What happens with SIPP

jonbristol

Directors can have company pension contributions or make their own payments into a SIPP. There are limits to how much can be paid in annually, with the option to use up previous years allowances. The annual limits are capped at £40,000 or the amount of taxable income during the year.
However, is this cap the legal limit on what can be paid into a SIPP, or a limit on how much is eligible for tax relief?
What happens to any excess amount paid into a SIPP? Could you still pay in any amount up to the lifetime limit £1.25m, even if it doesn't get tax relief when putting it in, can it stay and grow within the SIPP? Is the whole pot treated the same when you take the pension or when it is passed on as an inheritance?

mania112

Legally there are no restrictions on how much you can pay into a pension (the provider might stop you going over the limits however).

If you go over the annual allowance you are taxed on the excess as if it was earned income.

For example if you contributed £50,000 and you were a 40% rate taxpayer you'd have to pay £4,000 in tax.

This is the case whether your contributions were personal or from the employer.

If you exceed the lifetime allowance the penalty comes when you draw from the pension. If you take the excess as a cash sum you'd be taxed 55%, if you take the excess and put it into a drawdown or annuity contract you'd pay a tax penalty of 25% (plus the normal income tax on drawing it).

jonbristol

mania112 wrote: »

Legally there are no restrictions on how much you can pay into a pension (the provider might stop you going over the limits however).

If you go over the annual allowance you are taxed on the excess as if it was earned income.

For example if you contributed £50,000 and you were a 40% rate taxpayer you'd have to pay £4,000 in tax.

This is the case whether your contributions were personal or from the employer.

If you exceed the lifetime allowance the penalty comes when you draw from the pension. If you take the excess as a cash sum you'd be taxed 55%, if you take the excess and put it into a drawdown or annuity contract you'd pay a tax penalty of 25% (plus the normal income tax on drawing it).

Thank you. So you won't get tax relief when paying in more than the allowance - but there is nothing wrong with paying in as much as you want.

Would there be any penalty when it comes to withdrawing from the SIPP or will the whole pot still be treated the same? Is it OK to treat the SIPP as inheritance planning by putting as much as possible into the SIPP even if the amounts exceed the tax relief limits?

atush

There is no point in paying more, as you could get tax free growth in a S&S isa?

Also if you paid in up to the LTA, then any growth would be taxed at 55% when you withdraw so you dont want to get even near the LTA.

jonbristol

atush wrote: »

There is no point in paying more, as you could get tax free growth in a S&S isa?

Also if you paid in up to the LTA, then any growth would be taxed at 55% when you withdraw so you dont want to get even near the LTA.

But what about after all ISA allowance is already used. If you have no debt and you had to choose between 2 investments which would be better for receiving income during your lifetime and then inheritance tax planning?

1. an ordinary unwrapped S&S share dealing
2. into a SIPP over the annual allowances but staying within the life time limit

TH1878

jonbristol wrote: »

But what about after all ISA allowance is already used. If you have no debt and you had to choose between 2 investments which would be better for receiving income during your lifetime and then inheritance tax planning?

1. an ordinary unwrapped S&S share dealing
2. into a SIPP over the annual allowances but staying within the life time limit

Probably AIM or EIS portfolios

jonbristol

No AIM, EIS, VCT or anything fancy thanks. I wanted to compare the options for normal S&S investments.

No debt and used all ISA allowance. To invest in S&S which would be better for receiving income during your lifetime and then inheritance tax planning?

1. an ordinary unwrapped S&S share dealing account
2. into a SIPP and exceeding the annual allowances but staying within the life time limit

atush

VCTs.

Or invest unwrapped and make sure you use your CGT exemptions when you devest. Not too hard to do, and Dividends are tax paid already/

jonbristol

Sorry I did say no AIM, EIS, VCT or anything fancy thanks. I wanted to compare the options for normal S&S investments once ISA allowance is fully used. The choice being:

1. an ordinary unwrapped S&S share dealing account
2. into a SIPP and exceeding the annual allowances but staying within the life time limit

If the money goes into an unwrapped share dealing account, then after tax free allowances income tax is payable on withdrawals, capital gains tax, and inheritance tax.

If the money goes into a SIPP then only income tax is payable on withdrawals. No capital gains tax or inheritance tax.

Doesn't the SIPP win out of these two choices?

Daniel54

jonbristol wrote: »

1. an ordinary unwrapped S&S share dealing account
2. into a SIPP and exceeding the annual allowances but staying within the life time limit

If the money goes into an unwrapped share dealing account, then after tax free allowances income tax is payable on withdrawals, capital gains tax, and inheritance tax.

If the money goes into a SIPP then only income tax is payable on withdrawals. No capital gains tax or inheritance tax.

Doesn't the SIPP win out of these two choices?

I keep surplus investment in an unwrapped share dealing account.Reasons are:

Dividend income is taxed at 0% for basic rate tax payers and 25% for a higher rate tax payer -so less than taking income from a SIPP

It is easy and an efficient use of the CGT allowance to realise gains up to the CGT limit as and when required

In retirement ,drawings of capital and income can be taken from the unwrapped investments in priority to drawing down from the SIPP,thereby leaving more in the SIPP at the time of your passing

Alternatively you could progressively sell the unwrapped shares in retirement and use up your full ISA allowance each year until the unwrapped shares are exhausted

TH1878

jonbristol wrote: »

Sorry I did say no AIM, EIS, VCT or anything fancy thanks. I wanted to compare the options for normal S&S investments once ISA allowance is fully used. The choice being:

1. an ordinary unwrapped S&S share dealing account
2. into a SIPP and exceeding the annual allowances but staying within the life time limit

Investing in a SIPP beyond the annual allowance limit (if you can find a provider who will let you do that, which you won't) is NOT a 'normal S&S' investment! The admin alone wouldn't be worth it.

But to answer your question:

1) Why would you want to pay tax twice (on the contribution and on the income?) - Income tax is higher than capital gains tax.

2) If you artificially keep your income below the HRT threshold and invest in unwrapped S&S investments, the income tax treatment of equities (not fixed interest or property) is identical to ISAs. If you are a HRT, you pay a further 22.5% on the gross dividend.

3) You can easily utilise your annual CGT exemptions to ensure you don't pay any CGT now or in the future.

4) It's feasible that you may have a lifetime allowance charge in the future. This would be taxed at 55% above £1m from next April. You have no idea what will happen to the LTA (or your investments) in the future so you can't say for certain that you will stay within it.

Depending on the amounts involved, you could consider a segmented offshore bond to utilise top slicing relief (always back to the beginning) and 5% withdrawals of capital in the future. This can give you decent flexibility and growth within the bond is free of tax until you draw or surrender it, leaving the pension fund where it is.

The bond segments could also be assigned into trust in the future as part of an Inheritance Tax mitigation strategy.