she would pay 40% on into her SIPP makes sense, specially if she will be a 20% taxpayer later, when she starts to draw income from her SIPP. Same if she is a 20% taxpayer and her income will be below £10K (non taxpayer) when she starts to take income from her pension.

If your wife is a 20% taxpayer, and will be in the future, the advantage of putting, say, £100K into her SIPP is that she can later take 25K out tax free, saving you 20% of 25K - £5K.

Is any of that what you're thinking?

Taxiboy

Thanks for your replies

Our joint taxable profit is only around 30k pa ,we split this 50/50 at the moment . My plan would be to allocate 10250 to me and the rest to my wife giving her the income to support pension contributions of around 20k pa

My income would be around 30k including my pension drawdown to fund my wifes contributions so all tax would be at the basic rate. .

The basic idea is for my wife to have a fund large enough for her to retire in 5 years time drawing her personal allowance as income .

Thanks again

jamesd

Your plan seems like an eminently sensible one. The lump sum recycling rule only applies to contributions made to your own pension, not that of others.

You could take the drawdown income from the 75% left in the pension pot and recycle that into pension contributions for either of you. That will be tax neutral unless one of you is in salary sacrifice. Given you owning the company, you effectively are in salary sacrifice so there is a net gain from corporation tax or NI savings. If you take out more than the 25% tax free lump sum under the flexi-access drawdown rules from 6 April 2015 that will restrict contributions to pensions in your name by anyone or any business to no more than £10,000 a year.

Will you be 55 before 6 April 2015? If you will be, you can start capped income drawdown then. That will let you take out the whole GAD limit amount of income without triggering the drop from £40,000 to £10,000 of allowed pension contributions a year. This applies to all pots and contributions in capped drawdown, now and in the future, regardless of when you put the money into the pension.