SIPP for low earner

fred246

I was going to start a SIPP for my housewife wife paying in £2880 to which the taxman was going to add £720 ie £3600. She has now started doing some part time work probably earning about £2000 a year. None of the websites seem to cover this scenario. Do I just do the £3600 gross as though she is a non earner? Could she put her £2000 into the pension as well as £3600 or is it instead of the £3600?

jem16

Her maximum is £3600 gross.

xylophone

http://www.hl.co.uk/pensions/sipp/how-much-can-i-invest

If your wife earns less than £3,600 per annum then she is limited to paying in £2880- she will receive tax relief of £720.

If she earned more than £3600, even if still a non taxpayer because she earned less than her annual allowance, she could pay in up to the whole of her net earned income and receive tax relief.

For example, suppose she earned £4000 a year, she could contribute £3200 to a pension and receive tax relief of £800.

zagfles

Does the job come with a pension? If it's one she contributes to then depending how the contributions are made, you might need to deduct her contributions from the max amount you pay into the SIPP.

I don't think this would apply if the contributions are made by salary sacrifice.

fred246

Thanks for your replies. She is contributing very small amounts to the LGPS. It would seem easier to stop those contributions and put the maximum in a SIPP. However public sector pensions are generally quite good. Any advice would be welcome. Thanks.

jem16

fred246 wrote: »

Thanks for your replies. She is contributing very small amounts to the LGPS. It would seem easier to stop those contributions and put the maximum in a SIPP. However public sector pensions are generally quite good. Any advice would be welcome. Thanks.

It would be absolute madness to stop contributing to the LGPS even in the absence of tax relief in your wife's case.

Simply take the £3600 and deduct the amount she pays into the LGPS. That is then the maximum gross amount she can contribute to a PP/SIPP. Remember that she will actually contribute the net amount.

GazHol

jem16 wrote: »

It would be absolute madness to stop contributing to the LGPS even in the absence of tax relief in your wife's case.

Simply take the £3600 and deduct the amount she pays into the LGPS. That is then the maximum gross amount she can contribute to a PP/SIPP. Remember that she will actually contribute the net amount.

Be careful with the LGPS contributions, if it is the defined benifit scheme (e.g. CARE) then their yearly "deemed contributions" are the indexed increase in benefits (typically 1/49 per year). My OH is in a similar situation (non taxpayer, salary greater than £3600), the LGPS pension dept weren't able to give "deemed contributions" until next tax year - not helpful for making SIPP contributions this year!

dunstonh

It would seem easier to stop those contributions and put the maximum in a SIPP.

That would be one of the worst financial decisions of her life. A really bad idea that would cost a fortune in lost benefits.

jem16

GazHol wrote: »

Be careful with the LGPS contributions, if it is the defined benifit scheme (e.g. CARE) then their yearly "deemed contributions" are the indexed increase in benefits (typically 1/49 per year). My OH is in a similar situation (non taxpayer, salary greater than £3600), the LGPS pension dept weren't able to give "deemed contributions" until next tax year - not helpful for making SIPP contributions this year!

That only matters from the Annual Allowance point of view where you cannot contribute more than £40k unless using Carry Forward allowances. For Annual Allowance purposes both the employer and employee contributions count and for DB pensions it's the increase in value which is used.

It has no impact whatsoever on the tax relief point of view as you are allowed tax relief on a maximum of 100% of your earnings. Your employer's contribution doesn't enter into this calculation. For this purpose a simple £3600 minus whatever is actually paid by the OP's wife and your OH ( with whatever her 100% of earnings instead of £3600 ) will suffice.

zagfles

GazHol wrote: »

Be careful with the LGPS contributions, if it is the defined benifit scheme (e.g. CARE) then their yearly "deemed contributions" are the indexed increase in benefits (typically 1/49 per year). My OH is in a similar situation (non taxpayer, salary greater than £3600), the LGPS pension dept weren't able to give "deemed contributions" until next tax year - not helpful for making SIPP contributions this year!

You don't need to know. With an income under £10k in a CARE scheme you are going to be nowhere near the annual allowance, so you can forget about it. Even if you contribute 100% of your taxable earnings to a SIPP.

As Jem says the tax relief limit is different, it's 100% of relevant earnings subject to £3600 min. You only need to deduct your contributions to the workplace pensions scheme, not company, and not the value used for AA purposes.

People often get confused with simplistic rubbish you get in the media which tries to combine the two limits, the AA and the tax relief limit.

See https://forums.moneysavingexpert.com/discussion/5375434

GazHol

jem16 wrote: »

That only matters from the Annual Allowance point of view where you cannot contribute more than £40k unless using Carry Forward allowances. For Annual Allowance purposes both the employer and employee contributions count and for DB pensions it's the increase in value which is used.

It has no impact whatsoever on the tax relief point of view as you are allowed tax relief on a maximum of 100% of your earnings. Your employer's contribution doesn't enter into this calculation. For this purpose a simple £3600 minus whatever is actually paid by the OP's wife and your OH ( with whatever her 100% of earnings instead of £3600 ) will suffice.

Jem16, I was told by a potential SIPP provider:

"In any tax year you can contribute up to 100% of your 'Relevant UK Earnings' (RUKES), effectively capped by the annual allowance of £40,000. This includes the Governments contribution.

It is possible to obtain tax relief on a pension contribution even if you have not paid tax in the first instance, if your income is less than your personal allowance. For example, someone with earnings of £10,000 would be able to make a net contribution of £8,000 which would be grossed up to £10,000 by the Government.

Please remember to include any personal pension contributions you have already made in this tax year when calculating how much you can contribute. With regards to your Local Government scheme, you should contact your pension administrator to establish the level of 'deemed contributions' made, as this will not necessarily be the amount deducted from your salary. Total personal contributions cannot exceed your RUKES. Employer contributions are not restricted by your RUKES, but do count towards the overriding annual allowance of £40,000"

From what I understand you are saying, the increase in DB benefits (the 1/49 of salary, indexed, then multiplied by 16) only applies to the £40K limit and is not used to work out the actual amount (deemed contributions) that can be input into pension(s) in one year?