higher rate taxpayer and future SIPP contributions

robber2

Now that we seem to have clarity over the governments plansfor pension post April 2015 I’ve figured out what my stategy need to be but would welcome confirmation that Im understanding everything correctly.

I have a SIPP with HL with a pot approaching £150k. In addition to the payments into this fund made by my employer I have been making direct personal contributions of about £10k PA, with effect from this year I wish to increase this to £20k.

I understand that after April next year total contributions (employer + personal?) will be capped at £10k unless (at least some of) the fund has been put into drawdown and the 25% TFLS taken. I am concerned that I may be flagged up as recycling my pension if I crystallise the whole pot so my plan is to do the following;

· Crystallise say £10k, taking a TFLS of £2.5k which will be dumped in an ISA and leaving £7.5k as a crystallised drawdown pot inthe SIPP, leaving the remaining £140k un-crystallised in my SIPP.

· Continue to add employer and direct contributions to the main SIPP pot until retirement in a few years when I would then take the 25% TFLS from the entire un-crystallised pot. The remaining pot would then join the £7.5k pot in drawdown to be taken as needed and taxed according to the rules at the time.

I see the benefit of this approach being that the bulk ofthe TFLS will not be taken until contributions have been stopped which should avoid any recycling accusations from HMRC.

The risk is that Pension rules and particularly the TFLS options may be changed by a future government but I’m happy to take a chance that should this happen I could move quickly to change my strategy.

I would welcome any thoughts, suggestions or comments from the wise and willing on the board.



thanks

guymo

robber2 wrote: »

I understand that after April next year total contributions(employer + personal?) will be capped at £10k unless (at least some of) thefund has been put into drawdown and the 25% TFLS taken.

Is that right? I am not sure what you're referring to here, and this seems to be the crux of your plan.

middlepuss

As guymo says, you seem to have this *rse about face.

You can put £40K in per year. There is a rule that if you crystallise then in some circumstances you are limited to £10K.

But if you do not intend to crystallise - for other reasons that you have not mentioned? - you're OK with £40K - assuming you're not near the LTA.

Linton

I think you are confused about the £10K and have got things the wrong way round. The limit applies once you have started taking drawdown to stop large scale recycling. If you leave the pension SIPP untouched then the limit stays at £40K or earned income if that is less. The "unless" should be an "if".

david78

There is no £10k limit unless you are in drawdown as other posters have said. Personal contributions are capped at the smaller of your gross pay and the annual allowance. Total contributions (Personal + Employer) are capped at the annual allowance.

robber2

sorry,

I should have made it clear that I'm keen to take my 25% TFLS ASAP. This is following suggestiond from JamesD and others that its worth grabbing whats available outside the tax liability while the option is still there. If I do this after April 15 I believe further SIPP contributions will be capped at £10k whereas making arragements now will leave the cap at £40k.

thanks for the commetns to date.

Linton

robber2 wrote: »

sorry,

I should have made it clear that I'm keen to take my 25% TFLS ASAP. This is following suggestiond from JamesD and others that its worth grabbing whats available outside the tax liability while the option is still there. If I do this after April 15 I believe further SIPP contributions will be capped at £10k whereas making arragements now will leave the cap at £40k.

thanks for the commetns to date.

Why do you have this belief? It seems to me to be a false one. As I understand it from various websites the £10K limit isnt triggered by taking the TFLS. It is triggered by taking any subsequent drawdown.

robber2

hi Linton, I hadnt appreciated that it was posibble to crystallise a fund, take a TFLS and not actually commence any drawdown at all.

Thanks for the info.

xylophone

http://www.moneymarketing.co.uk/news-and-analysis/analysis/will-10k-annual-allowance-put-the-brakes-on-pension-flexibility/2012570.article


"Clarity has now been provided by the Government. It intends to introduce a new £10,000 annual allowance for those who draw more than their tax-free cash from a defined contribution scheme of more than £10,000 from April 2015"

jamesd

robber2 wrote: »

I should have made it clear that I'm keen to take my 25% TFLS ASAP. This is following suggestiond from JamesD and others that its worth grabbing whats available outside the tax liability while the option is still there. If I do this after April 15 I believe further SIPP contributions will be capped at £10k whereas making arragements now will leave the cap at £40k.

Almost right, except that you can still take the full tax free lump sum without triggering the reduction. What doing it before 6 April 2015 gets you is the option to take the GAD limit income level from all pots now or in the future without triggering the reduction from £40k to £10k.

So starting now just gets you a free boon that waiting costs you.

Examples with £100,000 pot:

A. Wait until after 6 April. You can take out £25,000 tax free lump sum but take even a penny more and you trigger the contribution limit drop from £40k to £10k.

B. Start capped income drawdown now. You can take out a 25,000 tax free lump sum and in addition this year and all future years you can take out up to about 6% (the GAD limit amount) of the pot and all other drawdown pots without triggering the cut from £40k to £10k.

C. Start capped income drawdown now and put £10,000 into capped drawdown. Take a 25% lump sum and up to GAD limit income. At any future time also put the rest of the pot into capped drawdown and take out the lump sum and GAD limit income without triggering the reduction from £40k to £10k.

D. Start capped income drawdown now and take the £25k tax free lump sum. Choose no income now and at any time in the future start taking the GAD limit income without triggering the reduction in contribution allowance from £40k to £10k.

Back in the days when people over 75 had to use a different form of capped income drawdown there used to be a minimum income requirement but that requirement to take an income has been removed and it's now settable in capped drawdown at any age anywhere between nothing and the GAD limit amount.

jamesd

On the recycling issue, you have a pot size of £250,000 so a possible tax free lump sum amount of £37,500. It's worth becoming familiar with the various elements that must all be met before the recycling rule can be triggered to help to ensure that you always have at least one of them acting in your favour.

For example, I'm discussing with HR at work an adjustment to standard policy that will let me put £40,000 into the pot in the third year before I plan to take the lump sum. Since £40,000 is the normal maximum it will be hard for HMRC to argue that I used the lump sum to increase pension contributions in the two years before taking the lump sum, the year I take it and the two years after. All I can do is make them lower than the legal maximum.

You can also use staged taking of the lump sums, crystalising part of the pot each year so that the lump sums being taken in each tax year don't exceed 1% of the lifetime allowance in each tax year. You'd have the whole lump sum out in just three years of doing this.

HMRC also has to have reason to believe that you planned recycling. If you have some other reason for increasing contributions it's not supposed to restrict you. For me I have at least three reasons to increase and these are my real reasons for doing it, even though I'm looking at the recycling rules to help protect myself from the chance of a HMRC mistake:

1. I have money outside the pension to live on before I reach age 55. Each year I get closer to 55 reduces the amount I need by a year's expenses so it becomes sensible to put that amount into the pension to get the pension tax relief now I no longer need it outside.
2. I had to keep money outside the pension to allow drawing at a higher rate between early retirement and state pension age. Now the GAD limit is being removed I no longer need to do this so it becomes better to put the money into the pension and get the pension tax relief.
3. I'm getting older and closer to retiring.

So for those reasons even though I will take the lump sum, the lump sum isn't the reason for the contributions to be increased. The lump sum is just incidental to the planning that I had to do for retirement and the way the rules changes and my circumstances affect what's sensible for me to do.

Taking the lump sum itself is significantly to reduce legislative risk but also for diversification.