Further contributions post taking 25% lump sum

PaulFraser

I intend taking my 25% tax free lump sum from my SIPP shortly to clear my mortgage but may contribute further sums into my SIPP in the future.
I intend zero drawdown so assume the £40000 pa contribution limit applies.
My question is how do you work out the further 25% tax free lump on subsequent contributions if it is all in one pot? Or do the SIPP providers put the funds in separate 'wrappers'?
SIPP with provider whom I have emailed, but would appreciate general advice.
Thanks.

DancingBadger

I know this isn't the question you asked, but generally speaking, using pension monies to pay off a mortgage is a bad idea, especially if you still have earned income and will be able to make further contributions.

Is there a specific reason for clearing the mortgage?

kidmugsy

Pension providers can split a SIPP into two "arrangements", one crystallised, one uncrystallised.

Why the rush to clear your mortgage? What is the interest rate?

PaulFraser

Well, I am taking redundancy and further contributions are dependent on further (quite uncertain) work as a contractor. I should be able to support myself for a year, maybe more, before having to drawdown.
I am aware of the argument that you can probably get a better return if invested in the stock market than you need to pay on the mortgage but:
(a) the market looks a bit toppy to me
(b) I like the idea of not having a mortgage.
Open minded though, so if you have any threads you can point me to re comparative returns, would be happy to research this. Thanks.

PaulFraser

2.89% tracker.

kidmugsy

PaulFraser wrote: »

Well, I am taking redundancy and further contributions are dependent on further (quite uncertain) work as a contractor. ...
I am aware of the argument that you can probably get a better return if invested in the stock market than you need to pay on the mortgage but:
(a) the market looks a bit toppy to me
(b) I like the idea of not having a mortgage.

(b) is personal so I won't argue with it.

(a) implies that you'd like to realise your stock market gains and make a conservative investment returning about 3% p.a. tax-free. I wouldn't argue with that either: that might prove to be a brilliant investment for years to come. Who knows? Locking in gains when facing a spell of unemployment might be particularly wise: it would be rotten if you wanted to do a withdrawal and the value had plummeted. I suppose using a pension as one's emergency cash will become commoner. How much of the crystallised remainder will you hold in cash, in bonds, in equities?

P.S. I hope "PaulFraser" is not your real name.

PaulFraser

No, pseudonym; private joke that won't make much sense to anyone else.
Haven't decided on the split yet.

jamesd

PaulFraser wrote: »

I intend zero drawdown so assume the £40000 pa contribution limit applies.

Right.

A person who starts capped drawdown for any amount of money before 6 April 2015 can take the GAD limit amount as well without triggering the reduction in the annual contribution allowance. All subsequent pots or others can be merged into such a pot allowing you to take this from them as well. If you want to do this I suggest calling Hargreaves Lansdown since they are open until midnight today and you just might be able to get some amount into capped drawdown before it's too late.

PaulFraser wrote: »

I intend taking my 25% tax free lump sum from my SIPP shortly to clear my mortgage but may contribute further sums into my SIPP in the future.

Even the lowest-paying peer to peer firms like Zopa and Wellesley offer more interest than your mortgage rate, even after allowing for income tax. 5-6% before tax range. The higher paying ones are in the 10-12% before tax range. It should be easy to use a diversified P2P set of investments to both pay the mortgage and provide extra income. Here I'm thinking only of the P2P firms that do secured lending or have reliable protection funds for lenders.

PaulFraser wrote: »

My question is how do you work out the further 25% tax free lump on subsequent contributions if it is all in one pot? Or do the SIPP providers put the funds in separate 'wrappers'?

Almost all providers put the crystallised money into a different pot. I'm aware of only one exception.