SIPP - Too good to be true?

Skibunny40

A friend and I were chatting about what to do with an inheritance she's come into, and when we were talking about pensions, I came up with an option that seemed too good to be true, but everything I've checked suggests it's possible...

She has a lump sum of £20k to invest. She earns around £50k pa, pays about £1k a month into her company pension, and is 52 years old. No debt other than mortgage which is on a fairly low rate.

Am I right in thinking she could put the lump sum into a SIPP ( very low risk option, cash if possible) claim 40% tax relief which would make it £28k and start withdrawal from age 55 - only 3 years away.

Seems an awfully good return for very little risk! What am I missing??

kidmugsy

Skibunny40 wrote: »

Am I right in thinking she could put the lump sum into a SIPP ( very low risk option, cash if possible) claim 40% tax relief which would make it £28k and start withdrawal from age 55 - only 3 years away.

She wouldn't get 40% relief on all of it: she doesn't earn enough for that.

And she'd pay 40% tax on the pension withdrawals, unless she's cut back on her work.

quotememiserable

She's paid no tax on the inheretance, so there's none to save. The sipp would just get the £20k. Might as well put it into an isa and invest, and draw it down as she chooses.

Skibunny40

Kidmugsy - of course you're right. But she'd still get 40% on some and 20% on the rest?

Skibunny40

Quote me miserable - I didn't think tax relief differentiated on where the money came from? As long as she's earned enough in the year, how would they know whether the invested money was from her salary or an inheritance?

Don't want to suggest any dodgy or tax evasion!

It's only when I start talking about this stuff, I realise how little I actually know!

coyrls

quotememiserable wrote: »

She's paid no tax on the inheretance, so there's none to save. The sipp would just get the £20k. Might as well put it into an isa and invest, and draw it down as she chooses.

Sorry, that's just not right. She earns 50K, pays 12K into her work pension and so can pay a further 38K gross into a SIPP (or her work pension) assuming that she has some carry forward from previous years. Where that 38K comes from doesn't matter. The only thing to worry about would be recycling rules when she takes money out, which you would need to check out but I think the fact the money came from an inheritance would actually help because you are not sacrificing current income to take later. You should note that apart from the 25% PCLS, she will pay tax when she take money out.

£20K into a SIPP will be grossed up to £25K. Any higher rate tax rebate would need to be claimed back via a tax return.

jamesd

First, ignore what quotememiserable wrote, it's completely wrong. The source of the money doesn't matter for whether you get tax relief or not.

Also ignore anyone who warns about pension lump sum recycling. An inheritance is not a pension tax free lump sum and is specifically mentioned as something that is exempt from consideration for those rules.

She can increase her pension contributions to up to £50k gross (including basic rate relief) and get full basic rate income tax relief on the lot. She should also tell HMRC and they will adjust her tax code to give her the higher rate income tax relief this year on the portion of her income that is in the higher rate income tax band. She can get this 40% on any income that is taxable and on which tax would normally be paid.

Given the numbers involved I'm ignoring the fiddly bits about a possible pension salary sacrifice (smart pension) scheme and what happens if work income at that job goes below the income tax tax free allowance.

fairleads

jamesd wrote: »

First, ignore what quotememiserable wrote, it's completely wrong. The source of the money doesn't matter for whether you get tax relief or not.

In the amounts quoted James, it does matter.

jamesd

Please explain why:

1. you think that the money coming from an inheritance makes any difference to the tax relief available, as asserted by quotememiserable in relation to the text of my post that you quoted.
2. you think that a person with an income of £50,000 paying £12,000 a year of pension contributions now and considering paying in £20,000 net, £25,000 gross, can end up getting no income tax relief on all or part of the money, as apparently you believe abased on mentioning amounts.

Payments into a personal pension using relief at source, like a standalone SIPP, within the money purchase annual allowance of £40,000 gross and the earned income get 25% added to deliver basic rate income tax relief. It doesn't matter whether that takes taxable income to below the income tax personal allowance level or not.

This is the reason why even people with no earned income at all still get tax relief on £2,880 net, £3,600 gross of pension contributions: the relief at source adds it anyway even though nil income is way inside the personal allowance.

Which leave me wondering why quotememiserable and/or you think there's a way to not get the tax relief.

fairleads

jamesd wrote: »

Please explain why:

1. you think that the money coming from an inheritance makes any difference to the tax relief available, as asserted by quotememiserable in relation to the text of my post that you quoted.
2. you think that a person with an income of £50,000 paying £12,000 a year of pension contributions now and considering paying in £20,000 net, £25,000 gross, can end up getting no income tax relief on all or part of the money, as apparently you believe abased on mentioning amounts.

Payments into a personal pension using relief at source, like a standalone SIPP, within the money purchase annual allowance of £40,000 gross and the earned income get 25% added to deliver basic rate income tax relief. It doesn't matter whether that takes taxable income to below the income tax personal allowance level or not.

This is the reason why even people with no earned income at all still get tax relief on £2,880 net, £3,600 gross of pension contributions: the relief at source adds it anyway even though nil income is way inside the personal allowance.

Which leave me wondering why quotememiserable and/or you think there's a way to not get the tax relief.

Because the op cannot get taxrelief on the the full value of the inheritance unless the earned income is of equivalent value. Therefore, in this case,the source of the income is relevant.

coyrls

fairleads wrote: »

Because the op cannot get taxrelief on the the full value of the inheritance unless the earned income is of equivalent value. Therefore, in this case,the source of the income is relevant.

But her earned income is £50K and her inheritance is £20K so the earned income is of greater value.