Redundancy

insured

If you take a tax free lump sum of £125,000 from your pension pot in 2015/16, can you reinvest this in a SIPP? If you also received Redundancy of £82,000 in 2015/16 can this whole amount be invested in a SIPP. Assume salary to 30.06.2015 was £10,000 and pension payments of £15,000 to 5.4.16. Do you have to have the SIPP before you finish work on 30.6.15? Person was in civil service scheme for 20+ years.

kidmugsy

insured wrote: »

If you take a tax free lump sum of £125,000 from your pension pot in 2015/16, can you reinvest this in a SIPP?

There may be little point to doing that. But probably not anyway. See below.

insured wrote: »

If you also received Redundancy of £82,000 in 2015/16 can this whole amount be invested in a SIPP. Assume salary to 30.06.2015 was £10,000 and pension payments of £15,000 to 5.4.16. Do you have to have the SIPP before you finish work on 30.6.15?

Right. Let me assume that the first £30k of the redundancy is tax-free, leaving £52k exposed to income tax. So taxable income for 15/16 looks like being £52k + £10k + £15k approx = £77k. That implies a big tax bill because some will pay 40% i.e. 40% tax on approx £77k -£42.4k = £33.6k. The way to avoid the bill is to pay £33.6k gross into a SIPP or other personal pension. You do that by handing over 0.8 x £33.6 = £26.9 (approx). Then the provider claims £6.7k from HMRC and you phone HMRC to claim another £6.7k for yourself.

In the event of not having enough annual allowance to permit a £33.6k contribution (which looks unlikely, unless there are material facts you're keeping from us), no worries: you just apply unused annual allowance from the previous three tax years.

kidmugsy

Oops, I forgot to explain why trying to contribute the £125k lump sum isn't a good idea. There are hmrc rules that constrain recycling of lump sums: you should google for them. But the easiest way to avoid them would simply be to recycle not only the part of the redundancy pay that's exposed to 40% income tax, but also the bit that's exposed to 20%. That equals £52k - £33.6k = £18.4k. Again, you pay in the net amount to the provider (0.8 x £18.4k = £14.7k) and they claim back the tax relief from HMRC. I'm pretty sure that hmrc would not dispute that the contributions were coming from the redundancy pay rather than the lump sum, and that they'd view the whole thing as normal retirement planning.

Once you start thinking of contributions bigger than the ones I've mentioned, you are going to have to make darn sure that you don't break the recycling rules. Perhaps the simplest way to do that is just to let 15/16, 16/17 and 17/18 expire, and start contributing again then. Or you could try to exploit the fact that you still have £10k of earnings in 15/16 that are not fully pensioned, and you could contribute a wee bit more therefore. I expect someone will come along shortly to elaborate that point. But broadly you can't contribute the extra £125k into a pension in 15/16 because you don't have enough earnings.

xylophone

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

http://www.hl.co.uk/pensions/sipp/pension-carry-forward

http://adviser.royallondon.com/technical-central/information-guidance/contributions-and-tax-relief/recycling-of-tax-free-cash/

insured

Can the pension pot not be related back to 2012/13, 2013/14 and 2014/15? Or would that be regarded as recycling?

kidmugsy

No; you can carry-forward the unused annual allowances from those years into 15/16, but only 15/16s earnings count when it comes to calculating the upper limit on contributions. You can't carry-back pension contributions into tax years in the past.

So the (gross) max you can contribute is £10k in earnings plus the £52k of tax-exposed redundancy pay (minus any pension contribution you've already made on that £10k). Unless you are confident that you can master the recycling rules, maybe it would be wiser to stick just to the (gross) £52k.

If you then bung your £30k tax-free money into ISAs (e.g. one for self, one for spouse) you're actually doing pretty well at salting money away for your old age.

insured

Many thanks for this.
One final question. If I have taken a lump sum of 25% of my pension, it is tax free. But if I now have an SIPP, can I take a 25% tax free lump sum from that? Can I take 25% per annum? Or is it 25% for each pension?
You also mentioned contributing again into a SIPP in 2018/19. How would that be possible if I have no relevant earnings at that time. Only pension income.

atush

25% from each pension.

Anyone w/o earned income can put in 2880/3600 per year into a pension.

kidmugsy

insured wrote: »

One final question. If I have taken a lump sum of 25% of my pension, it is tax free. But if I now have an SIPP, can I take a 25% tax free lump sum from that? Can I take 25% per annum? Or is it 25% for each pension?

As Atush says, if you open a new SIPP to accept your tax-exposed redundancy pay, that SIPP too carries a 25% tax-free allowance. You can take it all in one bite, or take it out in bits over the years.

Example: you have £52k in the SIPP after the tax rebate from HMRC arrives (usually allow a couple of months for this to happen). You can take out £13k tax-free up front, and that's the end of the TFLS for this pension. Or instead you can take out, say, £5k TFLS, and leave behind the corresponding £15k of "crystallised" funds within the SIPP. So you still have £32k uncrystallised with its own 25% due (= £8k). Say your investments do badly and the £32k shrinks to £28k. Then your remaining 25% lump sum due has sunk to £7k. But if instead the investments do well and grow to £36k, then your 25% TFLS entitlement will have grown to £9k.

insured wrote: »

You also mentioned contributing again into a SIPP in 2018/19. How would that be possible if I have no relevant earnings at that time. Only pension income.

As Atush says, there's special provision for people with no or small earnings: they can contribute annually £3600 gross = £2880 net. So a couple of non-earners can tuck away £7200 gross per tax year. (On which point: don't forget to exploit your spouse's pensions - there's no recycling rule to inhibit your providing money for her(?) pension contributions. If her earnings are high enough, bung the whole £125k in, over several years if needs be.)