Timing of SIPP payments

taktikback

Can't find a specific reference to this!

We have a lump sum of £20k available, so I'm planning to open a SIPP for Mrs T. She is currently also in the LGPS and earning about £33k pro rata.

As she is 53 - a SIPP appeals as an additional savings vehicle and a way of maximising tax relief (albeit basic) to be able to access 25% tax free in a couple of years if necessary - better than the rubbish high interest accounts available anyway.

So my question is - as this is a lump sum payment directly from our bank account, not via an employer, do we have to wait until she has actually earned £25K in this tax year before we can make the payment and the SIPP firm can add the tax relief?

Or will they look at the regular yearly salary and assume that the year end figure will cover it?

kidmugsy

One complication: there's an annual allowance of £40k, which means that you should ideally subtract from the £40k the increase in value attributed to her DB pension scheme in 16/17, and the result is the max she can contribute to the SIPP in this tax year.

There is, however, an escape clause. She can carry forward unused annual allowance from the preceding three tax years, which may well mean that she has ample scope for contributing £25k gross (as long as her own contribution to the DB scheme will have been less than £8k, being the difference between her earnings of £33k and her contribution of £25k).

So, you may have to do some arithmetic, or maybe the answer that she can safely contribute £25k gross stands out a mile. We can't know, but you two can.

Afterthought: will she really earn £33k? What do you mean by "pro rata"?

AnotherJoe

taktikback wrote: »

So my question is - as this is a lump sum payment directly from our bank account, not via an employer, do we have to wait until she has actually earned £25K in this tax year before we can make the payment and the SIPP firm can add the tax relief?

Or will they look at the regular yearly salary and assume that the year end figure will cover it?

Neither. She'll get the 25% added whatever, and any discrepancies will get trued up via self assessment at the end of the tax year.

taktikback

Thanks for the replies - most useful!

She will earn £33k - what I meant by "pro rata" was that her full time earnings would be something like £38k but she's currently only working 90% full time hours - so the £33k is actual earnings.

She also pays £100 PM into the Pru AVC and I think 5.8% standard contributions to the main scheme- so that should leave us some headroom. I didn't want to get too close to the annual allowance limit in case I miscalculated and ended up with a load of hassle putting it right.

It seems generous that the government would potentially give tax relief on her entire earnings yet she's only paying tax on some of it (because of her personal allowance)

jem16

taktikback wrote: »

She also pays £100 PM into the Pru AVC and I think 5.8% standard contributions to the main scheme- so that should leave us some headroom. I didn't want to get too close to the annual allowance limit in case I miscalculated and ended up with a load of hassle putting it right.

Employer's contributions are also taken into account for the annual allowance. However with DB pensions this is calculated as the increase from one year to the next. You would need to check with the LGPS how much has been used.

kidmugsy

taktikback wrote: »

She also pays £100 PM into the Pru AVC and I think 5.8% standard contributions to the main scheme- so that should leave us some headroom.

(i) remember to subtract that £1200 p.a. to the Pru when you calculate what she can contribute.

(ii) To emphasise what jem said let me quote myself: "the increase in value attributed to her DB pension scheme in 16/17" is what matters. Her own contribution doesn't tell you this. Nor does her employer's contribution. You need to ask the scheme.