Best option for making use of tax free allownaces

hyperhypo

This is a fascinating thread. I have a variant on the OP's questions in sense that my anticpated use of FAD is for a short ish finite time period.

I'm similar in age to OP but have a mix of deferred DB (13k in today's money from 63) and c. £100 k in current DC pot , to which i'mm adding £17k pa via salary sacrifice.

I'm hoping to grow the DC pot to > £150k by time i'm 61 ish and then use FAD to live off it until my DB pension kicks in at 63 and SS at age 66. So to drawdown quite aggresively for a couple of years and then ease off as the db kicks in and then a bit less at age 66.

I'm 56 next month.

So Judwin's worked example intrigued me....could the money that tax is paid on at 20% in his earlier example be used to pay into my wife's pension, rather than being recycled into one's own PP plan.

Actually she has no pension at all other than SS...although she works part time in areas where it is usual to work until past "normal" retirement age limits (personal music tuition). She earns around the tax allowance limit at moment on a self employed basis.

jamesd

Yes, recycling into another person's pension is fine. The pension recycling rules only apply to recycling tax free lump sums into your own pension.

OldBeanz

If you have the funds, she should be paying 80% of her salary into a pension which would be topped up by the government.

EdGasket

OldBeanz wrote: »

If you have the funds, she should be paying 80% of her salary into a pension which would be topped up by the government.

Plus you can use up to three year's worth of unused allowances.

jamesd

You can only use those allowances from past years if the salary is more than the annual allowance. You can't use the contribution limit of £40k or earnings from prior years to make higher payments in the current year.

EdGasket

jamesd wrote: »

You can only use those allowances from past years if the salary is more than the annual allowance. You can't use the contribution limit of £40k or earnings from prior years to make higher payments in the current year.

I don't understand you.

It says here:

https://www.gov.uk/tax-on-your-private-pension/annual-allowance

"You can top up your allowance for the current tax year (6 April to 5 April) with any allowance you didn’t use from the previous 3 tax years."

On that basis, my wife paid more than she earned last year into her pension last year. Is that a problem?

kidmugsy

EdGasket wrote: »

On that basis, my wife paid more than she earned last year into her pension last year. Is that a problem?

yes: the earnings cap overrules any other, save for people earning less that £3600 p.a.

jamesd

There are two limits: earned income and annual allowance. The annual allowance only matters if there is enough earned income to go over it.

earned income 20k: maximum contribution 20k gross.
earned income 40k: maximum contribution 40k gross.

earned income 41k: maximum contribution 40k (the annual allowance, unless carry forward is available, then that can be used to get to a maximum of 41k.

earned income 90k: maximum contribution 40k unless carry forward is available, up to 50k of carry forward could be used to get up to 90k contribution.

Your wife broke the rules. She should initially contact her pension provider to tell them and ask them whether they can unwind her overpayment. There is a process for doing this. It shouldn't be a big deal unless HMRC notices first, even then it probably won't be a big deal if she cooperates as fully as possible. So no big trouble just get her acting to correct it as soon as reasonably practical so it doesn't become one.

EdGasket

Oh dear; that's a major problem. The over-contribution is showing as applied on the 1/4/2015. Do you think the SIPP provider can change this by a few days to the current tax year? Are they allowed to do that? The money has not been invested yet; just sitting there as cash.

OK thanks James; we'll get onto it.

jamesd

Ask them. They probably can by doing an unwind then new contribution now. Just a case of how they handle it but since there is a process it should go reasonably smoothly.