Help understanding SIPP

flightinfo

I have been researching about SIPPS for the last couple of months. Unfortunately, although I've learnt lots I've also ended up quite confused - think I've read too much. I want to start a SIPP this tax year so obviously need to get sorted.

I am currently a non-taxpayer so can only pay in £3600 (inc tax relief). My initial thought was to put it in a cash SIPP where I could get a small amount of interest but platforms which offer these have high charges so I am now thinking of a a cheap platform which pays little or no interest.

I was thinking of paying in to the SIPP for approx 7/8 years. However, I will be getting a company pension in 4 years time and will be a basic rate taxpayer. Once I am a basic rate taypayer, is there any advantage to carrying on paying into the SIPP given that I will have to pay tax on it when I cash it in/take a pension?

Am I correct in thinking that if I pay in for the next 3 years, I could take the full amount out as cash - if I do this in the tax year before I start receiving my Company pension, would I be able to receive this tax free assuming my total income is below the basic rate tax band?

mania112

Firstly, the I in SIPP is invested. They are not designed to be held in cash, and this is true of all pensions.

You will lose money if it's only holding is cash, that's almost a dead-cert due to charges and inflation, as you've pointed out. So i would only consider this option if you are willing to take some investment risk and stick your money into a cautious multi-asset fund, or something similar.

But yes, after 55, you can draw your pension benefits. 75% is taxable and if you have no other income and the pension withdrawal is within your personal allowance it can be taken without paying tax. The SIPP provider needs to be asked that they can facilitate this withdrawal (most can) and you might need to get your tax back via a rebate from HMRC because the SIPP's withdrawal facility might not use the correct coding.

zagfles

flightinfo wrote: »

I have been researching about SIPPS for the last couple of months. Unfortunately, although I've learnt lots I've also ended up quite confused - think I've read too much. I want to start a SIPP this tax year so obviously need to get sorted.

I am currently a non-taxpayer so can only pay in £3600 (inc tax relief). My initial thought was to put it in a cash SIPP where I could get a small amount of interest but platforms which offer these have high charges so I am now thinking of a a cheap platform which pays little or no interest.

Yes, HL might be a good option as they have no annual SIPP charge and holding cash is free, although you'd get very little interest.

I was thinking of paying in to the SIPP for approx 7/8 years. However, I will be getting a company pension in 4 years time and will be a basic rate taxpayer. Once I am a basic rate taypayer, is there any advantage to carrying on paying into the SIPP given that I will have to pay tax on it when I cash it in/take a pension?

Yes because of the tax free lump sum when you take it out. So you get tax relief on the whole lot at 20% but only have to pay tax on three quarters of it when you take out. SO effectively 20% relief going in but only 15% tax taking it out.

Am I correct in thinking that if I pay in for the next 3 years, I could take the full amount out as cash - if I do this in the tax year before I start receiving my Company pension, would I be able to receive this tax free assuming my total income is below the basic rate tax band?

Yes. Assuming you're over 55 then. Also if you're thinking of contributing further to pensions after you've taken money out, watch out for the money purchase annual allowance and recycling rules.

zagfles

mania112 wrote: »

Firstly, the I in SIPP is invested. They are not designed to be held in cash, and this is true of all pensions.

You will lose money if it's only holding is cash, that's almost a dead-cert due to charges and inflation, as you've pointed out.

Not when you account for the tax relief. Putting £2880 net a year for 3 years into a SIPP with no annual charge (eg HL) would get the OP £10800 even assuming no interest (I think HL pay a tiny amount, so it'll be slightly more). If the OP has no other income when they take it out it'll all be tax free.

Putting £2880 a year into the best paying savings/current accounts for 3 years would likely only get £9000-9500 max.

flightinfo

Sorry, not sure how to multi-quote. Thanks to both of you for your quick replies.

'Firstly, the I in SIPP is invested. They are not designed to be held in cash, and this is true of all pensions.

You will lose money if it's only holding is cash, that's almost a dead-cert due to charges and inflation, as you've pointed out. So i would only consider this option if you are willing to take some investment risk and stick your money into a cautious multi-asset fund, or something similar.'


I was aware that SIPPs were really meant for investing but given the short timescale involved, I did not think this was necessarily a good idea. The tax relief still gives a much better return than if the money was held in a savings account. Zagfles (thank you) beat me to it.

'Yes, HL might be a good option as they have no annual SIPP charge and holding cash is free, although you'd get very little interest.'


HL is at the top of my list if I do go down the cash option.



So even though I will probably only be investing for a few years, is it still worth looking at a cautious multi asset fund? I thought that it is normally recommended that you should look on investments as medium - long term (at least 5/7 years and preferably longer?) When I first started looking at SIPPS I was thinking of doing this but the more I read, I wasn't sure it was the right option with the shorter time scale.

zagfles

I don't think 3 years is an unreasonable amount of time to hold as cash. You could invest it but for a shorter timescale there's obviously greater risk of the investment having gone down in value. Obviously it could also go up by much more than cash.

But what would you do with the money if you didn't put it in a SIPP? If you'd keep it as cash then putting it into a SIPP as cash is no different apart from the tax/interest treatment. The SIPP is just a wrapper and shouldn't decide what you invest in - if you were going to hold the money in cash anyway then why not in a SIPP? If you were going to buy shares/funds with it - then you could do that in a SIPP also.

flightinfo

zagfles wrote: »

But what would you do with the money if you didn't put it in a SIPP? If you'd keep it as cash then putting it into a SIPP as cash is no different apart from the tax/interest treatment. The SIPP is just a wrapper and shouldn't decide what you invest in - if you were going to hold the money in cash anyway then why not in a SIPP? If you were going to buy shares/funds with it - then you could do that in a SIPP also.

With the research I have done, my thinking had altered slightly in that if I held the money in a SIPP once I am a taxpayer, I will pay income tax when I withdraw it. If it is in a savings account, I will only pay tax on the interest if I am over the £1000 total interest allowed.

If I go down the SIPP cash route I obviously do not need to make the final decision as to how long I will put money in to it now so I think that I will go for this option. If I invest in a SIPP shares/fund I would need to make the decision now that it would be a medium/long term investment which I am not sure about at the moment.

Thank you all for your help.