A quick check before I open a SIPP for the first time

newlease

About to be a first time SIPPer, I believe I have read enough but just want to make sure there isn't anything obvious I am missing or should I avoid. I have had S&S ISA so have no questions about the investing part, it's more to avoid any dumb things with the SIPP steps.

Is this correct:
- SIPP application is just a formality (no chance of rejection like applying for a current account, credit card)
- once approved, I will receive a sort code/account for the SIPP to transfer money
- what I send will magically become 20% more in the SIPP account once received
- I can send as many payments over as I wish so long as I remain within the annual limit (and salary) of 40k; so in concept similar to ISA with it's annual limit which can be made over a number of transfers and months until April 5
- I can then buy and sell as I wish (like ISA)

Then, after April next year I report the gross (including the magic 20% addition) in my SA and get back another 20% as a cheque.

Sounds simple enough, just want to make sure there isn't anything to watch out for in the process.

Thanks
Louise

HappyHarry

You've pretty much got it. There won't be a sort code / account number like a bank account, but providers do make it very easy to pay in.

what I send will magically become 20% more in the SIPP account once received

Yes, but it may take some time. Some providers add the 20% immediately, some wait until the HMRC relief is obtained, which can take a few months.

so long as I remain within the annual limit (and salary) of 40k;

32k as the other 8k is tax relief.

Then, after April next year I report the gross (including the magic 20% addition) in my SA and get back another 20% as a cheque.

Depending on your tax status. If all the contributions will have attracted higher rate tax, then yes.

Sounds simple enough, just want to make sure there isn't anything to watch out for in the process.

Just be aware that you can not access the funds until at least age 55, and then there will be tax considerations on withdrawals.

newlease

Thanks Harry for such a quick reply.

Yes, all amounts will be higher rate band and I know I will not have access until at least 55.

Just wanted to avoid doing anything silly with the application process or miss any special tricks or caveats before I commit.

GazHol

newlease wrote: »

- I can send as many payments over as I wish so long as I remain within the annual limit (and salary) of 40k; so in concept similar to ISA with it's annual limit which can be made over a number of transfers and months until April 5

Be aware that you need to take into account any other pensions that you are paying into (and DB schemes appear to be more complex to calculate the "Deemed Contributions").

newlease

Yes, this is true, I do have a DB with annual contribution calculated to be around 15k. I did not realise the 40k annual limit was gross however, so minus 8k tax for net and minus 15k counted towards DB leaves me 17k net I can put in my SIPP. I only plan to put around 10k for the next few years so should be OK.

BobQ

You need to get an annual statement from your DB Pension Provider. I am not referring to an Annual Statement of Benefits. You will need a statement covering the Pension Input Period for that pension. While that may be the same year as the FY or the ABS, it may not.

See http://www.hmrc.gov.uk/manuals/rpsmmanual/rpsm06107170.htm

So in including your DB benefits within your annual allowance you need the DB increase for the PIP that ends in the current tax year.

http://www.hmrc.gov.uk/manuals/rpsmmanual/RPSM06200000.htm

Also, as you are starting the SIPP now you can carry forward any unused AA from the past 3 years provided your income supports the payment into the SIPP

bigadaj

Though pips will be aligned with tax year going forward, and there is the opportunity to put in up to £80k in this tax year, dependent On when the contributions have been made.

I'm not sure how the db increase would be allocated for the current tax year, logically split pro rata but I've not seen any confirmation.

newlease

My DB's PIP is January 1 to December 31. My annual allowance use has historically been around 15k. So, yes, I could use unused allowance from previous 3 years but that would require contributing beyond my income at the higher rate band. I guess it wasn't mentioned in this thread, but was in my first thread.

I am happy to get 20% now and 80% at retirement (plus/minus whatever happens on the investment) on my higher rate income (about 10k) rather than get 60% now and pay 40% as tax. I can afford to reduce my annual income by about 4k (20% instead of 60% of 10k). Any more, such as using allowance from previous years I can't really afford and on top of this I don't personally see as good value 20% tax relief in my situation (20-30 years away from retirement and already have a DB). If it were possible to get tax relief on my higher income bands from those previous 3 years I would put more in now, but that is no longer possible so the unused allowances and the PIP change seem irrelevant to my situation.

Does this make sense or did I miss a trick?

BobQ

bigadaj wrote: »

Though pips will be aligned with tax year going forward, and there is the opportunity to put in up to £80k in this tax year, dependent On when the contributions have been made.

I'm not sure how the db increase would be allocated for the current tax year, logically split pro rata but I've not seen any confirmation.

The PIPS are NOT always aligned with tax year as the OP confirms for his DB pension.

If he is investing in a SIPP this Tax Year he needs to know the growth in the value of his DB pension during the PIP that ends in this tax year (ie 31 Dec 15). This reduces his ability to pay into a SIPP in this tax year by the increase in the DB in that PIP.

BobQ

newlease wrote: »

Yes, this is true, I do have a DB with annual contribution calculated to be around 15k. I did not realise the 40k annual limit was gross however, so minus 8k tax for net and minus 15k counted towards DB leaves me 17k net I can put in my SIPP. I only plan to put around 10k for the next few years so should be OK.

OP I have just noticed the above. I could interpret the above as meaning that you are doing your own calculation of "annual contribution" in a DB pension.

You do realise that how much you pay in contributions each year is not relevant for DB?

The calculation that needs to be done is based on the assumed value of the pension in cash terms. Essentially it values the pension at the start of the PIP (basically 16 times the pension earned to date plus any lump sum) and repeats this at the end of the PIP. The difference is the figure you need not the value of your contributions (see the links I posted).

zagfles

BobQ wrote: »

The PIPS are NOT always aligned with tax year as the OP confirms for his DB pension.

If he is investing in a SIPP this Tax Year he needs to know the growth in the value of his DB pension during the PIP that ends in this tax year (ie 31 Dec 15). This reduces his ability to pay into a SIPP in this tax year by the increase in the DB in that PIP.

PIPs are now aligned with the tax year. That's what the PP was referring to - "going forwards".

There is a transition this year splitting the year into two mini tax years. The OP will not have a PIP ending on 31 Dec 15. The PIP which started on 1 Jan 15 ended on 8 July 15, and the current PIP started on 9 July 15 and will end on 5 Apr 16.

The transition for DB schemes is quite complicated, I've not read it...

https://www.gov.uk/government/publications/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods/pensions-technical-note-transitional-provisions-for-aligning-pension-input-periods