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Should I Put More In My SIPP?
Comments
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Given your situation, particularly large assets and being a basic rate tax payer, I don't think that a SIPP is your best option.Jointly my wife and I have £150K in ISAs, I have £150K in my SIPP, and a further £400K in a normal share dealing account (diversified funds) and a £500K BTL property with a £200K mortgage. Our house is worth about £500K and mortgage free. We have adequate emergency fund savings and no debt. No other pensions apart from the SIPP. We have a holiday home overseas.
We have had an unexpected £100K windfall. I am 50 and planning to retire at 55 so am considering taking up unused allowances to put the £100K into my SIPP.
You can obtain 30% initial tax relief and 10% or 11.2% tax free income a year by using VCT investing into either the Albion VCT or the Crown Place VCT respectively. The initial 30% relief is capped at the income tax due for the year of purchase so you'd perhaps purchase (total income - personal allowance) * 2 / 3 to eliminate your whole basic rate tax liability. The 30% has to be repaid if sold within five years, after that, not. If you're a PAYE employee telling HMRC about the purchase will cause them to change your tax code to deliver the relief during the tax year, with any extra claimable on your tax return. Your BTL and investment income probably means that PAYE couldn't provide the full amount of relief, just eliminate income tax on the PAYE income. Getting the VCT tax relief quickly beats the delay before getting it from pensions.
VCTs can be sold at any time after death, no five year or repay the 30% requirement in this situation.One doubt my wife and I have about adding anything further to the pension is that we are not clear on how much of it can be passed on to the kids after we’re gone.
There are plenty of other VCTs around, I'm just naming a couple that I think are currently open and that provide 100% or partly secured on property investing and quite high ongoing tax free income. More will be available in September and October as the main VCT season starts, though probably paying less ongoing income for more potential for capital growth. A typical VCT would pay around 7% after allowing for the effect of the 30% on the purchase price.
Is the holiday home in Portugal or would you want to live there for a year and outside the UK anywhere for a few more years? Portugal has a scheme you can apply for where they tax foreign pension income and lump sums at a 0% income tax rate. A tax treaty prevents double-taxation by the UK on this money. So you can withdraw 100% of UK pension pots tax free using it. No income tax or penalties at all, just all of the money no longer in the pension. If you return to the UK within a few years the UK will tax the money as if you were in the UK at the time you did it, so that out of the UK for a few years requirement matters.We may at some point decide to move overseas to retire where we already have a holiday home
The maximum you can pay into a pension and get tax relief on is your earned income in the year in which you pay into the pension. Investment income like BTL doesn't count for this. There is also a £40k cap but if that it below your earned income you can use carry-forward from the last three years of unused allowance provided you were in a pension scheme of any sort. There is no carry-forward for the earned income requirement, that's always the current tax year only. A person with no earned income can pay in 2880 net, 3600 gross.0 -
Given your situation, particularly large assets and being a basic rate tax payer, I don't think that a SIPP is your best option.
You can obtain 30% initial tax relief and 10% or 11.2% tax free income a year by using VCT investing into either the Albion VCT or the Crown Place VCT respectively. The initial 30% relief is capped at the income tax due for the year of purchase so you'd perhaps purchase (total income - personal allowance) * 2 / 3 to eliminate your whole basic rate tax liability. The 30% has to be repaid if sold within five years, after that, not. If you're a PAYE employee telling HMRC about the purchase will cause them to change your tax code to deliver the relief during the tax year, with any extra claimable on your tax return. Your BTL and investment income probably means that PAYE couldn't provide the full amount of relief, just eliminate income tax on the PAYE income. Getting the VCT tax relief quickly beats the delay before getting it from pensions.
VCTs can be sold at any time after death, no five year or repay the 30% requirement in this situation.
There are plenty of other VCTs around, I'm just naming a couple that I think are currently open and that provide 100% or partly secured on property investing and quite high ongoing tax free income. More will be available in September and October as the main VCT season starts, though probably paying less ongoing income for more potential for capital growth. A typical VCT would pay around 7% after allowing for the effect of the 30% on the purchase price.
Is the holiday home in Portugal or would you want to live there for a year and outside the UK anywhere for a few more years? Portugal has a scheme you can apply for where they tax foreign pension income and lump sums at a 0% income tax rate. A tax treaty prevents double-taxation by the UK on this money. So you can withdraw 100% of UK pension pots tax free using it. No income tax or penalties at all, just all of the money no longer in the pension. If you return to the UK within a few years the UK will tax the money as if you were in the UK at the time you did it, so that out of the UK for a few years requirement matters.
The maximum you can pay into a pension and get tax relief on is your earned income in the year in which you pay into the pension. Investment income like BTL doesn't count for this. There is also a £40k cap but if that it below your earned income you can use carry-forward from the last three years of unused allowance provided you were in a pension scheme of any sort. There is no carry-forward for the earned income requirement, that's always the current tax year only. A person with no earned income can pay in 2880 net, 3600 gross.
That is interesting. But is there any minimum residency period in Portugal in order to do this? For example could you be resident in Portugal for just 1 year to enable this, and then move again to Spain? Or do you have to stay there for a minimum period? Then how many years would we have to stay outside the UK before we could safely return if we had a change of heart about retiring abroad?0 -
Yes, if you die before you are 75 years old. Completely tax free to anyone you wish and they can take out the money as and when they want with no tax to pay. From age 75 onwards they can still take out as much as they like whenever they like but income tax is due at their normal rate. Their age doesn't matter for this paragraph, they could be a baby and still be entitled to it, no age 55 restriction.
If you were to be diagnosed with a medical condition that leads to an expectation of a year or less life expectancy you could also at any age get 100% of your pension pot tax free.
In all cases the money in the pension pot is not part of your estate and hence not subject to inheritance tax.
So after age 75 the SIPP can pass to a surviving spouse, who pays income tax on it (not Inheritance Tax). So the income tax could be quite steep - earnings over £42,386 are taxed at 40% and earnings over £150,000 are taxed at 50%. So even if there is no other taxable income (unlikely) on a £150,000 SIPP £107,604 would be taxed at 40% - £43,045! Anything over that gets taxed at 50%. :eek: That looks like a very good reason to keep money in other investments and not in a SIPP if you care about how much you can leave. Even inheritance tax is 'only' 40% after the threshold.
When the surviving spouse gets the value of the SIPP, it is then no longer a SIPP but gets received as cash payment and can then be spent or invested again outside of a SIPP? So whatever is left when they want to leave it to the children, passes on not as a SIPP but just as part of the estate and subject to Inheritance Tax?0 -
That's not actually true, the annual allowance is a limit on the amount that can be contributed to your pension each year, while still receiving tax relief. It's based on your earnings for the year and is capped at £40,000. However if he opens a sipp for his OH that makes it 80k. Any unused allowance from the last 3 years can be used and if that is not enough you can add 40k, then end your pension input period, and add another 40k.
You still need the earnings to support it in this tax year to make the contribution.
So if you'd been a member of a pension scheme for the last 3 years, but not contributed, you could make a contribution of £180k
2015/16 - £40k
2014/15 - £40k
2013/14 - £50k
2012/13 - £50k
However, to get tax relief on the contribution, you would still need to be earning £180,000 in the 2015/16 tax year.
If you close the PIP and make a contribution of £40,000, you will need earnings of £40,000 in the 2016/17 tax year. This is why most people use employer contributions for this type of planning.0 -
So after age 75 the SIPP can pass to a surviving spouse, who pays income tax on it (not Inheritance Tax). So the income tax could be quite steep - earnings over £42,386 are taxed at 40% and earnings over £150,000 are taxed at 50%. So even if there is no other taxable income (unlikely) on a £150,000 SIPP £107,604 would be taxed at 40% - £43,045! Anything over that gets taxed at 50%. :eek: That looks like a very good reason to keep money in other investments and not in a SIPP if you care about how much you can leave. Even inheritance tax is 'only' 40% after the threshold.
If taken as a lump sum after 75, then a 45% tax payment is due. From April 2016 this would be taxed as normal income.
If it's taken as income then normal tax rates would apply - is your wife likely to take more than £42k each year?When the surviving spouse gets the value of the SIPP, it is then no longer a SIPP but gets received as cash payment and can then be spent or invested again outside of a SIPP?
Only if the choice was to receive a lump sum. You can choose to leave it in a SIPP and take an income from it.
Perhaps read this and find out what happens?
http://www.pointonyork.co.uk/userfiles/file/PYSS%20Fact%20Sheet%205%20-%20Benefits%20on%20Death.pdf0 -
So after age 75 the SIPP can pass to a surviving spouse, who pays income tax on it (not Inheritance Tax). So the income tax could be quite steep - earnings over £42,386 are taxed at 40% and earnings over £150,000 are taxed at 50%. So even if there is no other taxable income (unlikely) on a £150,000 SIPP £107,604 would be taxed at 40% - £43,045! Anything over that gets taxed at 50%. :eek: That looks like a very good reason to keep money in other investments and not in a SIPP if you care about how much you can leave. Even inheritance tax is 'only' 40% after the threshold.
The top tax rate is 45%, not 50%. In any case, if the spouse has income of £42k per annum, why would she need to draw an income from the pension? She can just leave it there until she dies so it can go to the kids - the same rules apply re: age 75.When the surviving spouse gets the value of the SIPP, it is then no longer a SIPP but gets received as cash payment and can then be spent or invested again outside of a SIPP? So whatever is left when they want to leave it to the children, passes on not as a SIPP but just as part of the estate and subject to Inheritance Tax?
Completely incorrect. It can remain within a SIPP and be passed to your kids free of IHT. Free of income tax too if the spouse dies before age 75.0 -
I am confused
On the one hand some replies appear to suggest that a SIPP is quite tax efficient to pass on to a surviving spouse, and again when they pass it on to the children. But at the same time the replies refer to it being treated as income and taxed accordingly - which means lots of tax. So how can it be both?
Earlier in the thread it was indicated that (after age 75) a SIPP is passed on to a spouse free of inheritance tax but is taxed as normal income i.e. income tax. I think it was also suggested that the same will apply if the surviving spouse leaves the SIPP to children.
Now, income tax taxes all income over approx £40,000 p.a. at 40%. So if the value of the SIPP is £150,000 then even if the beneficiary has no other income, £90,000 of it will be taxed at the 40% rate. If the SIPP were more than £150,000 then everything over that would be taxed at 50%. I am rounding the figures and ignoring tax free allowances and marginal tax rates for simplicity. But the point is, if the value of a SIPP is treated as taxable income, then one way or another income tax due will be substantial.
Can anyone help clear the fog please!0 -
But the point is, if the value of a SIPP is treated as taxable income, then one way or another income tax due will be substantial.
If you take the whole pot in one lump sum, a substantial amount of tax will be due no matter what if the SIPP is passed on after age 75.
Before age 75 it passes on free of tax.
The question is - and you haven't answered it earlier - is why you would want to take the SIPP as one lump sum? Why would you not use it for taking an annual income with far less tax due?
Basically pensions are taxable but there are ways of mitigating that tax and a lump sum after age 75 is not necessarily one of them.0 -
If you take the whole pot in one lump sum, a substantial amount of tax will be due no matter what if the SIPP is passed on after age 75.
Before age 75 it passes on free of tax.
The question is - and you haven't answered it earlier - is why you would want to take the SIPP as one lump sum? Why would you not use it for taking an annual income with far less tax due?
Basically pensions are taxable but there are ways of mitigating that tax and a lump sum after age 75 is not necessarily one of them.
I see (I think). So it isn't the total value of the SIPP that the beneficiary is taxed on? They receive the SIPP still in the form of a SIPP wrapper, and can continue to make annual withdrawals at whatever rate they decide? Does this still apply the second time the SIPP is inherited -i.e. the surviving spouse leaves the SIPP to a non-dependend grown up child, and they too can continue to benefit from whatever the SIPP 'pot' generates at whatever rate of withdrawal they wish? And they are only taxed income tax on whatever they withdraw - not on the value of the pot that they inherit?
If this is the case, then a SIPP looks an ideal and tax-efficient way for a parent to leave something not only for their surviving spouse, but also knowing the pot will be there for your kids to get some income for life from. Assuming they don't blow the lot, or legislation doesn't change.
Is this how it is? Or am I still a bit foggy on the detail?0 -
Has to be long enough to establish eliminate UK residence and establish residence in Portugal, so at least half a year. There's more in Extracting pension pots: the Portugal plan and the linked FT story. For UK residence see the descriptions of the Statutory Residence Test to ensure you cease UK residency.That is interesting. But is there any minimum residency period in Portugal in order to do this? For example could you be resident in Portugal for just 1 year to enable this, and then move again to Spain? Or do you have to stay there for a minimum period?
Five full years. You'd pay the UK tax on the amount in the year you returned to the UK if you returned too quickly.Then how many years would we have to stay outside the UK before we could safely return if we had a change of heart about retiring abroad?
There's a £100,000 minimum for those UK rules to apply, so you can do it up to that amount and not have hassle when returning to the UK.0
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