Transfer a defined benefit pension to SIPP

xylophone

Your mother would simply open the SIPP with HL, put in the £2880, leave in cash, wait for HL to claim and add the tax relief (they publish a timetable), take the PCLS and most of what remains - do not close in first year as there is a high penalty.

http://www.taxation.co.uk/taxation/Articles/2015/05/05/333016/money-go-round

She would almost certainly overpay tax on the withdrawal but can reclaim in year from HMRC.

http://adviser.royallondon.com/news/pensions/2015/april/emergency-tax-and-lump-sum-withdrawals/

https://www.gov.uk/claim-tax-refund/you-get-a-pension

See HL web site- you can ring for clarification of any points you do not understand. They are helpful on the phone.

everyday7

Thanks - what stops anyone else doing this? For example someone else who is drawing a pension? Could they save £2880 into a pension and get the tax rebate?

Last question - is there a reason why you need to withdraw the bulk of the pension one the rebate is paid, is there anything stopping you from adding another £2880 next year and so forth and then taking it all as a lump sum?

Thanks this seems like a good idea.

saver861

everyday7 wrote: »

Will the taxman do this automatically or would my mum need to tell HMRC- How would HMRC know they needed to submit the additional money? Would she be allowed to remove all of the money from the SIPP or just the £720? Does it make a diff if its a SIPP or stakeholder pension? Reading on line it seems she would need a stakeholder pension because they are designed for low earners.

xlyophone has clarified your questions in a nutshell there.

I'd agree with him also that HL are helpful so they would talk you through what you need. There system is easy to use.

In essence, I opened a SIPP account with them and paid in £2880 from my bank account. The gov then pays £720. You keep the money in cash i.e. don't buy funds etc. When the tax man puts his share in, usually a few months later, you can withdraw the money.

Some points: As xylophone says, don't withdraw 'all' the money or you will be hit with nearly £300 charges. Leave £10 in it. Next April do the same thing again and again until your mum reaches spa. (She can still keep doing it then but might not make as much free money due to tax).

When you come to take the money - you can take it out as a lump sum. 25% of that will be tax free, the rest taxable. But as mum is not a tax payer it will all be tax free.

The first time you draw the money you will be taxed and HMRC will refund it. Alternatively, you can contact HMRC and ask them to transfer some of your personal tax allowance code to HL. Nothing too scary about that either, you just tell them to transfer £3600 of your personal allowance to HL and when you come to take your SIPP HL will not take any tax up to £3600.

It sounds convoluted but it not really - especially for a gain of £720 it is worth doing. Easier each year after everything set up in first year.

saver861

everyday7 wrote: »

Thanks - what stops anyone else doing this? For example someone else who is drawing a pension? Could they save £2880 into a pension and get the tax rebate?

Crossed posts there.

Nothing to stop anyone. You are only limited to £2880 as a non earner. If you are working you can put the equivalent of what you earn e.g. if you earned £6000 then you could put in £6000 and gov puts tax relief portion.

everyday7 wrote: »

Last question - is there a reason why you need to withdraw the bulk of the pension one the rebate is paid, is there anything stopping you from adding another £2880 next year and so forth and then taking it all as a lump sum?

Nothing in theory but you would go over the tax threshold and pay tax on amounts over your personal allowance. So, if you let it accumulate and had £20,000 in it. You still would get 25% tax free but would be subject to tax on the rest above your personal allowance if you took it all in one year.

everyday7 wrote: »

Thanks this seems like a good idea.

It is - it is £720 for diddly squat near enough .... so go for it ... at least until the rules change!!

WillowCat

everyday7 wrote: »

Overall its worth £31.6k.

I've requested for the cash transfer value.

If you don't yet have the cash transfer value how do you know how much it is worth?

If, when you get the value it is actually less than £30,000 (quite likely if the annual payment is due to be £1,200) then she can transfer it without taking any advice as it is exempt due to being of small value.

I know you don't want advice on whether this is a good idea or not, so I shall refrain on saying it may be a terrible idea!

If she does do it, and transfers, for example, to a SIPP, then she should make sure she only draws down enough each year to use up her personal allowance. So if her other income is £1,000 then she should draw down £10,000 this tax year and leave the rest in the pension. This is after the 25% tax free obviously. Otherwise she will be unnecessarily paying tax on the drawdown.

everyday7

Thanks. When she got her pension statement, the letter said your pension is worth x.x% (forget the exact aoumt) of your lifetime allowance, this works out to £31.6k. I've asked her pension provider for a CETV which I am awaiting for. I have made an assumption that
1. as her orginal pension statement was sent a year ago
2. based on newspaper FT that pension funds are assigning higher CETV to db schemes because they are so expensive to maintain

that she would be over the £30k limit

LXdaddy

everyday7 wrote: »

Thanks. When she got her pension statement, the letter said your pension is worth x.x% (forget the exact aoumt) of your lifetime allowance, this works out to £31.6k. I've asked her pension provider for a CETV which I am awaiting for. I have made an assumption that
1. as her orginal pension statement was sent a year ago
2. based on newspaper FT that pension funds are assigning higher CETV to db schemes because they are so expensive to maintain

that she would be over the £30k limit

As far as I know.... the value of a DB pension for LTA purposes is 20 times the annual pension.


It does not tell you the value that the pension provider would give you as a transfer value.


Almost certainly the transfer value will be "worth less" than the value of the pension stream. That's why generally speaking it is a poor deal and everyone tells you what you don't want to hear.

everyday7

Correction - what my mum doesn't want to hear. I've advised her its a bad idea and printed this thread to show her. She is now doubled minded and will probably decide to keep the pension in its current state and try to invest £3600 to get the 25% return - or get me to.

bigadaj

everyday7 wrote: »

Correction - what my mum doesn't want to hear. I've advised her its a bad idea and printed this thread to show her. She is now doubled minded and will probably decide to keep the pension in its current state and try to invest £3600 to get the 25% return - or get me to.

Just remember to put in £2880 only as a non taxpayer, that figure is then grossed up to the £3600 figure.

bigadaj

everyday7 wrote: »

How would HMRC know to automatically apply a 25% tax rebate instead of a 20% tax rebate.

No, it's a two stage process.

Contributions get 20% tax relief so that is £720 on the £3600 allowed, which is why you contribute the £2880 only.

Between the ages of 55 and 75 you can then drawdown that same straight away, or as soon as the pension provider has received the tax relief from hmrc. That gives a 25% tax free lump sum, and the rest subject to tax.

This process also needs to consider the charges the provider will make, this is discussed in other threads.